##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSION
 Washington, 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, 2006o

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(Address of principal
    executive offices)

60604(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
 o þ 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 SEC 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


43Item 8.

Financial
    Statements and Supplementary Data


46Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


81Item 9A.

Controls and
    Procedures


81Item 9B.

Other
    Information


81PART IIIItem 10.

Directors and
    Executive Officers of the Registrant


81Item 11.

Executive
    Compensation


81Item 12.

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


81Item 13.

Certain
    Relationships and Related Transactions


81Item 14.

Principal
    Accountant Fees and Services


81PART IVItem 15.

Exhibits and
    Financial Statement Schedules


82Quota Share TreatySubsidiariesConsentCertificationCertificationCertificationCertification   1




---



##### 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




---



##### Table of Contents



Standard
    and Poors (S&P)
   Product
    Information    Products
    and Policies
    and/or
    Bid bonds:
  Performance bonds:
  Payment bonds:
      License and Permit bonds:
  Judicial and Fiduciary bonds:
 3




---



##### Table of Contents



Public Official bonds:
          Gross Written Premiums% of





% of





% of2006


Total


2005


Total


2004


TotalContract

$
285,157



63.2
%

$
248,662



59.6
%

$
221,577



56.9
%Commercial:License and permit


79,144



17.5



77,764



18.6



81,502



20.9Judicial and fiduciary


23,949



5.3



23,142



5.5



22,590



5.8Public official


23,491



5.2



26,428



6.3



23,911



6.1Other


8,287



1.9



6,406



1.6



7,890



2.1Total commercial


134,871



29.9



133,740



32.0



135,893



34.9Fidelity and other


31,328



6.9



35,128



8.4



31,947



8.2$
451,356



100.0
%

$
417,530



100.0
%

$
389,417



100.0
%Domestic

$
448,387



99.3
%

$
415,520



99.5
%

$
381,655



98.0
%International


2,969



0.7



2,010



0.5



7,762



2.0$
451,356



100.0
%

$
417,530



100.0
%

$
389,417



100.0
%   Net Written Premiums% of





% of





% of2006


Total


2005


Total


2004


TotalContract

$
247,987



60.5
%

$
202,798



55.4
%

$
172,274



54.1
%Commercial


130,314



31.8



128,022



35.0



115,454



36.3Fidelity and other


31,328



7.7



35,128



9.6



30,556



9.6$
409,629



100.0
%

$
365,948



100.0
%

$
318,284



100.0
%Domestic

$
406,684



99.3
%

$
363,940



99.5
%

$
311,620



97.9
%International


2,945



0.7



2,008



0.5



6,664



2.1$
409,629



100.0
%

$
365,948



100.0
%

$
318,284



100.0
%   4




---



##### Table of Contents



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





% of





% of2006


Total


2005


Total


2004


TotalContract


30



1.2
%


32



1.2
%


33



1.4
%Commercial


1,926



76.0



1,901



72.4



1,803



73.8Fidelity and other


579



22.8



693



26.4



606



24.82,535



100.0
%


2,626



100.0
%


2,442



100.0
%   Average Bond Penalty/Policy Limit as of December 31,2006


2005


2004Contract

$
1,180,538


$
1,011,252


$
923,981Commercial

$
14,236


$
14,208


$
14,673Fidelity and other

$
19,486


$
20,380


$
19,245    Marketing      Years Ended December 31,2006


2005


2004Gross Written Premiums by State:Texas


9.5
%


8.7
%


8.8
%California


8.9



10.4



10.4Florida


7.8



7.4



6.6Illinois


4.6



5.2



4.6New York


3.9



4.1



4.0Pennsylvania


3.2



3.4



3.1Massachusetts


3.1



2.9



2.7Georgia


3.0



2.8



3.0Michigan


2.5



2.8



2.7Arizona


2.4



2.6



2.0All
    Other(a)


51.1



49.7



52.1Total


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, 2006. 5




---



##### Table of Contents



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




---



##### Table of Contents



Reinsurance         Reserves
    for Unpaid Losses and Loss Adjustment Expenses     7




---



##### Table of Contents



Net reserves at end of year, GAAP
    basis

$
289,366Ceded reinsurance, net of salvage
    and subrogation


144,858Gross reserves at end of year,
    GAAP basis


434,224Estimated reinsurance recoverable
    netted against gross reserves for SAP


(144,858
)Net reserves on retroactive
    reinsurance assumed


(10,536
)Net reserves at end of year, SAP
    basis

$
278,830       8




---



##### Table of Contents



As of December 31,1996


1997


1998


1999


2000


2001


2002


2003


2004


2005


2006Gross reserves for losses and loss
    adjustment expenses

$
142,282


$
130,381


$
150,020


$
157,933


$
204,457


$
315,811


$
303,433


$
413,539


$
363,387


$
424,449


$
434,224Originally reported ceded
    recoverable


5,218



7,656



7,986



20,464



70,159



166,318



137,301



158,357



116,831



147,435



144,858Net reserves for losses and loss
    adjustment expenses


137,064



122,725



142,034



137,469



134,298



149,493



166,132



255,182



246,556



277,014



289,366Net paid (cumulative) as of:One year later


9,866



19,595



32,428



35,825



44,763



64,832



59,567



88,857



65,353



76,623



Two years later


20,171



30,775



52,524



47,795



75,825



98,885



100,595



128,607



92,582







Three years later


25,206



43,999



58,421



73,341



87,011



117,396



115,034



145,895











Four years later


32,918



47,144



67,451



81,788



93,154



132,891



125,740















Five years later


35,214



51,742



71,352



86,539



99,117



139,051



















Six years later


38,371



54,659



74,462



91,520



100,628























Seven years later


41,058



57,211



77,916



92,727



























Eight years later


43,525



60,330



77,576































Nine years later


44,374



59,734



































Ten years later


44,088







































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


137,064



122,725



142,034



137,469



134,298



149,493



166,132



255,182



246,556



277,014



289,366One year later


96,178



118,373



128,949



130,376



139,110



155,673



205,422



254,570



223,223



271,704



Two years later


90,796



102,304



114,605



128,134



140,094



182,812



199,865



231,619



224,919







Three years later


77,086



87,321



110,462



130,280



132,504



169,340



195,191



246,244











Four years later


62,217



86,271



113,748



122,469



120,051



174,346



203,488















Five years later


60,882



86,320



105,797



110,055



119,471



174,847



















Six years later


61,443



79,029



93,768



109,874



118,485























Seven years later


57,375



69,923



93,447



109,237



























Eight years later


51,857



69,963



93,556































Nine years later


47,656



70,982



































Ten years later


52,480







































Total net (deficiency) redundancy

$
84,584


$
51,743


$
48,478


$
28,232


$
15,813


$
(25,354)


$
(37,356)


