##### Table of Contents





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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended
    December 31, 2007o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission File
    Number: 1-13277
      CNA SURETY
    CORPORATION
 (Exact name of registrant as
    specified in its charter)
  Delaware

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

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

60604(Address of principal executive
    offices)

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

Accelerated
    filer  þ

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

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




---



##### 





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

Business


2General


2Formation of CNA Surety and Merger


2Description of Business


2Financial Strength Ratings


2Product Information


3Marketing


5Underwriting


6Competition


6Reinsurance


7Reserves for Unpaid Losses and Loss
    Adjustment Expenses


7Claims


9Environmental Claims


9Regulation


10Investments


11Employees


11Availability of Securities and
    Exchange Commission Reports


11Item 1A.

Risk Factors


12Item 1B.

Unresolved Staff Comments


14Item 2.

Properties


14Item 3.

Legal Proceedings


15Item 4.

Submission of Matters to a Vote of Security
    Holders


15PART IIItem 5.

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


16Item 6.

Selected Financial Data


18Item 7.

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


19Item 7A.

Quantitative and Qualitative Discussions About
    Market Risk


42Item 8.

Financial Statements and Supplementary Data


45Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


79Item 9A.

Controls and Procedures


79Item 9B.

Other Information


79PART IIIItem 10.

Directors and Executive Officers of the
    Registrant


79Item 11.

Executive Compensation


79Item 12.

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


79Item 13.

Certain Relationships and Related Transactions


79Item 14.

Principal Accountant Fees and Services


79PART IVItem 15.

Exhibits and Financial Statement Schedules


80SubsidiariesConsentCertificationCertificationCerticationCertification   1




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Public Official bonds:
          Gross Written Premiums% of





% of





% of2007


Total


2006


Total


2005


TotalContract

$
305,624



64.8
%

$
285,157



63.2
%

$
248,662



59.6
%Commercial:License and permit


78,875



16.7



79,144



17.5



77,764



18.6Judicial and fiduciary


23,348



5.0



23,949



5.3



23,142



5.5Public official


23,584



5.0



23,491



5.2



26,428



6.3Other


9,021



1.9



8,287



1.9



6,406



1.6Total commercial


134,828



28.6



134,871



29.9



133,740



32.0Fidelity and other


31,208



6.6



31,328



6.9



35,128



8.4$
471,660



100.0
%

$
451,356



100.0
%

$
417,530



100.0
%Domestic

$
467,285



99.1
%

$
448,387



99.3
%

$
415,520



99.5
%International


4,375



0.9



2,969



0.7



2,010



0.5$
471,660



100.0
%

$
451,356



100.0
%

$
417,530



100.0
%   Net Written Premiums% of





% of





% of2007


Total


2006


Total


2005


TotalContract

$
266,749



62.3
%

$
247,987



60.5
%

$
202,798



55.4
%Commercial


130,332



30.4



130,314



31.8



128,022



35.0Fidelity and other


31,208



7.3



31,328



7.7



35,128



9.6$
428,289



100.0
%

$
409,629



100.0
%

$
365,948



100.0
%Domestic

$
423,914



99.0
%

$
406,684



99.3
%

$
363,940



99.5
%International


4,375



1.0



2,945



0.7



2,008



0.5$
428,289



100.0
%

$
409,629



100.0
%

$
365,948



100.0
%   4




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##### Table of Contents



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





% of





% of2007


Total


2006


Total


2005


TotalContract


30



1.2
%


30



1.2
%


32



1.2
%Commercial


1,906



76.5



1,926



76.0



1,901



72.4Fidelity and other


557



22.3



579



22.8



693



26.42,493



100.0
%


2,535



100.0
%


2,626



100.0
%   Average Bond Penalty/Policy Limit as of December 31,2007


2006


2005Contract

$
1,191,817


$
1,180,538


$
1,011,252Commercial


14,115



14,236



14,208Fidelity and other


19,437



19,486



20,380    Marketing      Years Ended December 31,2007


2006


2005Gross Written Premiums by State:Texas


9.4
%


9.5
%


8.7
%California


9.1



8.9



10.4Florida


7.6



7.8



7.4Illinois


4.5



4.6



5.2New York


4.5



3.9



4.1Georgia


3.3



3.0



2.8Massachusetts


3.1



3.1



2.9Pennsylvania


2.9



3.2



3.4Maryland


2.8



2.4



2.1Arizona


2.7



2.4



2.6All
    Other(a)


50.1



51.2



50.4Total


100.0
%


100.0
%


100.0
%     (a)
    
    Includes the District of Columbia and Puerto Rico. No other
    state represented more than 2.4% for the year ended
    December 31, 2007. 5




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##### Table of Contents



Contract
    Surety
    Commercial
    Surety
    one-day easy-to-use
   Underwriting     Competition     6




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##### Table of Contents



Reinsurance         Reserves
    for Unpaid Losses and Loss Adjustment Expenses     7




---



##### Table of Contents



Net reserves at end of year, GAAP basis

$
322,346Ceded reinsurance, net of indemnification


150,496Gross reserves at end of year, GAAP basis


472,842Estimated reinsurance recoverable netted against gross reserves
    for SAP


(150,496
)Net reserves on retroactive reinsurance assumed


(10,284
)Net reserves at end of year, SAP basis

$
312,062       8




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##### Table of Contents



As of December 31,1997


1998


1999


2000


2001


2002


2003


2004


2005


2006


2007Gross reserves for losses and loss adjustment expenses

$
130,381


$
150,020


$
157,933


$
204,457


$
315,811


$
303,433


$
413,539


$
363,387


$
424,449


$
434,224


$
472,842Originally reported ceded recoverable


7,656



7,986



20,464



70,159



166,318



137,301



158,357



116,831



147,435



144,858



150,496Net reserves for losses and loss adjustment expenses


122,725



142,034



137,469



134,298



149,493



166,132



255,182



246,556



277,014



289,366



322,346Net paid (cumulative) as of:One year later


19,595



32,428



35,825



44,763



64,832



59,567



88,857



65,353



76,623



55,879



Two years later


30,775



52,524



47,795



75,825



98,885



100,595



128,607



92,582



120,462







Three years later


43,999



58,421



73,341



87,011



117,396



115,034



145,895



114,984











Four years later


47,144



67,451



81,788



93,154



132,891



125,740



158,257















Five years later


51,742



71,352



86,539



99,117



139,051



133,696



















Six years later


54,659



74,462



91,520



100,628



139,125























Seven years later


57,211



77,916



92,727



98,737



























Eight years later


60,330



77,576



90,448































Nine years later


59,734



78,296



































Ten years later


60,234







































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


122,725



142,034



137,469



134,298



149,493



166,132



255,182



246,556



277,014



289,366



322,346One year later


118,373



128,949



130,376



139,110



155,673



205,422



254,570



223,223



271,704



284,312



Two years later


102,304



114,605



128,134



140,094



182,812



199,865



231,619



224,919



264,794







Three years later


87,321



110,462



130,280



132,504



169,340



195,191



246,244



218,301











Four years later


86,271



113,748



122,469



120,051



174,346



203,488



237,544















Five years later


86,320



105,797



110,055



119,471



174,847



196,258



















Six years later


79,029



93,768



109,874



118,485



167,741























Seven years later


69,923



93,447



109,237



118,834



























Eight years later


69,963



93,556



109,672































Nine years later


70,982



93,632



































Ten years later


71,147







































Total net (deficiency) redundancy

$
51,578


$
48,402


$
27,797


$
15,464


$
(18,248)


$
(30,126)


$
17,638


$
28,255


$
12,220


$
5,054


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


42.0%



34.1%



20.2%



11.5%



(12.2)%



(18.1)%



6.9%



11.5%



4.4%



1.7%



%Net reserves re-estimated

$
71,147


$
93,632


$
109,672


$
118,834


$
167,741


$
196,258


$
237,544


$
218,301


$
264,794


$
284,312Re-estimated ceded recoverable


8,669



12,915



63,475



101,729



113,836



135,232



86,303



85,057



130,983



134,012Gross reserves re-estimated

$
79,816


$
106,547


$
173,147


$
220,563


$
281,577


$
331,490


$
323,847


$
303,358


$
395,777


$
418,324  Claims   Environmental
    Claims   9




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##### Table of Contents



Regulation           10




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##### Table of Contents



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




---



##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



ITEM 3. LEGAL
    PROCEEDINGS   ITEM 4. SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS  Form 10-K.
 15




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##### Table of Contents



PART II.  ITEM 5.
    MARKET
    FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER
    MATTERS    High