$
8,938


$
21,637


$
5,310


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


61.7%



42.2%



34.1%



20.5%



11.8%



(17.0)%



(22.5)%



3.5%



8.8%



1.9%



%Net reserves re-estimated

$
52,480


$
70,982


$
93,556


$
109,237


$
118,485


$
174,847


$
203,488


$
246,244


$
224,919


$
271,704Re-estimated ceded recoverable


5,254



8,784



13,231



67,897



108,005



122,766



143,597



94,263



85,890



132,800Gross reserves re-estimated

$
57,734


$
79,766


$
106,787


$
177,134


$
226,490


$
297,613


$
347,085


$
340,507


$
310,809


$
404,504  Claims   Environmental
    Claims   9




---



##### Table of Contents



Regulation         10




---



##### Table of Contents



Investments       Employees   Availability
    of SEC 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




---



##### 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.
    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.
   13




---



##### Table of Contents



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  sub-lease
   14




---



##### Table of Contents



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




---



##### Table of Contents



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


Low20061st Quarter

$
18.20


$
14.542nd Quarter

$
18.92


$
15.613rd Quarter

$
21.99


$
16.054th Quarter

$
22.74


$
19.4420051st Quarter

$
14.45


$
12.422nd Quarter

$
15.17


$
12.663rd Quarter

$
15.34


$
12.144th Quarter

$
15.56


$
12.80  16




---



##### Table of Contents



Indexed ReturnsYears Ended December 31,Company/Index

2001


2002


2003


2004


2005


2006CNA Surety Corporation


100



50.65



61.35



86.13



94.00



138.71Standard & Poors
    500 Stock Index


100



76.63



96.85



105.56



108.73



123.54Standard & Poors
    Property & Casualty Index


100



87.47



108.42



117.49



132.74



146.97   
      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


1,008,525


$
12.02



3,000,000   Dividends
   17




---



##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA      2006(b)(c)


2005


2004


2003


2002(Dollars in thousands, except per share data)Total revenues

$
431,693


$
384,082


$
350,789


$
332,576


$
318,487Gross written premiums

$
451,356


$
417,530


$
389,417


$
371,375


$
359,892Net written premiums

$
409,629


$
365,948


$
318,284


$
319,210


$
306,654Net earned premium

$
393,642


$
348,361


$
317,857


$
304,449


$
298,319Net losses and loss adjustment
    expenses(a)


95,830



127,841



87,356



172,476



94,198Net commissions, brokerage and
    other underwriting expenses


216,560



202,521



207,166



190,740



179,827Net investment income


39,324



33,747



30,181



26,301



27,754Net realized investment gains
    (losses)


(1,273
)


1,974



2,751



1,826



(7,586
)Interest expense


3,669



3,545



2,260



1,523



1,708Income (loss) before income taxes


115,634



50,175



54,007



(32,163
)


42,754Income tax expense (benefit)


32,816



11,744



14,297



(18,012
)


12,635Net income (loss)

$
82,818


$
38,431


$
39,710


$
(14,151
)

$
30,119Basic earnings (loss) per common
    share

$
1.90


$
0.89


$
0.92


$
(0.33
)

$
0.70Diluted earnings (loss) per common
    share

$
1.89


$
0.89


$
0.92


$
(0.33
)

$
0.70Loss
    ratio(a)


24.3
%


36.7
%


27.5
%


56.7
%


31.6
%Expense ratio


55.0



58.1



65.2



62.6



60.3Combined
    ratio(a)


79.3
%


94.8
%


92.7
%


119.3
%


91.9
%Invested assets and cash

$
897,285


$
797,914


$
766,387


$
654,072


$
638,204Intangible assets, net of
    amortization


138,785



138,785



138,785



138,785



143,785Total assets


1,368,333



1,262,614



1,174,494



1,169,123



1,093,380Insurance reserves


688,027



665,496



589,406



637,607



519,646Debt


30,690



50,589



65,488



50,418



60,816Total liabilities


802,431



786,039



728,123



758,982



672,819Stockholders equity


565,902



476,575



446,371



410,141



420,561Book value per share

$
12.90


$
11.00


$
10.38


$
9.54


$
9.79Dividends paid per share

$



$



$



$



$
0.45     (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 $5,310, or 1.4%, for the year
    ended December 31, 2006, a reduction of $23,333, or 6.7%,
    for the year ended December 31, 2005, a reduction of $613,
    or 0.2%, for the year ended December 31, 2004, an addition
    of $39,290, or 12.9%, for the year ended December 31, 2003,
    and an addition of $6,180, or 2.1%, for the year ended
    December 31, 2002.  (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 18




---



##### Table of Contents



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 $1.2 million for the year ended
    December 31, 2006. Net of deferred tax benefit, adoption of
    SFAS 123R decreased net income by $0.8 million for the
    year ended December 31, 2006.  (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, 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




---



##### Table of Contents



and/or and/or and/or and/or
  sub-line
  Gross Case Loss


Gross IBNR Loss


Total Grossand LAE Reserves


and LAE Reserves


ReservesContract

$
129,985


$
132,033


$
262,018Commercial


110,131



49,912



160,043Fidelity and other


4,747



7,416



12,163Total

$
244,863


$
189,361


$
434,224         
    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
  Expected
    Ultimate Losses multiplied by IBNR (or Unpaid) Percentage
    Average
    Hindsight Outstanding Method
    Frequency-Severity
    Method
    Loss
    Ratio Method
     21




---



##### Table of Contents



sub-lines sub-line, sub-lines
    
    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.   22




---



##### Table of Contents



December 31,2006


2005Gross basis:Recorded loss reserves

$
434,224


$
424,449Actuarial point estimate


438,313



428,238Difference

$
(4,089
)

$
(3,789
)Difference as a % of actuarial
    point estimate


(0.9
)%


(0.9
)%Net basis:Recorded loss reserves

$
289,366


$
277,015Actuarial point estimate


292,703



278,617Difference

$
(3,337
)

$
(1,602
)Difference as a % of actuarial
    point estimate


(1.1
)%


(0.6
)%           and/or
 23




---



##### Table of Contents



sub-lines sub-lines
  and/or and/or
    Investments
  available-for-sale.
  other-than-temporary
   24




---



##### Table of Contents



Intangible
    Assets
      Insurance
    Premiums
    Deferred
    Policy Acquisition Costs
    Results
    of Operations
  Financial
    Measures
       25




---



##### Table of Contents



Comparison
    of CNA Surety Actual Results for the Years Ended
    December 31, 2006, 2005 and 2004
  Analysis
    of Net Income
      Results
    of Insurance Operations
    Years Ended December 31,2006