Low20074th Quarter

$
22.00


$
16.493rd Quarter

$
21.17


$
15.792nd Quarter

$
23.24


$
18.861st Quarter

$
22.44


$
19.4320064th Quarter

$
22.74


$
19.443rd Quarter

$
21.99


$
16.052nd Quarter

$
18.92


$
15.611st Quarter

$
18.20


$
14.54  16




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##### Table of Contents



Indexed ReturnsYears Ended December 31,Company/Index

2002


2003


2004


2005


2006


2007CNA Surety Corporation


100



121.15



170.06



185.61



273.89



252.10Standard & Poors 500 Stock Index


100



126.38



137.75



141.88



161.20



166.89Standard & Poors Property & Casualty
    Index


100



123.96



134.33



151.76



168.03



141.61   
      Number of Securities to be

Weighted-Average

Number of Securities RemainingIssued Upon the Exercise of

Exercise Price of

Available for Future IssuanceOutstanding Options

Outstanding Options

Under Equity Compensation PlansEquity compensation plans approved by security holders


1,054,588


$
14.53



2,678,700   Dividends
   17




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##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA      2007(b)(c)


2006(b)(c)


2005


2004


2003(Dollars in thousands, except per share data)Total revenues

$
465,697


$
431,693


$
384,082


$
350,789


$
332,576Gross written premiums

$
471,660


$
451,356


$
417,530


$
389,417


$
371,375Net written premiums

$
428,289


$
409,629


$
365,948


$
318,284


$
319,210Net earned premium

$
421,506


$
393,642


$
348,361


$
317,857


$
304,449Net losses and loss adjustment
    expenses(a)


103,124



95,830



127,841



87,356



172,476Net commissions, brokerage and other underwriting expenses


227,412



216,560



202,521



207,166



190,740Net investment income


44,636



39,324



33,747



30,181



26,301Net realized investment (losses) gains


(445
)


(1,273
)


1,974



2,751



1,826Interest expense


2,918



3,669



3,545



2,260



1,523Income (loss) before income taxes


132,243



115,634



50,175



54,007



(32,163
)Income tax expense (benefit)


39,747



32,816



11,744



14,297



(18,012
)Net income (loss)

$
92,496


$
82,818


$
38,431


$
39,710


$
(14,151
)Basic earnings (loss) per common share

$
2.10


$
1.90


$
0.89


$
0.92


$
(0.33
)Diluted earnings (loss) per common share

$
2.09


$
1.89


$
0.89


$
0.92


$
(0.33
)Loss
    ratio(a)


24.5
%


24.3
%


36.7
%


27.5
%


56.7
%Expense ratio


54.0



55.0



58.1



65.2



62.6Combined
    ratio(a)


78.5
%


79.3
%


94.8
%


92.7
%


119.3
%Invested assets and cash

$
1,024,826


$
897,285


$
797,914


$
766,387


$
654,072Intangible assets, net of amortization


138,785



138,785



138,785



138,785



138,785Total assets


1,507,654



1,368,333



1,262,614



1,174,494



1,169,123Insurance reserves


731,772



688,027



665,496



589,406



637,607Debt


30,791



30,690



50,589



65,488



50,418Total liabilities


839,949



802,431



786,039



728,123



758,982Stockholders equity


667,705



565,902



476,575



446,371



410,141Book value per share

$
15.13


$
12.90


$
11.00


$
10.38


$
9.54     (a)
    
    Includes the effect of recording revisions of prior year
    reserves, known as reserve development. The dollar amount and
    the percentage point effect on the loss ratio of these reserve
    revisions were a reduction of $5.1 million, or 1.2%, for
    the year ended December 31, 2007, a reduction of
    $5.3 million, or 1.4%, for the year ended December 31,
    2006, a reduction of $23.3 million, or 6.7%, for the year
    ended December 31, 2005, a reduction of $0.6 million,
    or 0.2%, for the year ended December 31, 2004, and an
    addition of $39.3 million, or 12.9%, for the year ended
    December 31, 2003. 18




---



##### Table of Contents



(b)
    
    Statement of Financial Accounting Standards (SFAS)
    No. 123 (revised 2004), Share-based Payment
    (SFAS 123R) was effective for the Company on
    January 1, 2006. Prior to 2006, the Company applied the
    intrinsic value method under Accounting Principles Board
    (APB) Opinion No. 25 (APB 25), and
    related interpretations, in accounting for its stock-based
    compensation plan as allowed under the provisions of
    SFAS No. 123, Accounting for Stock-based
    Compensation (SFAS 123). Under the
    recognition and measurement principles of APB 25, no stock-based
    compensation cost was recognized, as the exercise price of the
    granted options equaled the market price of the underlying stock
    at the grant date. Under SFAS 123R, entities generally are
    required to measure and record compensation expense using a
    fair-value based method. Adoption of SFAS 123R increased
    compensation expense by $1.9 million and $1.2 million
    for the years ended December 31, 2007 and 2006,
    respectively. Net of deferred tax benefit, adoption of
    SFAS 123R decreased net income by $1.2 million and
    $0.8 million for the years ended December 31, 2007 and
    2006, respectively.(c)
    
    As of December 31, 2006, the Company adopted
    SFAS No. 158, Employers Accounting for
    Defined Benefit Pension and Other Postretirement Plans (an
    amendment of FASB Statements No. 87, 88, 106 and 132(R),
    (SFAS 158). SFAS 158 requires a company
    who sponsors one or more single-employer defined benefit plans
    to recognize the overfunded or underfunded status of a defined
    benefit postretirement plan as an asset or liability in its
    statement of financial position and to recognize changes in that
    funded status in the year in which the changes occur through
    other comprehensive income. The Companys postretirement
    benefit plans are unfunded. Recognition of the accumulated
    postretirement benefit obligation, measured as of
    December 31, 2007, decreased the liability for
    postretirement benefits by $3.4 million, gross of deferred
    tax benefit, and increased accumulated other comprehensive
    income by $1.0 million. Recognition of the accumulated
    postretirement benefit obligation, measured as of
    December 31, 2006, increased the liability for
    postretirement benefits by $4.7 million, gross of deferred
    tax benefit, and decreased accumulated other comprehensive
    income by $2.7 million.  ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Form 10-K.
  Critical
    Accounting Policies
    Reserves
    for Unpaid Losses and Loss Adjustment Expenses and
    Reinsurance
     19




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##### Table of Contents



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


Gross IBNR Loss


Total Grossand LAE Reserves


and LAE Reserves


ReservesContract

$
128,039


$
172,868


$
300,907Commercial


103,296



56,162



159,458Fidelity and other


4,316



8,161



12,477Total

$
235,651


$
237,191


$
472,842         
    Historical development method, sometimes referred to as a link
    ratio method;
    Bornhuetter-Ferguson method on both a paid and incurred basis;
    Average hindsight outstanding projection method;
    Frequency-severity method; and
    Loss ratio method.    Historical
    Development Method
   20




---



##### Table of Contents



Bornhuetter-Ferguson
    Method
  and/or
      Average
    Hindsight Outstanding Method
    Frequency-Severity
    Method
    Loss
    Ratio Method
     21




---



##### Table of Contents




    Current claim activity, including the frequency and severity of
    current claims;
    Changes in underwriting standards and business mix such as the
    Companys efforts to reduce exposures to large commercial
    bonds;
    Changes in the claims handling process; and
    Current economic conditions, especially corporate default rates
    and the condition of the construction economy.      December 31,2007


2006Gross basis:Recorded loss reserves

$
472,842


$
434,224Actuarial point estimate


469,589



438,313Difference

$
3,253


$
(4,089
)Difference as a % of actuarial point estimate


0.7
%


(0.9
)%Net basis:Recorded loss reserves

$
322,346


$
289,366Actuarial point estimate


317,325



292,703Difference

$
5,021


$
(3,337
)Difference as a % of actuarial point estimate


1.6
%


(1.1
)%    22




---



##### Table of Contents



and/or
      and/or and/or
 23




---



##### Table of Contents



Investments
        Intangible
    Assets
      Insurance
    Premiums
   24




---



##### Table of Contents



Deferred
    Policy Acquisition Costs
    Results
    of Operations
  Financial
    Measures
          Comparison
    of CNA Surety Actual Results for the Years Ended
    December 31, 2007, 2006 and 2005
  Analysis
    of Net Income
   25