2005


2004Gross written premium

$
451,356


$
417,530


$
389,417Net written premium

$
409,629


$
365,948


$
318,284Net earned premium

$
393,642


$
348,361


$
317,857Net losses and loss adjustment
    expenses

$
95,830


$
127,841


$
87,356Net commissions, brokerage and
    other underwriting expenses

$
216,560


$
202,521


$
207,166Loss ratio


24.3
%


36.7
%


27.5
%Expense ratio


55.0



58.1



65.2Combined ratio


79.3
%


94.8
%


92.7
%   Premiums
    Written/Earned
   26




---



##### Table of Contents



sub-line
  Years Ended December 31,2006


2005


2004Contract

$
285,157


$
248,662


$
221,577Commercial


134,871



133,740



135,893Fidelity and other


31,328



35,128



31,947$
451,356


$
417,530


$
389,417       sub-line
  Years Ended December 31,2006


2005


2004Contract

$
247,987


$
202,798


$
172,274Commercial


130,314



128,022



115,454Fidelity and other


31,328



35,128



30,556$
409,629


$
365,948


$
318,284    27




---



##### Table of Contents



sub-line
  Years Ended December 31,2006


2005


2004Contract

$
230,856


$
192,463


$
173,294Commercial


129,208



122,940



115,280Fidelity and other


33,578



32,958



29,283$
393,642


$
348,361


$
317,857       Excess of
    Loss Reinsurance
    2005
    Third Party Reinsurance Compared to 2004 Third Party
    Reinsurance
   28




---



##### Table of Contents



2006
    Third Party Reinsurance Compared to 2005 Third Party
    Reinsurance
    2007
    Third Party Reinsurance Compared to 2006 Third Party
    Reinsurance
    Related
    Party Reinsurance
       29




---



##### Table of Contents



30




---



##### Table of Contents



Net Loss
    Ratio
                 31




---



##### Table of Contents



Exposure
    Management
    Number of Accounts


Total ExposureAs of December 31,


As of December 31,% IncreaseCommercial Account Exposure

2006


2005


2006


2005


(Reduction)(Dollars in millions)$100 million and larger


2



2


$
226.3


$
246.6



(8.2
)%$50 to $100 million


2



2



114.5



137.6



(16.8
)%$25 to $50 million


6



9



211.3



307.7



(31.3
)%$10 to $25 million


40



32



606.0



445.6



36.0
%Total


50



45


$
1,158.1


$
1,137.5



1.8
%       Expense
    Ratio
      Investment
    Income
   32




---



##### Table of Contents



Realized
    Investment Gains and Losses
      Years Ended December 31,2006


2005


2004Gross realized investment gains

$
265


$
2,302


$
2,765Gross realized investment losses


(1,538
)


(328
)


(14
)Net realized investment gains
    (losses)

$
(1,273
)

$
1,974


$
2,751   Interest
    Expense
    Income
    Taxes
    Liquidity
    and Capital Resources
     33




---



##### Table of Contents



34




---



##### Table of Contents



30-year
      Contractual Obligations as ofDecember 31, 2006

2007


2008


2009


2010


2011


Thereafter


Total(In millions)Debt(a)

$
2.8


$
2.7


$
2.7


$
2.7


$
2.7


$
91.6


$
105.2Operating leases


2.1



2.0



2.0



1.9



1.8



0.9



10.7Loss and loss adjustment expense
    reserves


203.0



103.4



69.6



15.0



10.4



32.8



434.2Other long-term
    liabilities(b)


1.3



1.1



0.9



0.5



0.6



11.4



15.8Total

$
209.2


$
109.2


$
75.2


$
20.1


$
15.5


$
136.7


$
565.9     (a)
    
    includes interest payments(b)
    
    reflects unfunded postretirement benefit plan payments  12-month
 35




---



##### Table of Contents



36




---



##### Table of Contents



Financial
    Condition
  Investment
    Portfolio
    December 31,





December 31,2006





2005Estimated


% 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

$
14,505



1.8
%

$
15,452



2.1
%U.S. Agencies


61,764



7.9



39,905



5.5Collateralized mortgage obligations


16,937



2.2



18,905



2.6Mortgage pass-through securities


37,799



4.8



44,594



6.2Obligations of states and
    political subdivisions


506,345



64.4



477,084



65.9Corporate bonds


67,254



8.6



70,346



9.7Non-agency collateralized mortgage
    obligations


36,462



4.6



21,510



3.0Other asset-backed securities:Second mortgages/home equity loans


20,749



2.6



25,764



3.6Credit card receivables


17,441



2.2







Other


5,535



0.7



5,591



0.8Redeemable preferred stock










3,128



0.4Total fixed income securities


784,791



99.8
%


722,279



99.8
%Equity securities


1,668



0.2



1,306



0.2Total

$
786,459



100.0
%

$
723,585



100.0
%     available-for-sale,
 37




---



##### Table of Contents



Gross


Gross  Unrealized LossesAmortized Cost


Unrealized


Less Than


More Than


Estimated FairDecember 31, 2006

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

$
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
)


20,749Credit card receivables


17,230



211











17,441Other


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   Form 10-K.
    2006


2005Credit Rating

Fair Value


% of Total


Fair Value


% of TotalAAA/Aaa

$
618,835



78.8
%

$
557,883



77.2
%AA/Aa


113,612



14.5



97,565



13.5A/Aa


30,544



3.9



49,346



6.8BBB/Baa


17,040



2.2



16,485



2.3Non investment grade


3,960



0.5







Not rated


800



0.1



1,000



0.2Total

$
784,791



100.0
%

$
722,279



100.0
%  38




---



##### Table of Contents



% of


% ofMarket


UnrealizedContractual Maturity

Value


LossDue in one year or less


1
%



%Due after one year through five
    years


37



16Due after five years through ten
    years


19



24Due after ten years


5



2Asset-backed securities


38



58Total


100
%


100
%     December 31, 2006


December 31, 2005Estimated


Gross


Estimated


GrossUnrealized Loss Aging

Fair Value


Unrealized Loss


Fair Value


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

$
75,215


$
205


$
224,117


$
3,4687-12 months


10,104



40



32,630



1,04913-24 months


137,954



3,457



32,429



1,105Greater than 24 months


16,206



684



1,089



75Total investment grade


239,479



4,386



290,265



5,697Non-investment grade


3,960



77







Total

$
243,439


$
4,463


$
290,265


$
5,697   other-than-temporary other-than-temporary
   39




---



##### Table of Contents



other-than-temporary other-than-temporary
  other-than-temporary
  Risk
    Based Capital (RBC) and Other Regulatory
    Ratios
  state-by-state
   40




---



##### Table of Contents



Impact of
    Pending Accounting Standards
         41




---



##### Table of Contents



(SOP 05-01). SOP 05-01 SOP 05-01 SOP 05-01 SOP 05-01,
  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;
    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; 42




---



##### Table of Contents




    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   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



HypotheticalEstimated Fair


PercentageHypothetical


Value After


IncreaseFair Value at


Change in


Hypothetical


(Decrease) inDecember 31,


Interest Rate


Change in


Stockholders2005


(bp=basis points)


Interest Rate


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

$
118,856



200 bp increase


$
108,293



(1.4
)%100 bp increase



113,974



(0.7
)100 bp decrease



122,326



0.5200 bp decrease



124,776



0.8States, municipalities and
    political subdivisions


477,084



200 bp increase



424,215



(7.2
)100 bp increase



450,423



(3.6
)100 bp decrease



509,862



4.5200 bp decrease



540,451



8.6Corporate bonds and all other


126,339



200 bp increase



110,645



(2.1
)100 bp increase



115,724



(1.4
)100 bp decrease



126,871



0.1200 bp decrease



132,628



0.9Total fixed income securities
    available-for-sale

$
722,279



200 bp increase



643,153



(10.8
)100 bp increase



680,121



(5.8
)100 bp decrease



759,059



5.0200 bp decrease



797,855



10.3  45




---



##### 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 Internal Control  Integrated
    Framework
    
     46




---



##### Table of Contents



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
      Internal
    Control  Integrated Framework.
    
     47




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              Internal Control 
    Integrated Framework
  
    48




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2005(Amounts in thousands, except per share data)ASSETSInvested assets and cash:Fixed income securities, at fair
    value (amortized cost: $773,178 and $710,775)

$
784,791


$
722,279Equity securities, at fair value
    (cost: $1,508 and $1,201)


1,668



1,306Short-term investments, at cost
    (approximates fair value)


103,640



65,041Other investments, at cost


22



965Total invested assets


890,121



789,591Cash


7,164



8,323Deferred policy acquisition costs


102,937



102,833Insurance receivables:Premiums, including $6,885 and
    $7,947 from affiliates, (net of allowance for doubtful accounts:
    $1,369 and $1,490)


37,205



33,359Reinsurance, including $55,023 and
    $53,025 from affiliates


118,412



119,670Deposit with affiliated ceding
    company


33,145



32,287Intangible assets (net of
    accumulated amortization: $25,523 and $25,523)


138,785



138,785Current income taxes receivable


323



Property and equipment, at cost
    (less accumulated depreciation and amortization: $24,466 and
    $24,887)


24,807



19,674Prepaid reinsurance premiums


2,165



5,396Accrued investment income


10,089



9,522Other assets


3,180



3,174Total assets

$
1,368,333


$
1,262,614LIABILITIESReserves:Unpaid losses and loss adjustment
    expenses

$
434,224


$
424,449Unearned premiums


253,803



241,047Total reserves


688,027



665,496Debt


30,690



50,589Deferred income taxes, net


17,298



18,820Current income taxes payable






6,459Reinsurance and other payables to
    affiliates


166



174Accrued expenses


20,247



16,532Liability for postretirement
    benefits


12,466



7,154Other liabilities


33,537



20,815Total liabilities


802,431



786,039Commitments 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;
    45,263 shares issued and 43,872 shares outstanding at
    December 31, 2006 and 44,734 shares issued and
    43,334 shares outstanding at December 31, 2005


453



447Additional paid-in capital


268,651



259,684Retained earnings


306,745



223,927Accumulated other comprehensive
    income


4,993



7,546Treasury stock, 1,391 and
    1,400 shares, at cost


(14,940
)


(15,029
)Total stockholders equity


565,902



476,575Total liabilities and
    stockholders equity

$
1,368,333


$
1,262,614    49




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF INCOME
  Years Ended December 31,2006


2005


2004(Amounts in thousands,except per share data)Revenues:Net earned premium

$
393,642


$
348,361


$
317,857Net investment income


39,324



33,747



30,181Net realized investment gains
    (losses)


(1,273
)


1,974



2,751Total revenues


431,693



384,082



350,789Expenses:Net losses and loss adjustment
    expenses


95,830



127,841



87,356Net commissions, brokerage and
    other underwriting expenses


216,560



202,521



207,166Interest expense


3,669



3,545



2,260Total expenses


316,059



333,907



296,782Income before income taxes


115,634



50,175



54,007Income tax expense


32,816



11,744



14,297Net income

$
82,818


$
38,431


$
39,710Earnings per common share

$
1.90


$
0.89


$
0.92Earnings per common share,
    assuming dilution

$
1.89


$
0.89


$
0.92Weighted average shares outstanding


43,654



43,205



42,998Weighted average shares
    outstanding, assuming dilution


43,922



43,357



43,143    50




---



##### Table of Contents



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








Comprehensive





Other


Treasury


TotalStock Shares


Common


Additional


Income


Retained


Comprehensive


Stock


StockholdersOutstanding


Stock


Paid-in Capital


(Loss)


Earnings


Income


(at Cost)


Equity(Amounts in thousands)Balance, January 1, 2004


42,980


$
444


$
255,816






$
145,786


$
23,351


$
(15,256
)

$
410,141Comprehensive income:Net income





$



$



$
39,710


$
39,710


$



$



$
39,710Other comprehensive income (loss):Change in unrealized gains on
    securities, after income tax benefit of $2,046 (net of
    reclassification adjustment of $1,753 after income tax expense
    of $944)














(3,800
)






(3,800
)






(3,800
)Total comprehensive income













$
35,910Stock options exercised and other


35







180















140



320Balance, December 31, 2004


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
)

$
565,902    51




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended December 31,2006


2005


2004(Amounts in thousands)CASH FLOWS FROM OPERATING
    ACTIVITIES:Net income

$
82,818


$
38,431


$
39,710Adjustments to reconcile net income
    to net cash provided by operating activities:Provision for doubtful accounts


594



(168
)


910Depreciation and amortization


5,302



4,486



4,551Amortization of bond premium, net


1,149



2,310



2,930Loss on disposal of property and
    equipment


141



242



Net realized investment (gains)
    losses


1,273



(1,974
)


(2,751
)Stock-based compensation


1,207







Changes in:Insurance receivables


(3,182
)


(21,647
)


85,106Reserve for unearned premiums


12,756



15,028



1,951Reserve for unpaid losses and loss
    adjustment expenses


9,775



61,062



(50,151
)Deposit with affiliated ceding
    company


(859
)


(31,886
)


Deferred policy acquisition costs


(104
)


(705
)


2,546Deferred income taxes, net


(1,630
)


(1,740
)


(1,667
)Reinsurance and other payables to
    affiliates


(8
)


(287
)


270Prepaid reinsurance premiums


3,231



2,559



(1,523
)Accrued expenses


3,715



(558
)


2,236Other assets and liabilities


8,070



5,033



23,837Net cash provided by operating
    activities


124,248



70,186



107,955CASH FLOWS FROM INVESTING
    ACTIVITIES:Fixed income securities:Purchases


(337,848
)


(174,192
)


(270,679
)Maturities


47,288



35,591



22,686Sales


224,338



124,363



93,558Purchases of equity securities


(1,193
)


(817
)


(313
)Proceeds from the sale of equity
    securities


1,041



809



280Changes in short-term investments


(37,180
)


(36,157
)


35,437Purchases of property and
    equipment, net


(10,475
)


(8,666
)


(3,527
)Other, net


767



1,567



(1,353
)Net cash (used in) investing
    activities


(113,262
)


(57,502
)


(123,911
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Proceeds from long-term debt










30,930Principal payments on debt


(20,000
)


(15,000
)


(15,417
)Debt issuance costs






(125
)