---



##### Table of Contents



Results
    of Insurance Operations
    Years Ended December 31,2007


2006


2005Gross written premium

$
471,660


$
451,356


$
417,530Net written premium

$
428,289


$
409,629


$
365,948Net earned premium

$
421,506


$
393,642


$
348,361Net losses and loss adjustment expenses

$
103,124


$
95,830


$
127,841Net commissions, brokerage and other underwriting expenses

$
227,412


$
216,560


$
202,521Loss ratio


24.5
%


24.3
%


36.7
%Expense ratio


54.0



55.0



58.1Combined ratio


78.5
%


79.3
%


94.8
%   Premiums
    Written/Earned
  and/or
   26




---



##### Table of Contents



Years Ended December 31,2007


2006


2005Contract

$
305,624


$
285,157


$
248,662Commercial


134,828



134,871



133,740Fidelity and other


31,208



31,328



35,128$
471,660


$
451,356


$
417,530         Years Ended December 31,2007


2006


2005Contract

$
266,749


$
247,987


$
202,798Commercial


130,332



130,314



128,022Fidelity and other


31,208



31,328



35,128$
428,289


$
409,629


$
365,948      27




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##### Table of Contents



Years Ended December 31,2007


2006


2005Contract

$
259,362


$
230,856


$
192,463Commercial


130,541



129,208



122,940Fidelity and other


31,603



33,578



32,958$
421,506


$
393,642


$
348,361       Excess of
    Loss Reinsurance
    2006
    Third Party Reinsurance Compared to 2005 Third Party
    Reinsurance
    2007
    Third Party Reinsurance Compared to 2006 Third Party
    Reinsurance
   28




---



##### Table of Contents



2008
    Third Party Reinsurance Compared to 2007 Third Party
    Reinsurance
    Related
    Party Reinsurance
         29




---



##### Table of Contents



Net Loss
    Ratio
       30




---



##### Table of Contents



Exposure
    Management
        Expense
    Ratio
   31




---



##### Table of Contents



Investment
    Income
    Realized
    Investment Gains and Losses
      Years Ended December 31,2007


2006


2005Gross realized investment gains

$
511


$
265


$
2,302Gross realized investment losses


(956
)


(1,538
)


(328
)Net realized investment (losses) gains

$
(445
)

$
(1,273
)

$
1,974   Interest
    Expense
    Income
    Taxes
    Liquidity
    and Capital Resources
   32




---



##### Table of Contents



33




---



##### Table of Contents



30-year
      Contractual Obligations as ofDecember 31, 2007

2008


2009


2010


2011


2012


Thereafter


Total(In millions)Debt(a)

$
2.6


$
2.6


$
2.6


$
2.5


$
2.5


$
85.5


$
98.3Operating leases


2.0



2.0



2.0



1.8



0.9







8.7Loss and loss adjustment expense reserves


190.7



122.1



83.7



23.0



13.5



39.8



472.8Other long-term
    liabilities(b)


1.2



1.0



0.6



0.5



0.5



9.3



13.1Total

$
196.5


$
127.7


$
88.9


$
27.8


$
17.4


$
134.6


$
592.9     (a)
    
    Reflects expected principal and interest payments(b)
    
    Reflects unfunded postretirement benefit plans and long term
    incentive plan payments to certain executives.  12-month
 34




---



##### Table of Contents



35




---



##### Table of Contents



Financial
    Condition
  Investment
    Portfolio
    December 31,





December 31,2007





2006Estimated


% of


Estimated


% ofFair Value


Total


Fair Value


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

$
18,275



1.9
%

$
14,505



1.8
%U.S. Agencies


53,308



5.5



61,764



7.9Collateralized mortgage obligations


30,470



3.2



16,937



2.2Mortgage pass-through securities


54,474



5.7



37,799



4.8Obligations of states and political subdivisions


638,125



66.1



506,345



64.4Corporate bonds


95,702



9.9



67,254



8.6Non-agency collateralized mortgage obligations


34,544



3.6



36,462



4.6Other asset-backed securities:Second mortgages/home equity loans


9,901



1.0



20,749



2.6Credit card receivables


17,685



1.8



17,441



2.2Other


10,870



1.1



5,535



0.7Total fixed income securities


963,354



99.8
%


784,791



99.8
%Equity securities


1,789



0.2



1,668



0.2Total

$
965,143



100.0
%

$
786,459



100.0
%      36




---



##### Table of Contents



Gross


Gross Unrealized LossesAmortized Cost


Unrealized


Less Than


More Than


Estimated FairDecember 31, 2007

or Cost


Gains


12 Months


12 Months


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

$
17,790


$
485


$



$



$
18,275U.S. Agencies


52,617



706







(15
)


53,308Collateralized mortgage obligations


30,086



502



(11
)


(107
)


30,470Mortgage pass-through securities


54,659



401







(586
)


54,474Obligations of states and political subdivisions


625,858



15,408



(2,500
)


(641
)


638,125Corporate bonds


95,714



1,493



(97
)


(1,408
)


95,702Non-agency collateralized mortgage obligations


35,011



232







(699
)


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


9,951











(50
)


9,901Credit card receivables


17,234



451











17,685Other


10,788



157







(75
)


10,870Total fixed income securities


949,708



19,835



(2,608
)


(3,581
)


963,354Equity securities


1,683



106











1,789Total

$
951,391


$
19,941


$
(2,608
)

$
(3,581
)

$
965,143   Form 10-K.
    2007


2006Credit Rating

Fair Value


% of Total


Fair Value


% of TotalAAA/Aaa

$
758,825



78.8
%

$
618,835



78.8
%AA/Aa


130,850



13.6



113,612



14.5A/Aa


62,118



6.4



30,544



3.9BBB/Baa


7,979



0.8



17,040



2.2Non investment grade


3,582



0.4



3,960



0.5Not rated










800



0.1Total

$
963,354



100.0
%

$
784,791



100.0
%    37




---



##### Table of Contents



% of


% ofFair


UnrealizedContractual Maturity

Value


LossDue after one year through five years


2
%


7
%Due after five years through ten years


14



17Due after ten years


51



51Asset-backed securities


33



25Total


100
%


100
%     December 31, 2007


December 31, 2006Estimated


Gross


Estimated


GrossUnrealized Loss Aging

Fair Value


Unrealized Loss


Fair Value


Unrealized LossFixed income securities:Investment grade:0-6 months

$
17,785


$
175


$
75,215


$
2057-12 months


112,914



2,433



10,104



4013-24 months


9,984



671



137,954



3,457Greater than 24 months


91,683



2,463



16,206



684Total investment grade


232,366



5,742



239,479



4,386Non-investment grade:13-24 months










3,960



77Greater than 24 months


3,582



447







Total

$
235,948


$
6,189


$
243,439


$
4,463  38




---



##### Table of Contents



Risk-Based
    Capital (RBC) and Other Regulatory Ratios
   39




---



##### Table of Contents



state-by-state
      Impact of
    Pending Accounting Standards
     40




---



##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
      
    general economic and business conditions;
    changes in financial markets such as fluctuations in interest
    rates, long-term periods of low interest rates, credit
    conditions and currency, commodity and stock prices;
    the ability of the Companys contract principals to fulfill
    their bonded obligations;
    the effects of corporate bankruptcies on surety bond claims, as
    well as on capital markets;
    changes in foreign or domestic political, social and economic
    conditions;
    regulatory initiatives and compliance with governmental
    regulations, judicial decisions, including interpretation of
    policy provisions, decisions regarding coverage, trends in
    litigation and the outcome of any litigation involving the
    Company, and rulings and changes in tax laws and regulations; 41




---



##### Table of Contents




    regulatory limitations, impositions and restrictions upon the
    Company, including the effects of assessments and other
    surcharges for guaranty funds and other mandatory pooling
    arrangements;
    the impact of competitive products, policies and pricing and the
    competitive environment in which the Company operates, including
    changes in the Companys books of business;
    product and policy availability and demand and market responses,
    including the level of ability to obtain rate increases and
    decline or non-renew underpriced accounts, to achieve premium
    targets and profitability and to realize growth and retention
    estimates;
    development of claims and the impact on loss reserves, including
    changes in claim settlement practices;
    the performance of reinsurance companies under reinsurance
    contracts with the Company;
    results of financing efforts, including the availability of bank
    credit facilities;
    changes in the Companys composition of operating segments;
    the sufficiency of the Companys loss reserves and the
    possibility of future increases in reserves;
    the risks and uncertainties associated with the Companys
    loss reserves; and,
    the possibility of further changes in the Companys ratings
    by ratings agencies, including the inability to access certain
    markets or distribution channels and the required
    collateralization of future payment obligations as a result of
    such changes, and changes in rating agency policies and
    practices.    ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK     42