(506
)Employee stock option exercises and
    other


7,855



3,428



320Net cash provided by (used in)
    financing activities


(12,145
)


(11,697
)


15,327Increase (decrease) in cash


(1,159
)


987



(629
)Cash at beginning of period


8,323



7,336



7,965Cash at end of period

$
7,164


$
8,323


$
7,336Supplemental Disclosure of Cash
    Flow Information:Cash paid (received) during the
    period for:Interest

$
3,628


$
3,271


$
2,066Income taxes

$
38,349


$
10,156


$
(8,840
)    52




---



##### 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
  available-for-sale.
  other-than-temporary
    Deferred
    Policy Acquisition Costs
   53




---



##### 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
   54




---



##### 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
   55




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Years Ended December 31,2006


2005


2004Net income

$
82,818


$
38,431


$
39,710Shares:Weighted average shares outstanding


43,334



43,015



42,980Weighted average shares of options
    exercised and additional stock issuance


320



190



18Total weighted average shares
    outstanding


43,654



43,205



42,998Effect of dilutive options


268



152



145Total weighted average shares
    outstanding, assuming dilution


43,922



43,357



43,143Earnings per share

$
1.90


$
0.89


$
0.92Earnings per share, assuming
    dilution

$
1.89


$
0.89


$
0.92     Accounting
    Pronouncements
    and/or
  No. 115-1 No. 124-1, Other-than-Temporary 115-1 124-1),
 56




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  115-1 124-1 No. 03-1, Other-Than-Temporary 03-1), 115-1 124-1 03-1 other-than-temporary 115-1 124-1 03-1 other-than-temporary. other-than-temporary 115-1 124-1 115-1 124-1 115-1 124-1 and/or
     57




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   2.
    Investments    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
)


20,749Credit card receivables


17,230



211











17,441Other


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   58




---



##### 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, 2005

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

$
15,637


$



$
(32
)

$
(153
)

$
15,452U.S. Agencies


40,055



131



(195
)


(86
)


39,905Collateralized mortgage obligations


18,696



432



(223
)






18,905Mortgage pass-through securities


45,607



87



(647
)


(453
)


44,594Obligations of states and
    political subdivisions


464,417



14,424



(1,282
)


(475
)


477,084Corporate bonds


69,626



1,885



(1,152
)


(13
)


70,346Non-agency collateralized mortgage
    obligations


22,200







(690
)






21,510Other asset-backed securities:Second mortgages/home equity loans


25,924



21



(181
)






25,764Other


5,613



93



(115
)






5,591Redeemable preferred stock


3,000



128











3,128Total fixed income securities


710,775



17,201



(4,517
)


(1,180
)


722,279Equity securities


1,201



105











1,306Total

$
711,976


$
17,306


$
(4,517
)

$
(1,180
)

$
723,585      59




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2006


2005Amortized


Estimated Fair


Amortized


Estimated FairCost


Value


Cost


ValueFixed income securities:Due within one year

$
9,041


$
9,049


$
5,531


$
5,532Due after one year but within five
    years


146,632



147,897



102,853



103,045Due after five years but within
    ten years


302,253



310,292



384,625



396,412Due after ten years


178,595



182,630



99,726



100,926636,521



649,868



592,735



605,915Mortgage pass-through securities,
    collateralized mortgage obligations and asset-backed securities


136,657



134,923



118,040



116,364$
773,178


$
784,791


$
710,775


$
722,279     Years Ended December 31,2006


2005


2004Investment income:Fixed income securities

$
35,648


$
31,694


$
29,682Equity securities


41



37



87Short-term investments


3,333



2,592



1,396Other investments


4



73



(17
)Total investment income on
    available-for-sale
    securities


39,026



34,396



31,148Investment income on deposit with
    affiliated ceding company


1,513



401



Investment expenses


(1,215
)


(1,050
)


(967
)Net investment income

$
39,324


$
33,747


$
30,181  60




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  available-for-sale
  Years Ended December 31,2006


2005


2004Net realized investment gains
    (losses):Fixed income securities:Gross realized investment gains

$
140


$
1,622


$
2,702Gross realized investment losses


(1,391
)


(325
)


(10
)Net realized investment gains
    (losses) on fixed income securities

$
(1,251
)

$
1,297


$
2,692Equity securities:Gross realized investment gains

$
125


$
83


$
63Gross realized investment losses


(8
)


(3
)


(4
)Net realized investment gains on
    equity securities

$
117


$
80


$
59Other


(139
)

$
597


$
Net realized investment gains
    (losses)

$
(1,273
)

$
1,974


$
2,751Net change in unrealized gains
    (losses):Fixed income securities

$
109


$
(18,460
)

$
(5,891
)Equity securities


55



(9
)


45Total net change in unrealized
    gains (losses)

$
164


$
(18,469
)

$
(5,846
)Net realized gains (losses) and
    change in unrealized gains (losses)

$
(1,109
)

$
(16,495
)

$
(3,095
)       % of


% ofMarket


UnrealizedContractual Maturity

Value


LossDue in one year or less


1
%



%Due after one year through five
    years


37



16Due after five years through ten
    years


19



24Due after ten years


5



2Asset-backed securities


38



58Total


100
%


100
%  61




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31, 2006


December 31, 2005Gross





GrossEstimated


Unrealized


Estimated


UnrealizedUnrealized Loss Aging

Fair Value


Loss


Fair Value


LossFixed income securities:Investment grade:0-6 months

$
75,215


$
205


$
224,117


$
3,4687-12 months


10,104



40



32,630



1,04913-24 months


137,954



3,457



32,429



1,105Greater than 24 months


16,206



684



1,089



75Total investment grade


239,479



4,386



290,265



5,697Non-investment grade


3,960



77







Total

$
243,439


$
4,463


$
290,265


$
5,697       other-than-temporary other-than-temporary
  other-than-temporary
  3.
    Debt   62




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          30-year
    4.
    Fair
    Value of Financial Instruments   63




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2006


2005Carrying


Estimated


Carrying


EstimatedAmount


Fair Value


Amount


Fair ValueFixed income securities

$
784,791


$
784,791


$
722,279


$
722,279Equity securities


1,668



1,668



1,306



1,306Short-term investments


103,640



103,640



65,041



65,041Other investments


22



22



965



965Cash


7,164



7,164



8,323



8,323Debt


30,690



30,690



50,589



50,589     Investments
  Cash, Short-term Investments and Other
    Investments
  Debt
  5.
    Deferred
    Policy Acquisition Costs and Other Operating Expenses    Years Ended December 31,2006


2005


2004Balance at beginning of period

$
102,833


$
102,128


$
104,674Costs deferred


164,614



157,347



147,925Amortization


(164,510
)


(156,642
)


(150,471
)Balance at end of period

$
102,937


$
102,833


$
102,128     Years Ended December 31,2006


2005


2004Amortization of deferred policy
    acquisition costs

$
164,510


$
156,642


$
150,471Other operating expenses


52,050



45,879



56,695Net commissions, brokerage and
    other underwriting expenses

$
216,560


$
202,521


$
207,166  64




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  6.
    Reinsurance      Years Ended December 31,2006