---



##### Table of Contents



HypotheticalEstimated Fair


PercentageHypothetical


Value After


IncreaseFair Value at


Change in


Hypothetical


(Decrease) inDecember 31,


Interest Rate


Change in


Stockholders2007


(bp=basis points)


Interest Rate


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

$
156,527



200 bp increase


$
143,016



(1.3
)%100 bp increase



150,653



(0.6
)100 bp decrease



160,156



0.4200 bp decrease



162,267



0.6States, municipalities and political subdivisions


638,125



200 bp increase



561,138



(7.5
)100 bp increase



598,496



(3.9
)100 bp decrease



680,200



4.1200 bp decrease



725,517



8.5Corporate bonds and all other


168,702



200 bp increase



153,539



(1.5
)100 bp increase



160,869



(0.8
)100 bp decrease



177,063



0.8200 bp decrease



185,960



1.7Total fixed income securities available-for-sale

$
963,354



200 bp increase



857,693



(10.3
)100 bp increase



910,018



(5.3
)100 bp decrease



1,017,419



5.3200 bp decrease



1,073,744



10.8   43




---



##### Table of Contents



HypotheticalEstimated Fair


PercentageHypothetical


Value After


IncreaseFair Value at


Change in


Hypothetical


(Decrease) inDecember 31,


Interest Rate


Change in


Stockholders2006


(bp=basis points)


Interest Rate


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

$
131,005



200 bp increase


$
120,310



(1.2
)%100 bp increase



126,070



(0.6
)100 bp decrease



134,299



0.4200 bp decrease



136,143



0.6States, municipalities and political subdivisions


506,345



200 bp increase



447,610



(6.7
)100 bp increase



476,768



(3.4
)100 bp decrease



537,633



3.6200 bp decrease



571,614



7.5Corporate bonds and all other


147,441



200 bp increase



136,456



(1.3
)100 bp increase



141,804



(0.6
)100 bp decrease



153,399



0.7200 bp decrease



159,611



1.4Total fixed income securities available-for-sale

$
784,791



200 bp increase



704,376



(9.2
)100 bp increase



744,642



(4.6
)100 bp decrease



825,331



4.7200 bp decrease



867,368



9.5  44




---



##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      Internal Control 
    Integrated Framework
        Internal Control  Integrated Framework
    
    45




---



##### Table of Contents



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
      Internal
    Control  Integrated Framework.
        46




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              Internal Control 
    Integrated Framework
  
    47




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2007


2006(Amounts in thousands, except per share data)ASSETSInvested assets:Fixed income securities, at fair value (amortized cost: $949,708
    and $773,178)

$
963,354


$
784,791Equity securities, at fair value (cost: $1,683 and $1,508)


1,789



1,668Short-term investments, at cost (approximates fair value)


49,453



103,640Other investments, at cost






22Total invested assets


1,014,596



890,121Cash


10,230



7,164Deferred policy acquisition costs


104,280



102,937Insurance receivables:Premiums, including $12,317 and $6,885 from affiliates, (net of
    allowance for doubtful accounts: $1,145 and $1,369)


36,317



37,205Reinsurance, including $50,547 and $55,023 from affiliates


127,119



118,412Deposit with affiliated ceding company


34,644



33,145Intangible assets (net of accumulated amortization: $25,523 and
    $25,523)


138,785



138,785Current income taxes receivable


1,960



323Property and equipment, at cost (less accumulated depreciation
    and amortization: $29,467 and $24,466)


24,288



24,807Prepaid reinsurance premiums (including $322 and $1,702 from
    affiliates)


510



2,165Accrued investment income


12,242



10,089Other assets


2,683



3,180Total assets

$
1,507,654


$
1,368,333LIABILITIESReserves:Unpaid losses and loss adjustment expenses

$
472,842


$
434,224Unearned premiums


258,930



253,803Total reserves


731,772



688,027Debt


30,791



30,690Deferred income taxes, net


17,756



17,298Reinsurance and other payables to affiliates


643



166Accrued expenses


18,273



20,247Liability for postretirement benefits


10,001



12,466Other liabilities


30,713



33,537Total liabilities


839,949



802,431Commitments and contingencies (See Note 6, 7 & 8)STOCKHOLDERS EQUITYPreferred stock, par value $.01 per share, 20,000 shares
    authorized; none issued and outstanding






Common stock, par value $.01 per share, 100,000 shares
    authorized; 45,505 shares issued and 44,121 shares
    outstanding at December 31, 2007 and 45,263 shares
    issued and 43,872 shares outstanding at December 31,
    2006


455



453Additional paid-in capital


274,069



268,651Retained earnings


399,241



306,745Accumulated other comprehensive income


8,800



4,993Treasury stock, 1,384 and 1,391 shares, at cost


(14,860
)


(14,940
)Total stockholders equity


667,705



565,902Total liabilities and stockholders equity

$
1,507,654


$
1,368,333    48




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF INCOME
  Years Ended December 31,2007


2006


2005(Amounts in thousands,except per share data)Revenues:Net earned premium

$
421,506


$
393,642


$
348,361Net investment income


44,636



39,324



33,747Net realized investment (losses) gains


(445
)


(1,273
)


1,974Total revenues


465,697



431,693



384,082Expenses:Net losses and loss adjustment expenses


103,124



95,830



127,841Net commissions, brokerage and other underwriting expenses


227,412



216,560



202,521Interest expense


2,918



3,669



3,545Total expenses


333,454



316,059



333,907Income before income taxes


132,243



115,634



50,175Income tax expense


39,747



32,816



11,744Net income

$
92,496


$
82,818


$
38,431Earnings per common share

$
2.10


$
1.90


$
0.89Earnings per common share, assuming dilution

$
2.09


$
1.89


$
0.89Weighted average shares outstanding


44,000



43,654



43,205Weighted average shares outstanding, assuming dilution


44,267



43,922



43,357    49




---



##### Table of Contents



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





Additional


Comprehensive





Other


Treasury


TotalStock Shares


Common


Paid-in


Income


Retained


Comprehensive


Stock


StockholdersOutstanding


Stock


Capital


(Loss)


Earnings


Income (Loss)


At Cost


Equity(Amounts in thousands)Balance, January 1, 2005


43,015


$
444


$
255,996






$
185,496


$
19,551


$
(15,116
)

$
446,371Comprehensive income:Net income





$



$



$
38,431


$
38,431


$



$



$
38,431Other comprehensive income (loss):Change in unrealized gains on securities, after income tax
    benefit of $6,464 (net of reclassification adjustment of $1,193,
    after income tax expense of $643)














(12,005
)






(12,005
)






(12,005
)Total comprehensive income













$
26,426Stock options exercised and other


319



3



3,688















87



3,778Balance, December 31, 2005


43,334


$
447


$
259,684






$
223,927


$
7,546


$
(15,029
)

$
476,575Comprehensive income:Net income





$



$



$
82,818


$
82,818


$



$



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














107







107







107Total comprehensive income













$
82,925Adjustment to initially recognize accumulated postretirement
    benefit obligations, net of tax benefit of $1,997






















(2,660
)






(2,660
)Stock-based compensation










1,207



















1,207Stock options exercised and other


538



6



7,760















89



7,855Balance, December 31, 2006


43,872


$
453


$
268,651






$
306,745


$
4,993


$
(14,940
)

$
565,902Comprehensive income:Net income





$



$



$
92,496


$
92,496


$



$



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














1,286







1,286







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














2,521







2,521







2,521Total comprehensive income













$
96,303Stock-based compensation










1,892



















1,892Stock options exercised and other


249



2



3,526















80



3,608Balance, December 31, 2007


44,121


$
455


$
274,069






$
399,241


$
8,800


$
(14,860
)

$
667,705    50




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended December 31,2007


2006


2005(Amounts in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
92,496


$
82,818


$
38,431Adjustments to reconcile net income to net cash provided by
    operating activities:Provision for doubtful accounts


393



594



(168
)Depreciation and amortization


6,179



5,302



4,486Amortization of bond premium, net


369



1,149



2,310Loss on disposal of property and equipment


279



141



242Net realized investment losses (gains)


445



1,273



(1,974
)Stock-based compensation


1,892



1,207



Changes in:Insurance receivables


(8,212
)


(3,182
)


(21,647
)Reserve for unearned premiums


5,127



12,756



15,028Reserve for unpaid losses and loss adjustment expenses


38,618



9,775



61,062Deposit with affiliated ceding company


(1,499
)


(859
)


(31,886
)Deferred policy acquisition costs


(1,343
)


(104
)


(705
)Deferred income taxes, net


(1,523
)


(1,630
)


(1,740
)Reinsurance and other payables to affiliates


477



(8
)


(287
)Prepaid reinsurance premiums


1,655



3,231



2,559Accrued expenses


(1,974
)


3,715



(558
)Other assets and liabilities


(4,173
)


8,070



5,033Net cash provided by operating activities


129,206



124,248



70,186CASH FLOWS FROM INVESTING ACTIVITIES:Fixed income securities:Purchases


(350,480
)


(337,848
)


(174,192
)Maturities


55,357



47,288



35,591Sales


114,303



224,338



124,363Purchases of equity securities


(822
)


(1,193
)


(817
)Proceeds from the sale of equity securities


844



1,041



809Changes in short-term investments


56,897



(37,180
)


(36,157
)Purchases of property and equipment, net


(5,838
)


(10,475
)


(8,666
)Other, net


(9
)


767



1,567Net cash (used in) investing activities


(129,748
)


(113,262
)


(57,502
)CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt






(20,000
)


(15,000
)Debt issuance costs










(125
)Employee stock option exercises and other


3,608



7,855



3,428Net cash provided by (used in) financing activities


3,608



(12,145
)


(11,697
)Increase (decrease) in cash


3,066



(1,159
)


987Cash at beginning of period


7,164



8,323



7,336Cash at end of period

$
10,230


$
7,164


$
8,323Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest

$
2,837


$
3,628


$
3,271Income taxes

$
42,219


$
38,349


$
10,156    51




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Significant
    Accounting Policies  Formation
    of CNA Surety Corporation and Merger
    Principles
    of Consolidation
    Estimates
    Investments
        Deferred
    Policy Acquisition Costs
   52




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Intangible
    Assets
        Reserves
    for Unpaid Losses and Loss Adjustment Expenses
    Insurance
    Premiums
    Reinsurance
   53




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Stock-Based
    Compensation
    Income
    Taxes
      Property
    and Equipment
    Earnings
    Per Share
   54




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Years Ended December 31,2007


2006


2005Net income

$
92,496


$
82,818


$
38,431Shares:Weighted average shares outstanding


43,872



43,334



43,015Weighted average shares of options exercised and additional
    stock issuance


128



320



190Total weighted average shares outstanding


44,000



43,654



43,205Effect of dilutive options


267



268



152Total weighted average shares outstanding, assuming dilution


44,267



43,922



43,357Earnings per share

$
2.10


$
1.90


$
0.89Earnings per share, assuming dilution

$
2.09


$
1.89


$
0.89     Accounting
    Pronouncements
     55




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  instrument-by-instrument
  05-1, (SOP 05-1). SOP 05-1 SOP 05-1 SOP 05-1
  2.
    Investments    Gross


Gross Unrealized LossesAmortized Cost


Unrealized


Less Than


More Than


EstimatedDecember 31, 2007

or Cost


Gains


12 Months


12 Months


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

$
17,790


$
485


$



$



$
18,275U.S. Agencies


52,617



706







(15
)


53,308Collateralized mortgage obligations


30,086



502



(11
)


(107
)


30,470Mortgage pass-through securities


54,659



401







(586
)


54,474Obligations of states and political subdivisions


625,858



15,408



(2,500
)


(641
)


638,125Corporate bonds


95,714



1,493



(97
)


(1,408
)


95,702Non-agency collateralized mortgage obligations


35,011



232







(699
)


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


9,951











(50
)


9,901Credit card receivables


17,234



451











17,685Other


10,788



157







(75
)


10,870Total fixed income securities


949,708



19,835



(2,608
)


(3,581
)


963,354Equity securities


1,683



106











1,789Total

$
951,391


$
19,941


$
(2,608
)

$
(3,581
)

$
965,143   56




---



##### Table of Contents



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


Gross Unrealized LossesAmortized Cost


Unrealized


Less Than


More Than


EstimatedDecember 31, 2006

or Cost


Gains


12 Months


12 Months


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

$
14,832


$



$



$
(327
)

$
14,505U.S. Agencies


62,106



14



(96
)


(260
)


61,764Collateralized mortgage obligations


16,969



294







(326
)


16,937Mortgage pass-through securities


38,851



77







(1,129
)


37,799Obligations of states and political subdivisions


492,640



13,833



(118
)


(10
)


506,345Corporate bonds


66,943



1,375



(5
)


(1,059
)


67,254Non-agency collateralized mortgage obligations


37,069



210







(817
)


36,462Other asset-backed securities:Second mortgages/home equity loans


20,925







(26
)


(150
)


20,749Other


17,230



211











17,441Redeemable preferred stock


5,613



62







(140
)


5,535Total fixed income securities


773,178



16,076



(245
)


(4,218
)


784,791Equity securities


1,508



160











1,668Total

$
774,686


$
16,236


$
(245
)

$
(4,218
)

$
786,459       2007


2006Amortized


Estimated Fair


Amortized


Estimated FairCost


Value


Cost


ValueFixed income securities:Due within one year

$
4,133


$
4,164


$
9,041


$
9,049Due after one year but within five years


189,384



193,656



146,632



147,897Due after five years but within ten years


323,327



332,657



302,253



310,292Due after ten years


275,135



274,933



178,595



182,630791,979



805,410



636,521



649,868Mortgage pass-through securities, collateralized mortgage
    obligations and asset-backed securities


157,729



157,944



136,657



134,923$
949,708


$
963,354


$
773,178


$
784,791  57




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2007


2006


2005Investment income:Fixed income securities

$
39,990


$
35,648


$
31,694Equity securities


72



41



37Short-term investments


4,265



3,333



2,592Other investments






4



73Total investment income on available-for-sale securities


44,327



39,026



34,396Investment income on deposit with affiliated ceding company


1,611



1,513



401Investment expenses


(1,302
)


(1,215
)


(1,050
)Net investment income

$
44,636


$
39,324


$
33,747     Years Ended December 31,2007


2006


2005Net realized investment gains (losses):Fixed income securities:Gross realized investment gains

$
345


$
140


$
1,622Gross realized investment losses


(955
)


(1,391
)


(325
)Net realized investment (losses) gains on fixed income securities


(610
)


(1,251
)


1,297Equity securities:Gross realized investment gains


147



125



83Gross realized investment losses


(1
)


(8
)


(3
)Net realized investment gains on equity securities


146



117



80Other


19



(139
)


597Net realized investment (losses) gains

$
(445
)

$
(1,273
)

$
1,974Net change in unrealized gains (losses)Fixed income securities

$
2,032


$
109


$
(18,460
)Equity securities


(53
)


55



(9
)Total net change in unrealized gains (losses)

$
1,979


$
164


$
(18,469
)Net realized gains (losses) and change in unrealized gains
    (losses)

$
1,534


$
(1,109
)

$
(16,495
)    58




---



##### Table of Contents



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


% ofFair


UnrealizedContractual Maturity

Value


LossDue after one year through five years


2
%


7
%Due after five years through ten years


14



17Due after ten years


51



51Asset-backed securities


33



25Total


100
%


100
%     December 31, 2007


December 31, 2006Gross





GrossEstimated


Unrealized


Estimated


UnrealizedUnrealized Loss Aging

Fair Value


Loss


Fair Value


LossFixed income securities:Investment grade:0-6 months

$
17,785


$
175


$
75,215


$
2057-12 months


112,914



2,433



10,104



4013-24 months


9,984



671



137,954



3,457Greater than 24 months


91,683



2,463



16,206



684Total investment grade


232,366



5,742



239,479



4,386Non-investment grade:13-24 months










3,960



77Greater than 24 months


3,582



447







Total

$
235,948


$
6,189


$
243,439


$
4,463        59




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          3.
    Debt        30-year
 60




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      4.
    Fair
    Value of Financial Instruments      2007


2006Carrying


Estimated


Carrying


EstimatedAmount


Fair Value


Amount


Fair ValueFixed income securities

$
963,354


$
963,354


$
784,791


$
784,791Equity securities


1,789



1,789



1,668



1,668Short-term investments


49,453



49,453



103,640



103,640Other investments










22



22Cash


10,230



10,230



7,164



7,164Debt


30,791



30,791



30,690



30,690     Investments
  Cash, Short-term Investments and Other
    Investments
  Debt
 61




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5.
    Deferred
    Policy Acquisition Costs and Other Operating Expenses    Years Ended December 31,2007


2006


2005Balance at beginning of period

$
102,937


$
102,833


$
102,128Costs deferred


171,689



164,614



157,347Amortization


(170,346
)