2005


2004Written


Earned


Written


Earned


Written


EarnedDirect

$
334,020


$
324,831


$
311,435


$
288,994


$
267,371


$
238,309Assumed


117,336



113,769



106,095



113,508



122,046



149,158Ceded


(41,727
)


(44,958
)


(51,582
)


(54,141
)


(71,133
)


(69,610
)Net premiums

$
409,629


$
393,642


$
365,948


$
348,361


$
318,284


$
317,857       Years Ended December 31,2006


2005


2004$


Ratio


$


Ratio


$


RatioGross losses and loss adjustment
    expenses

$
94,520



21.6
%

$
176,416



43.8
%

$
65,550



16.9
%(Increase) decrease in reinsurance
    recoverables


1,310



2.9
%


(48,575
)


(89.7
)%


21,806



31.3
%Net losses and loss adjustment
    expenses

$
95,830



24.3
%

$
127,841



36.7
%

$
87,356



27.5
%    65




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Excess of
    Loss Reinsurance
  2005
    Third Party Reinsurance Compared to 2004 Third Party
    Reinsurance
    2006
    Third Party Reinsurance Compared to 2005 Third Party
    Reinsurance
    Related
    Party Reinsurance
     66




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           67




---



##### 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 31,2006


2005


2004Reserves at beginning of period:Gross

$
424,449


$
363,387


$
413,539Ceded reinsurance


147,435



116,831



158,357Net reserves at beginning of period


277,014



246,556



255,182Net incurred loss and loss
    adjustment expenses:Provision for insured events of
    current period


101,140



151,174



87,969Decrease in provision for insured
    events of prior periods


(5,310
)


(23,333
)


(613
)Total net incurred


95,830



127,841



87,356Net payments attributable to:Current period events


6,855



32,030



7,125Prior period events


76,623



65,353



88,857Total net payments


83,478



97,383



95,982Net reserves at end of period


289,366



277,014



246,556Ceded reinsurance at end of period


144,858



147,435



116,831Gross reserves at end of period

$
434,224


$
424,449


$
363,387      68




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      8.
    Commitments
    and Contingencies      9.
    Income
    Taxes    2006


2005Deferred tax assets related to:Unearned premium reserve

$
17,795


$
16,639Loss and loss adjustment expense
    reserve


4,070



4,618Accrued expenses


2,205



1,952Accumulated postretirement benefit
    obligation


1,997



Other


6,494



7,911Total deferred tax assets


32,561



31,120Deferred tax liabilities related
    to:Deferred policy acquisition costs


36,028



35,991Intangible assets


5,650



5,650Unrealized net gains on securities


4,120



4,063Other


4,061



4,236Total deferred tax liabilities


49,859



49,940Net deferred tax liability

$
17,298


$
18,820    69




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Years Ended December 31,2006


2005


2004Current tax

$
34,446


$
13,484


$
15,964Deferred tax


(1,630
)


(1,740
)


(1,667
)Total income tax expense

$
32,816


$
11,744


$
14,297     Years Ended December 31,2006


2005


2004Federal statutory rate


35.0
%


35.0
%


35.0
%Tax-exempt income deduction


(5.5
)


(11.5
)


(9.4
)Non-deductible expenses


0.2



0.3



0.3State income tax, net of federal
    income tax benefit


1.0



0.6



0.5Other


(2.3
)


(1.0
)


0.1Total income tax expense


28.4
%


23.4
%


26.5
%   10.
    Employee
    Benefits         70




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        2006


2005Reconciliation of benefit
    obligation:Benefit obligation at beginning of
    the year

$
10,570


$
5,185Service cost


259



242Interest cost


584



511Actuarial loss


1,349



4,814Benefits and expenses paid


(296
)


(182
)Benefit obligation at end of year

$
12,466


$
10,570     2006


2005Reconciliation of funded status:Funded status

$
(12,466
)

$
(10,570
)Unrecognized prior service cost
    (benefit)


(672
)


(834
)Unrecognized net actuarial loss


5,329



4,250Accrued benefit cost

$
(7,809
)

$
(7,154
)      71




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2006Amounts recognized in AOCI, not
    yet recognized in net periodic benefit cost:Net prior service cost (benefit)

$
(672
)Net actuarial loss


5,329Total pre-tax accumulated other
    comprehensive income

$
4,657Increase in SFAS 158
    liability included in AOCI in 2006

$
4,657Estimated expense (benefit)
    expected to be recognized from AOCI into net periodic benefit
    cost in 2007:Amortization of prior service cost
    (credit)

$
(162
)Amortization of net actuarial loss


321Total estimated expense to be
    recognized

$
159   Before Application


Effect of


After Application ofof SFAS 158


SFAS 158


SFAS 158Amounts recognized in the
    consolidated balance sheets:Liability for postretirement
    benefits

$
7,809


$
4,657


$
12,466Deferred income taxes, net


19,295



(1,997
)


17,298Total liabilities


799,771



2,660



802,431Accumulated other comprehensive
    income


7,653



(2,660
)


4,993Total stockholders equity


568,562



(2,660
)


565,902   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

$
12,466


$
13,514


$
1,048     2006


2005


2004Net periodic benefit cost:Service cost

$
259


$
241


$
149Interest cost


584



511



340Amortization of prior service cost


(162
)


(162
)


(162
)Net amortization of actuarial loss
    (gain)


270



193



(4
)Net periodic benefit cost

$
951


$
783


$
323   72




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2006


2005


2004Key Assumptions:Discount rate


5.625
%


5.50
%


5.875
%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
%


8.0
%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


2012



2011



2010Mortality


RP 2000 Projected



1983 GAM



1983 GAMAverage remaining service
    life  postretirement medical plan


12.7 Years



13.1 Years



13.6 YearsAverage life
    expectancy  postretirement medical plan


13.5 Years



13.9 Years



13.8 YearsAverage remaining service
    life  sick leave plan


12.6 Years



12.9 Years



13.9 Years       Before Impact of Federal Subsidy


Net of Federal Subsidy2007

$
303


$
2712008


366



3292009


428



3862010


438



3882011


466



4092012-2016


3,131



2,774   11.
    Stockholders
    Equity   73




---



##### 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, 2004


1,734,392


$
12.11Options granted


356,425


$
12.04Options forfeited/expired


(369,263
)

$
12.23Options exercised


(22,313
)

$
9.73Outstanding options at
    December 31, 2004


1,699,241


$
12.09Options granted


354,775


$
13.07Options forfeited/expired


(155,275
)

$
13.77Options exercised


(310,832
)

$
10.75Outstanding options at
    December 31, 2005


1,587,909


$
12.41Options granted





$
Options forfeited/expired


(50,450
)

$
13.05Options exercised


(528,934
)