(164,510
)


(156,642
)Balance at end of period

$
104,280


$
102,937


$
102,833     Years Ended December 31,2007


2006


2005Amortization of deferred policy acquisition costs

$
170,346


$
164,510


$
156,642Other operating expenses


57,066



52,050



45,879Net commissions, brokerage and other underwriting expenses

$
227,412


$
216,560


$
202,521   6.
    Reinsurance      Years Ended December 31,2007


2006


2005Written


Earned


Written


Earned


Written


EarnedDirect

$
360,877


$
353,594


$
334,020


$
324,831


$
311,435


$
288,994Assumed


110,783



112,938



117,336



113,769



106,095



113,508Ceded


(43,371
)


(45,026
)


(41,727
)


(44,958
)


(51,582
)


(54,141
)Net premiums

$
428,289


$
421,506


$
409,629


$
393,642


$
365,948


$
348,361    62




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Years Ended December 31,2007


2006


2005$


Ratio


$


Ratio


$


RatioGross losses and loss adjustment expenses

$
119,567



25.6
%

$
94,520



21.6
%

$
176,416



43.8
%(Increase) decrease in reinsurance recoverables


(16,443
)


36.5
%


1,310



(2.9
)%


(48,575
)


89.7
%Net losses and loss adjustment expenses

$
103,124



24.5
%

$
95,830



24.3
%

$
127,841



36.7
%       Excess of
    Loss Reinsurance
  2006
    Third Party Reinsurance Compared to 2005 Third Party
    Reinsurance
    2007
    Third Party Reinsurance Compared to 2006 Third Party
    Reinsurance
   63




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2008
    Third Party Reinsurance Compared to 2007 Third Party
    Reinsurance
    Related
    Party Reinsurance
       64




---



##### Table of Contents



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




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  7.
    Reserves
    for Losses and Loss Adjustment Expenses    Years Ended December 31,2007


2006


2005Reserves at beginning of period:Gross

$
434,224


$
424,449


$
363,387Ceded reinsurance


144,858



147,435



116,831Net reserves at beginning of period


289,366



277,014



246,556Net incurred loss and loss adjustment expenses:Provision for insured events of current period


108,178



101,140



151,174Decrease in provision for insured events of prior periods


(5,054
)


(5,310
)


(23,333
)Total net incurred


103,124



95,830



127,841Net payments attributable to:Current period events


14,265



6,855



32,030Prior period events


55,879



76,623



65,353Total net payments


70,144



83,478



97,383Net reserves at end of period


322,346



289,366



277,014Ceded reinsurance at end of period


150,496



144,858



147,435Gross reserves at end of period

$
472,842


$
434,224


$
424,449           8.
    Commitments
    and Contingencies     66




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  9.
    Income
    Taxes    2007


2006Deferred tax assets related to:Unearned premium reserve

$
18,361


$
17,795Loss and loss adjustment expense reserve


3,946



4,070Accrued expenses


2,253



2,205Postretirement benefits


4,233



4,873Other


4,639



3,618Total deferred tax assets


33,432



32,561Deferred tax liabilities related to:Deferred policy acquisition costs


36,498



36,028Intangible assets


5,650



5,650Unrealized net gains on securities


4,813



4,120Other


4,227



4,061Total deferred tax liabilities


51,188



49,859Net deferred tax liability

$
17,756


$
17,298       Years Ended December 31,2007


2006


2005Current tax expense

$
41,270


$
34,446


$
13,484Deferred tax benefit


(1,523
)


(1,630
)


(1,740
)Total income tax expense

$
39,747


$
32,816


$
11,744     Years Ended December 31,2007


2006


2005Federal statutory rate


35.0
%


35.0
%


35.0
%Tax-exempt income deduction


(5.7
)


(5.5
)


(11.5
)Non-deductible expenses


0.2



0.2



0.3State income tax, net of federal income tax benefit


0.9



1.0



0.6Other


(0.3
)


(2.3
)


(1.0
)Total income tax expense


30.1
%


28.4
%


23.4
%  67




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    10.
    Employee
    Benefits           68




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007


2006Reconciliation of benefit obligation:Benefit obligation at beginning of the year

$
12,466


$
10,570Service cost


334



259Interest cost


761



584Actuarial (gain) loss


(3,359
)


1,349Benefits and expenses paid


(201
)


(296
)Benefit obligation at end of year

$
10,001


$
12,466         2007


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

$
(511
)

$
(672
)Net actuarial loss


1,528



5,329Total pre-tax accumulated other comprehensive income

$
1,017


$
4,657Pre-tax AOCI in beginning of year related to postretirement
    benefit obligation

$
4,657


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


106



Amortization of net actuarial loss


(387
)


Amounts recognized in other comprehensive income arising during
    the year:Net actuarial losses/(gains)


(3,359
)


Increase due to adoption of SFAS 158






4,657Pre-tax AOCI at end of year related to postretirement benefit
    obligation

$
1,017


$
4,657       2007


2006Amounts recognized in the consolidated balance sheets for
    postretirement benefit obligations:Liability for postretirement benefits

$
10,001


$
12,466Deferred income taxes, net


4,223



4,873Accumulated other comprehensive income, net of tax


138



2,660  69




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Difference Due toIncluding Effects

Without Effects of

Effects ofof Tax-Free Subsidy

Tax-Free Subsidy

Tax-Free SubsidyLiability for postretirement benefits after application of
    SFAS 158 at December 31, 2007

$
10,001


$
11,495


$
1,494     2007


2006


2005Net periodic benefit cost:Service cost

$
333


$
259


$
241Interest cost


761



584



511Amortization of prior service cost


(106
)


(162
)


(162
)Net amortization of actuarial loss (gain)


387



270



193Net periodic benefit cost

$
1,375


$
951


$
783   2007


2006


2005Key Assumptions:Discount rate


5.875
%


5.625
%


5.50
%Rate of compensation increases (postretirement sick leave plan
    only)


5.0
%


5.0
%


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


10.0
%


10.0
%


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


10.0
%


10.0
%


10.0
%Ultimate health care cost trend rate


5.0
%


5.0
%


5.0
%Year in which ultimate trend rate is reached


2013



2012



2011Mortality


RP 2000 Projected



RP 2000 Projected



1983 GAMAverage remaining service life  postretirement
    medical plan


12.7 Years



12.7 Years



13.1 YearsAverage life expectancy  postretirement medical plan


14.3 Years



13.5 Years



13.9 YearsAverage remaining service life  sick leave plan


12.7 Years



12.6 Years



12.9 Years      70




---



##### Table of Contents



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

$
(162
)Amortization of net actuarial loss


50Total estimated (benefit) expense to be recognized

$
(112
)     Before Impact of Federal Subsidy


Net of Federal Subsidy2008

$
281


$
2542009


301



2702010


317



2782011


337



2922012


375



3272013-2017


2,802



2,505   11.
    Stockholders
    Equity    EQUITY
    COMPENSATION PLANS
       71




---



##### Table of Contents



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


Price perto Option


ShareOutstanding options at January 1, 2007


1,008,525



12.02Options granted


334,100



20.70Options forfeited


(40,825
)


14.97Options expired


(7,390
)


15.80Options exercised


(239,822
)


12.43Outstanding options at December 31, 2007


1,054,588



14.53     WeightedShares


AverageSubject


Grant DateTo Option


Fair ValueNon-vested options at January 1, 2007


481,613


$
4.51Options granted


334,100


$
9.04Options vested


(220,331
)

$
4.28Options forfeited


(40,825
)

$
5.98Non-vested options at December 31, 2007


554,557


$
7.23    72




---



##### Table of Contents



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





Options ExercisableNumber


Remaining


Weighted Average


Number


Weighted AverageRange of Exercise Prices

Outstanding


Contractual Life


Exercise Price


Exercisable


Exercise Price$9.35 to $11.50


234,725



5.0 years


$
9.86



233,475


$
9.86$12.06 to $15.875


498,563



7.1 years



12.76



266,556



12.77$16.00 and above


321,300



9.1 years



20.70







     Options Vested or Expected to VestWeighted





Weighted AverageAverage


Aggregate


RemainingNumber


Exercise Price


Intrinsic Value


Contractual LifeDecember 31, 2007


982,045


$
14.23


$
5,707,693


7.2 years   Options ExercisableWeighted





Weighted AverageAverage


Aggregate


RemainingNumber


Exercise Price


Intrinsic Value


Contractual LifeDecember 31, 2007


500,031


$
11.41


$
4,190,236


5.9 years       Year EndedDecember 31,2005Net income

$
38,431Less: Total stock-based compensation cost determined under the
    fair value method, net of tax