$
13.09Outstanding options at
    December 31, 2006


1,008,525


$
12.02  74




---



##### Table of Contents



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


AverageSubject


Grant-Dateto Option


Fair ValueNon-vested options at
    January 1, 2006


785,845


$
11.91Options granted






Options vested


(275,657
)

$
11.32Options forfeited


(28,575
)

$
12.32Non-vested options at
    December 31, 2006


481,613


$
12.23     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


319,600



5.8 years


$
9.89



249,750


$
9.98$12.06 to $15.875


688,925



7.5 years


$
13.01



277,162


$
13.49     Options Vested or Expected to VestWeighted





Weighted AverageAverage


Aggregate


RemainingNumber


Exercise Price


Intrinsic Value


Contractual LifeDecember 31, 2006


912,585


$
11.96


$
8,710,930



6.9 years   Options ExercisableWeighted





Weighted AverageAverage


Aggregate


RemainingNumber


Exercise Price


Intrinsic Value


Contractual LifeDecember 31, 2006


526,912


$
11.83


$
5,097,722



5.9 years        75




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2005


2004(In thousands, except for per share)Net income

$
38,431


$
39,710Less: Total stock-based
    compensation cost determined under the fair value method, net of
    tax


(758
)


(616
)Pro forma net income

$
37,673


$
39,094Basic and diluted earnings per
    share, as reported

$
0.89


$
0.92Basic earnings per share, pro forma

$
0.87


$
0.91       12.
    Segment
    Information      and/or
    76




---



##### Table of Contents



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





% of





% of2006


Total


2005


Total


2004


TotalContract

$
285,157



63.2
%

$
248,662



59.6
%

$
221,577



56.9
%Commercial:License and permit


79,144



17.5



77,764



18.6



81,502



20.9Judicial and fiduciary


23,949



5.3



23,142



5.5



22,590



5.8Public official


23,491



5.2



26,428



6.3



23,911



6.1Other


8,287



1.9



6,406



1.6



7,890



2.1Total commercial


134,871



29.9



133,740



32.0



135,893



34.9Fidelity and other


31,328



6.9



35,128



8.4



31,947



8.2$
451,356



100.0
%

$
417,530



100.0
%

$
389,417



100.0
%Domestic

$
448,387



99.3
%

$
415,520



99.5
%

$
381,655



98.0
%International


2,969



0.7



2,010



0.5



7,762



2.0$
451,356



100.0
%

$
417,530



100.0
%

$
389,417



100.0
%   Net Written Premiums for the Years Ended% of





% of





% of2006


Total


2005


Total


2004


TotalContract

$
247,987



60.5
%

$
202,798



55.4
%

$
172,274



54.1
%Commercial


130,314



31.8



128,022



35.0



115,454



36.3Fidelity and other


31,328



7.7



35,128



9.6



30,556



9.6$
409,629



100.0
%

$
365,948



100.0
%

$
318,284



100.0
%Domestic

$
406,684



99.3
%

$
363,940



99.5
%

$
311,620



97.9
%International


2,945



0.7



2,008



0.5



6,664



2.1$
409,629



100.0
%

$
365,948



100.0
%

$
318,284



100.0
%     13.
    Statutory
    Financial Data (unaudited)   77




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2006


2005Consolidated equity per GAAP

$
565,902


$
476,575Impact of non-insurance companies
    and eliminations


19,720



34,426Insurance company equity per GAAP


585,622



511,001Intangible assets


(133,361
)


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


(11,690
)


(12,044
)Deferred policy acquisition costs


(102,937
)


(102,833
)Deferred income taxes, net


33,408



34,437Accumulated postretirement benefit
    obligations


4,657



Non-admitted assets


(26,684
)


(22,617
)Other






573Total statutory capital and
    surplus per statutory accounting practices

$
349,015


$
275,156   state-by-state
   78




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   14.
    Related
    Party Transactions    and/or
         79




---



##### 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


Quarter2006Revenues

$
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 (loss)

$
14,075


$
(11,935
)

$
19,783


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

$
0.33


$
(0.28
)

$
0.46


$
0.382004Revenues

$
84,404


$
84,667


$
90,950


$
90,768Income before income taxes

$
8,119


$
13,884


$
15,194


$
16,810Income tax expense


1,745



3,699



4,220



4,633Net income

$
6,374


$
10,185


$
10,974


$
12,177Basic and diluted earnings per
    common share

$
0.15


$
0.24


$
0.25


$
0.28  80




---



##### 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.
 81




---



##### Table of Contents



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


83Schedule II 
    Condensed Financial Information of Registrant


84Schedule III 
    Supplementary Insurance Information


88Schedule
    IV  Reinsurance


89Schedule
    V  Valuation and Qualifying Accounts


90Schedule
    VI  Supplemental Information Concerning
    Property  Casualty Insurance Operations


91(a)
    (3) Exhibits


92  82




---



##### Table of Contents



SCHEDULE I
  CNA
    SURETY CORPORATION AND SUBSIDIARIESSUMMARY OF INVESTMENTS
    OTHER THAN INVESTMENTS IN RELATED PARTIES
    As of December 31, 2006 and 2005
  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   As of December 31, 2005Cost orAmortized


Fair


CarryingCost


Value


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

$
119,995


$
118,856


$
118,856States, municipalities and
    political subdivisions


464,417



477,084



477,084All other bonds, including
    corporate bonds and other asset-backed securities


123,363



123,211



123,211Redeemable preferred stock


3,000



3,128



3,128Total fixed income securities


710,775



722,279



722,279Equity securities


1,201



1,306



1,306Short-term investments


65,041







65,041Other investments


965







965Total investments

$
777,982






$
789,591  83




---



##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATIONCONDENSED FINANCIAL INFORMATION OF REGISTRANT
    (PARENT COMPANY)
 BALANCE SHEETS
  December 31,2006


2005(Amounts in thousands)ASSETSInvestments in and advances to
    subsidiaries

$
578,865


$
505,301Fixed income securities (amortized
    cost: $800 and $1,000)


800



1,000Equity investments (cost: $1,508
    and $1,201)


1,668



1,306Short-term investments, at cost
    (which approximates fair value)


9,452



16,551Cash (restricted: $2,823 and
    $2,565)


2,897



2,566Other assets


6,394



1,418Total assets

$
600,076


$
528,142LIABILITIESDebt

$
30,690


$
50,589Other liabilities


3,484



978Total liabilities


34,174



51,567STOCKHOLDERS
    EQUITYCommon stock


453



447Additional paid-in capital


268,651



259,684Retained earnings


306,745



223,927Accumulated other comprehensive
    income


4,993



7,546Treasury stock, at cost


(14,940
)


(15,029
)Total stockholders equity


565,902



476,575Total liabilities and
    stockholders equity

$
600,076


$
528,142    84




---



##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
    (PARENT COMPANY)  (Continued)
    STATEMENTS OF INCOME
  Years Ended December 31,2006