(758
)Pro forma net income

$
37,673Basic and diluted earnings per share, as reported

$
0.89Basic earnings per share, pro forma

$
0.87      73




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    12.
    Segment
    Information      and/or
    Gross Written Premiums% of





% of





% of2007


Total


2006


Total


2005


TotalContract

$
305,624



64.8
%

$
285,157



63.2
%

$
248,662



59.6
%Commercial:License and permit


78,875



16.7



79,144



17.5



77,764



18.6Judicial and fiduciary


23,348



5.0



23,949



5.3



23,142



5.5Public official


23,584



5.0



23,491



5.2



26,428



6.3Other


9,021



1.9



8,287



1.9



6,406



1.6Total commercial


134,828



28.6



134,871



29.9



133,740



32.0Fidelity and other


31,208



6.6



31,328



6.9



35,128



8.4$
471,660



100.0
%

$
451,356



100.0
%

$
417,530



100.0
%Domestic

$
467,285



99.1
%

$
448,387



99.3
%

$
415,520



99.5
%International


4,375



0.9



2,969



0.7



2,010



0.5$
471,660



100.0
%

$
451,356



100.0
%

$
417,530



100.0
%   74




---



##### Table of Contents



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





% of





% of2007


Total


2006


Total


2005


TotalContract

$
266,749



62.3
%

$
247,987



60.5
%

$
202,798



55.4
%Commercial


130,332



30.4



130,314



31.8



128,022



35.0Fidelity and other


31,208



7.3



31,328



7.7



35,128



9.6$
428,289



100.0
%

$
409,629



100.0
%

$
365,948



100.0
%Domestic

$
423,914



99.0
%

$
406,684



99.3
%

$
363,940



99.5
%International


4,375



1.0



2,945



0.7



2,008



0.5$
428,289



100.0
%

$
409,629



100.0
%

$
365,948



100.0
%     13.
    Statutory
    Financial Data (unaudited)   75




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007


2006Consolidated equity per GAAP

$
667,705


$
565,902Impact of non-insurance companies and eliminations


18,063



19,720Insurance company equity per GAAP


685,768



585,622Intangible assets


(133,361
)


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


(14,092
)


(11,690
)Deferred policy acquisition costs


(104,280
)


(102,937
)Deferred income taxes, net


34,134



33,408Accumulated postretirement benefit obligations


1,017



4,657Non-admitted assets


(26,961
)


(26,684
)Total statutory capital and surplus per statutory accounting
    practices

$
442,225


$
349,015   state-by-state
    14.
    Related
    Party Transactions    and/or
 76




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
             77




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##### Table of Contents



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


Second


Third


FourthQuarter


Quarter


Quarter


Quarter2007Revenues

$
109,283


$
115,620


$
125,010


$
115,784Income before income taxes

$
29,721


$
31,018


$
40,478


$
31,026Income tax expense


8,972



9,124



12,481



9,170Net income

$
20,749


$
21,894


$
27,997


$
21,856Basic earnings per common share

$
0.47


$
0.50


$
0.64


$
0.50Diluted earnings per common share

$
0.47


$
0.50


$
0.63


$
0.492006Revenues

$
101,060


$
107,145


$
111,649


$
111,839Income before income taxes

$
25,599


$
27,674


$
33,022


$
29,339Income tax expense


7,598



8,185



9,402



7,631Net income

$
18,001


$
19,489


$
23,620


$
21,708Basic earnings per common share

$
0.41


$
0.45


$
0.54


$
0.50Diluted earnings per common share

$
0.41


$
0.45


$
0.54


$
0.492005Revenues

$
90,545


$
93,316


$
99,850


$
100,371Income (loss) before income taxes

$
19,535


$
(20,344
)

$
27,045


$
23,939Income tax expense (benefit)


5,460



(8,409
)


7,262



7,431Net income

$
14,075


$
(11,935
)

$
19,783


$
16,508Basic and diluted earnings (loss) per common share

$
0.33


$
(0.28
)

$
0.46


$
0.38  78




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##### Table of Contents



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Rules 13a-15 15d-15
  Form 10-K
  Rules 13a-15 15d-15
  ITEM 9B.
    OTHER
    INFORMATION   PART III.  ITEMS 10,
    11, 12, 13, and 14.
    DIRECTORS
    AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
    COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS, CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND PRINCIPAL ACCOUNTANT
    FEES AND SERVICES  Form 10-K.
 79




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##### Table of Contents



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


81Schedule II  Condensed Financial
    Information of Registrant


82Schedule III  Supplementary Insurance
    Information


86Schedule IV  Reinsurance


87Schedule V  Valuation and Qualifying
    Accounts


88Schedule VI  Supplemental Information
    Concerning Property  Casualty Insurance Operations


89(a) (3) Exhibits


90  80




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##### Table of Contents



SCHEDULE I
  CNA
    SURETY CORPORATION AND SUBSIDIARIESSUMMARY OF INVESTMENTS
    OTHER THAN INVESTMENTS IN RELATED PARTIES
    As of December 31, 2007 and 2006
  As of December 31, 2007Cost orAmortized


Fair


CarryingCost


Value


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

$
155,152


$
156,527


$
156,527States, municipalities and political subdivisions


625,858



638,125



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


168,698



168,702



168,702Total fixed income securities


949,708



963,354



963,354Equity securities


1,683



1,789



1,789Short-term investments


49,453







49,453Total investments

$
1,000,844






$
1,014,596   As of December 31, 2006Cost orAmortized


Fair


CarryingCost


Value


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

$
132,758


$
131,005


$
131,005States, municipalities and political subdivisions


492,640



506,345



506,345All other bonds, including corporate bonds and other
    asset-backed securities


147,780



147,441



147,441Total fixed income securities


773,178



784,791



784,791Equity securities


1,508



1,668



1,668Short-term investments


103,640







103,640Other investments


22







22Total investments

$
878,348






$
890,121  81




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##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
  CONDENSED FINANCIAL INFORMATION OF
    REGISTRANT
 (PARENT COMPANY)
 BALANCE SHEETS
  December 31,2007


2006(Amounts in thousands)ASSETSInvestments in and advances to subsidiaries

$
680,923


$
578,865Fixed income securities (amortized cost: $-0- and $800)






800Equity investments (cost: $1,683 and $1,508)


1,789



1,668Short-term investments, at cost (which approximates fair value)


7,294



9,452Cash (restricted: $4,765 and $2,823)


4,767



2,897Other assets


6,384



6,394Total assets

$
701,157


$
600,076LIABILITIESDebt

$
30,791


$
30,690Other liabilities


2,661



3,484Total liabilities


33,452



34,174STOCKHOLDERS EQUITYCommon stock


455



453Additional paid-in capital


274,069



268,651Retained earnings


399,241



306,745Accumulated other comprehensive income


8,800



4,993Treasury stock, at cost


(14,860
)


(14,940
)Total stockholders equity


667,705



565,902Total liabilities and stockholders equity

$
701,157


$
600,076    82




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##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 (PARENT COMPANY)  (Continued)
 STATEMENTS OF INCOME
  Years Ended December 31,2007


2006


2005(Amounts in thousands)Revenues:Net investment income

$
677


$
854


$
774Net realized investment gains


146



117



2,227Total revenues


823



971



3,001Expenses:Interest expense


2,918



3,669



3,545Corporate expense


7,193



7,672



5,648Total expenses


10,111



11,341



9,193Loss from operations before income taxes and equity in net
    income of subsidiaries


(9,288
)


(10,370
)


(6,192
)Income tax benefit


(3,367
)


(5,235
)


(2,069
)Net loss before equity in net income of subsidiaries


(5,921
)


(5,135
)


(4,123
)Equity in net income of subsidiaries


98,417



87,953



42,554Net income

$
92,496


$
82,818


$
38,431    83




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##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 (PARENT COMPANY)  (Continued)
 STATEMENTS OF CASH FLOWS
  Years Ended December 31,2007


2006


2005(Amounts in thousands)OPERATING ACTIVITIES:Net income

$
92,496


$
82,818


$
38,431Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:Equity in net income of subsidiaries


(98,417
)


(87,953
)


(42,554
)Depreciation and amortization


101



101



101Net realized investment gains


(146
)


(117
)


(2,227
)Stock-based compensation


1,892



1,207



Cash dividends from subsidiaries


2,000



11,513



20,465Tax payments received from subsidiaries


43,385



42,449



11,764Federal income tax payments


(41,000
)


(37,250
)


(10,000
)Changes in:Deferred income taxes, net


(483
)


(653
)


(650
)Accrued expenses


(747
)


642



(373
)Change in other assets and liabilities


(3,380
)


(5,358
)


(253
)Net cash (used in) provided by operating activities


(4,299
)


7,399



14,704INVESTING ACTIVITIES:Net advances from (to) subsidiaries


232



(2,032
)


731Net sales of fixed income securities


200



200



7,860Net purchases of equity securities


(29
)


(190
)


(38
)Changes in short-term investments


2,158



7,099



(10,753
)Net cash provided by (used in) investing activities


2,561



5,077



(2,200
)FINANCING ACTIVITIES:Principal payments on debt






(20,000
)


(15,000
)Debt issuance costs










(125
)Employee stock option exercises and other


3,608



7,855



3,428Net cash provided by (used in) financing activities


3,608



(12,145
)


(11,700
)Increase in cash


1,870



331



804Cash at beginning of period


2,897



2,566



1,762Cash at end of period

$
4,767


$
2,897


$
2,566    84




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##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 (PARENT COMPANY)  (Continued)
 NOTES TO CONDENSED FINANCIAL INFORMATION
  1.
    Restricted
    Cash and Short-Term Investments   85




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##### Table of Contents



SCHEDULE III
  CNA
    SURETY CORPORATION AND SUBSIDIARIES
  SUPPLEMENTARY INSURANCE INFORMATION
 As of and for the Years Ended
 December 31, 2007, 2006 and 2005
  Years Ended December 31,2007


2006


2005(Amounts in thousands)Deferred policy acquisition costs

$
104,280


$
102,937Unpaid losses and loss adjustment expense reserves

$
472,842


$
434,224Unearned premiums

$
258,930


$
253,803Net premium revenue

$
421,506


$
393,642


$
348,361Net investment income

$
44,636


$
39,324


$
33,747Benefits, claims, losses and settlement expenses

$
103,124


$
95,830


$
127,841Amortization of deferred policy acquisition costs

$
170,346


$
164,510


$
156,642Other operating expenses

$
57,066


$
52,050


$
45,879Net premiums written

$
428,289


$
409,629


$
365,948  86




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##### Table of Contents



SCHEDULE IV
  CNA
    SURETY CORPORATION AND SUBSIDIARIES
  REINSURANCE
 For the Years Ended December 31, 2007, 2006 and 2005
  PercentageCeded to


Assumed





of AmountGross


Other


from Other


Net


AssumedAmount


Companies


Companies(1)


Amount


to Net(Amounts in thousands)Year Ended December 31, 2007Premiums written:Property and casualty insurance

$
360,877


$
43,371


$
110,783


$
428,289



25.9
%Total premiums written

$
360,877


$
43,371


$
110,783


$
428,289



25.9
%Premiums earned:Property and casualty insurance

$
353,594


$
45,026


$
112,938


$
421,506



26.8
%Total premiums earned

$
353,594


$
45,026


$
112,938


$
421,506



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

$
334,020


$
41,727


$
117,336


$
409,629



28.6
%Total premiums written

$
334,020


$
41,727


$
117,336


$
409,629



28.6
%Premiums earned:Property and casualty insurance

$
324,831


$
44,958


$
113,769


$
393,642



28.9
%Total premiums earned

$
324,831


$
44,958


$
113,769


$
393,642



28.9
%Year Ended December 31, 2005Premiums written:Property and casualty insurance

$
311,435


$
51,582


$
106,095


$
365,948



29.0
%Total premiums written

$
311,435


$
51,582


$
106,095


$
365,948



29.0
%Premiums earned:Property and casualty insurance

$
288,994


$
54,141


$
113,508


$
348,361



32.6
%Total premiums earned

$
288,994


$
54,141


$
113,508


$
348,361



32.6
%     (1)
    
    Primarily from affiliates. 87




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##### Table of Contents



SCHEDULE V
  CNA
    SURETY CORPORATION AND SUBSIDIARIES
  VALUATION AND QUALIFYING ACCOUNTS
 As of and for the Years Ended December 31, 2007, 2006
    and 2005
  AdditionsBalance at


Charged to


Charged to





Balance atBeginning


Costs and


Other





End ofof Period


Expenses


Accounts


Deductions(1)


Period(Amounts in thousands)Year Ended December 31, 2007Allowance for doubtful accounts on premiums receivable

$
1,369


$
393


$



$
617


$
1,145Allowance for doubtful accounts on reinsurance receivable

$



$



$



$



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

$
1,490


$
594


$



$
715


$
1,369Allowance for doubtful accounts on reinsurance receivable

$



$



$



$



$
Year Ended December 31, 2005Allowance for doubtful accounts on premiums receivable

$
2,153


$
(168
)

$



$
495


$
1,490Allowance for doubtful accounts on reinsurance receivable

$



$



$



$



$
     (1)
    
    Write-offs charged against allowance. 88




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##### Table of Contents



SCHEDULE VI
  CNA
    SURETY CORPORATION AND SUBSIDIARIES
  SUPPLEMENTAL INFORMATION CONCERNING
    PROPERTY-CASUALTY
 INSURANCE OPERATIONS
 As of and for the Years Ended December 31, 2007, 2006
    and 2005
  Years Ended December 31,2007


2006


2005(Amounts in thousands)Deferred policy acquisition costs

$
104,280


$
102,937Reserves for unpaid claims and claim adjustment expenses

$
472,842


$
434,224Discount (if any) deducted

$



$
Unearned premiums

$
258,930


$
253,803Net premium revenue

$
421,506


$
393,642


$
348,361Net investment income

$
44,636


$
39,324


$
33,747Net claims and claim expenses incurred related to:Current year

$
108,178


$
101,140


$
151,174Prior years

$
(5,054
)

$
(5,310
)

$
(23,333
)Amortization of deferred policy acquisition costs

$
170,346


$
164,510


$
156,642Net paid claims and claim adjustment expenses

$
70,144


$
83,478


$
97,383Net premiums written

$
428,289


$
409,629


$
365,948  89




---



##### Table of Contents



(a)(3)
    Exhibits  ExhibitNumber

Description9


Not applicable.10
(1)

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

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

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

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

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

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

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

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

Form of Services and Indemnity Agreement by and between Western
    Surety Company and Continental Casualty Company (filed on
    November 14, 2002 as Exhibit 10(5) to CNA Surety
    Corporations
    Form 10-Q,
    and incorporated herein by reference.)10
(23)

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

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

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

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

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

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

Amendment to Form of Surety Quota Share Reinsurance Contract by
    and between Western Surety Company and Continental Casualty
    Company (filed on August 2, 2005 as Exhibit 10(32) to
    CNA Surety Corporations
    Form 10-Q,
    and incorporated herein by reference.) 90




---



##### Table of Contents



ExhibitNumber

Description10
(34)

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

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

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

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

Form of Surety Quota Share Reinsurance Contract by and between
    Western Surety Company and Continental Casualty Company (filed
    on February 21, 2007 as Exhibit 10(38) to CNA Surety
    Corporations Form
    10-K, and
    incorporated herein by reference.)11


Not Applicable.12


Not Applicable.13


Not Applicable.16


Not Applicable.18


Not Applicable.21


Subsidiaries of the Registrant.22


Not Applicable.23


Consent of Deloitte & Touche LLP dated
    February 19, 2008.24


Not Applicable.31
(1)

Certification pursuant to
    Rule 13a-14(a)
    of the Securities Exchange Act of 1934, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002-Chief
    Executive Officer.31
(2)

Certification pursuant to
    Rule 13a-14(a)
    of the Securities Exchange Act of 1934, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002-Chief
    Financial Officer.32
(1)

Certification Pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.32
(2)

Certification Pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.  91




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##### Table of Contents



SIGNATURES
      John
    F. Welch
          John
    F. Corcoran
             Date

Title

SignatureFebruary 19, 2008

Chairman of the Board
    and Director

/s/  James
    R. LewisJames
    R. LewisFebruary 19, 2008

Director

/s/  Philip
    H. BrittPhilip
    H. BrittFebruary 19, 2008

Director

/s/  Robert
    A. TinstmanRobert
    A. TinstmanFebruary 19, 2008

Director

/s/  David
    B. EdelsonDavid
    B. EdelsonFebruary 19, 2008

Director

/s/  Anthony
    S. ClebergAnthony
    S. ClebergFebruary 19, 2008

Director

/s/  D.
    Craig MenseD.
    Craig MenseFebruary 19, 2008

Director

/s/  John
    F. WelchJohn
    F. Welch  92