2005


2004(Amounts in thousands)Revenues:Net investment income

$
854


$
774


$
1,262Net realized investment gains


117



2,227



40Total revenues


971



3,001



1,302Expenses:Interest expense


3,669



3,545



2,248Corporate expense


7,672



5,648



6,419Total expenses


11,341



9,193



8,667Loss from operations before income
    taxes and equity in net income of subsidiaries


(10,370
)


(6,192
)


(7,365
)Income tax benefit


(5,235
)


(2,069
)


(2,573
)Net loss before equity in net
    income of subsidiaries


(5,135
)


(4,123
)


(4,792
)Equity in net income of
    subsidiaries


87,953



42,554



44,502Net income

$
82,818


$
38,431


$
39,710    85




---



##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    (PARENT COMPANY)  (Continued)
    STATEMENTS OF CASH FLOWS
  Years Ended December 31,2006


2005


2004(Amounts in thousands)OPERATING ACTIVITIES:Net income (loss)

$
82,818


$
38,431


$
39,710Cash dividends from subsidiaries


11,513



20,465



Tax payments received from (paid
    to) subsidiaries


42,449



11,764



(6,172
)Federal and state income tax
    (payments) receipts


(37,250
)


(10,000
)


8,988Depreciation and amortization


101



101



63Net realized investment (gains)
    losses


(117
)


(2,227
)


(40
)Stock-based compensation


1,207







Adjustments to reconcile net
    income (loss) to net cash provided by (used in) operating
    activities:Equity in net (income) loss of
    subsidiaries


(87,953
)


(42,554
)


(44,502
)Deferred income taxes, net


(653
)


(650
)


Accrued expenses


642



(373
)


549Change in other assets and
    liabilities


(5,358
)


(253
)


(3,415
)Net cash provided by (used in)
    operating activities


7,399



14,704



(4,819
)INVESTING ACTIVITIES:Net advances from (to) subsidiaries


(2,032
)


731



(3,207
)Capital contributions to
    subsidiaries










(20,350
)Net sales of fixed income
    securities


200



7,860



180Net purchases of equity securities


(190
)


(38
)


(51
)Changes in short-term investments


7,099



(10,753
)


8,291Net cash (used in) investing
    activities


5,077



(2,200
)


(15,137
)FINANCING ACTIVITIES:Proceeds from debt










30,930Principal payments on debt


(20,000
)


(15,000
)


(15,000
)Debt issuance costs






(125
)


(506
)Issuance of treasury stock to
    employee stock purchase plan


103



82



106Employee stock option exercises
    and other


7,752



3,346



214Net cash provided by (used in)
    financing activities


(12,145
)


(11,700
)


15,745Increase (decrease) in cash


331



804



(4,211
)Cash at beginning of period


2,566



1,762



5,973Cash at end of period

$
2,897


$
2,566


$
1,762    86




---



##### 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   87




---



##### Table of Contents



SCHEDULE III  CNA
    SURETY CORPORATION AND SUBSIDIARIES
    SUPPLEMENTARY INSURANCE INFORMATION
    As of and for the Years Ended
    December 31, 2006, 2005 and 2004
  Years Ended December 31,2006


2005


2004(Amounts in thousands)Deferred policy acquisition costs

$
102,937


$
102,833Unpaid losses and loss adjustment
    expense reserves

$
434,224


$
424,449Unearned premiums

$
253,803


$
241,047Net premium revenue

$
393,642


$
348,361


$
317,857Net investment income

$
39,324


$
33,747


$
30,181Benefits, claims, losses and
    settlement expenses

$
95,830


$
127,841


$
87,356Amortization of deferred policy
    acquisition costs

$
164,510


$
156,642


$
150,471Other operating expenses

$
52,050


$
45,879


$
56,695Net premiums written

$
409,629


$
365,948


$
318,284  88




---



##### Table of Contents



SCHEDULE IV  CNA
    SURETY CORPORATION AND SUBSIDIARIES
  REINSURANCE
 For the
    Years Ended December 31, 2006, 2005 and 2004
  PercentageCeded to


Assumed





of AmountGross


Other


from Other


Net


AssumedAmount


Companies


Companies(1)


Amount


to Net(Amounts in thousands)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
%Year Ended December 31,
    2004Premiums written:Property and casualty insurance

$
267,371


$
71,133


$
122,046


$
318,284



38.3
%Total premiums written

$
267,371


$
71,133


$
122,046


$
318,284



38.3
%Premiums earned:Property and casualty insurance

$
238,309


$
69,610


$
149,158


$
317,857



46.9
%Total premiums earned

$
238,309


$
69,610


$
149,158


$
317,857



46.9
%     (1)
    
    Primarily from affiliates. 89




---



##### Table of Contents



SCHEDULE V  CNA
    SURETY CORPORATION AND SUBSIDIARIES
  VALUATION
    AND QUALIFYING ACCOUNTS
 As of and
    for the Years Ended December 31, 2006, 2005 and
    2004
  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,
    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

$



$



$



$



$
Year Ended December 31,
    2004Allowance for doubtful accounts on
    premiums receivable

$
1,575


$
910


$



$
332


$
2,153Allowance for doubtful accounts on
    reinsurance receivable

$



$



$



$



$
     (1)
    
    Write-offs charged against allowance. 90




---



##### 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, 2006, 2005 and
    2004
  Years Ended December 31,2006


2005


2004(Amounts in thousands)Deferred policy acquisition costs

$
102,937


$
102,833Reserves for unpaid claims and
    claim adjustment expenses

$
434,224


$
424,449Discount (if any) deducted

$



$
Unearned premiums

$
253,803


$
241,047Net premium revenue

$
393,642


$
348,361


$
317,857Net investment income

$
39,324


$
33,747


$
30,181Net claims and claim expenses
    incurred related to:Current year

$
101,140


$
151,174


$
87,969Prior years

$
(5,310
)

$
(23,333
)

$
(613
)Amortization of deferred policy
    acquisition costs

$
164,510


$
156,642


$
150,471Net paid claims and claim
    adjustment expenses

$
83,478


$
97,383


$
95,982Net premiums written

$
409,629


$
365,948


$
318,284  91




---



##### 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). 92




---



##### Table of Contents



ExhibitNumber

Description10
(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).10
(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 as Exhibit 10(38) to
    this 10-K).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 20, 2007.24


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.  93




---



##### Table of Contents



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

Title

SignatureFebruary 21, 2007

Chairman of the Board
    and Director

/s/  James
    LewisJames
    LewisFebruary 21, 2007

Director

/s/  Philip
    H. BrittPhilip
    H. BrittFebruary 21, 2007

Director

/s/  Robert
    TinstmanRobert
    TinstmanFebruary 21, 2007

Director

/s/  Lori
    KomstadiusLori
    KomstadiusFebruary 21, 2007

Director

*****Roy
    E. PosnerFebruary 21, 2007

Director

/s/  Adrian
    M. TocklinAdrian
    M. TocklinFebruary 21, 2007

Director

/s/  John
    F. WelchJohn
    F. Welch    94