UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

o		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 (State or other jurisdiction of incorporation or organization)		36-4144905 (I.R.S. Employer Identification No.)
333 S. WABASH AVE., CHICAGO, ILLINOIS (Address of principal executive offices)		60604 (Zip Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    þ No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. o Yes   o No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

44,303,248 shares of Common Stock, $.01 par value as of April 23, 2010.

 

 

CNA SURETY CORPORATION AND SUBSIDIARIES

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at March 31, 2010 and at December 31, 2009			3
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009			4
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2010 and 2009			5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults Upon Senior Securities			42
Item 4.			42
Item 5. Other Information			42
Item 6. Exhibits			42
EX-10.49
EX-31.1
EX-31.2
EX-32.1
EX-32.2

CNA SURETY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		March 31,				December 31,
		2010				2009
		(Amounts in thousands,
		except per share data)
Assets
Invested assets:
Fixed income securities, at fair value (amortized cost: $1,258,775 and $1,219,270)		$	1,308,297			$	1,266,223
Equity securities, at fair value (cost: $1,650 and $1,429)			1,852				1,610
Short-term investments, at amortized cost (approximates fair value)			39,970				48,999
Total invested assets			1,350,119				1,316,832
Cash			2,018				5,822
Deferred policy acquisition costs			102,660				99,836
Insurance receivables:
Premiums, including $9,215 and $9,753 from affiliates, (net of allowance for doubtful accounts: $1,112 and $1,110)			43,089				33,392
Reinsurance			49,144				48,645
Deposit with affiliated ceding company			26,904				26,878
Goodwill and other intangible assets (net of accumulated amortization: $25,523 and $25,523)			138,785				138,785
Property and equipment, at cost (less accumulated depreciation and amortization: $38,603 and $37,514)			18,936				19,681
Prepaid reinsurance premiums			197				210
Accrued investment income			14,724				15,832
Other assets			2,548				3,122
Total assets		$	1,749,124			$	1,709,035
Liabilities
Reserves:
Unpaid losses and loss adjustment expenses		$	426,458			$	406,123
Unearned premiums			256,171				247,776
Total reserves			682,629				653,899
Long-term debt			30,930				30,930
Deferred income taxes, net			29,663				28,065
Reinsurance and other payables to affiliates			676				548
Accrued expenses			12,169				18,586
Liability for postretirement benefits			10,911				10,718
Payable for securities purchased			3,426				1,356
Income tax payable			7,781				13,389
Other liabilities			24,580				28,460
Total liabilities			802,765				785,951
Commitments and contingencies (See Notes 3, 5, & 8)
Stockholders’ Equity
Common stock, par value $.01 per share, 100,000 shares authorized; 45,659 shares issued and 44,298 shares outstanding at March 31, 2010 and 45,635 shares issued and 44,268 shares outstanding at December 31, 2009			457				456
Additional paid-in capital			280,126				279,388
Retained earnings			648,310				627,505
Accumulated other comprehensive income			32,072				30,406
Treasury stock, 1,361 and 1,367 shares, at cost			(14,606	)			(14,671	)
Total stockholders’ equity			946,359				923,084
Total liabilities and stockholders’ equity		$	1,749,124			$	1,709,035

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

CNA SURETY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		Three Months Ended
		March 31,
		2010				2009
		(Amounts in thousands,
		except per share data)
Revenues:
Net earned premium		$	98,252			$	101,151
Net investment income			13,377				12,246
Net realized investment gains (losses):
Other-than-temporary impairment losses			—				(46	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (before taxes)			(94	)			—
Net impairment losses recognized in earnings			(94	)			(46	)
Net realized investment gains (losses), excluding impairment losses on available-for-sale securities			417				(20	)
Total net realized investment gains (losses)			323				(66	)
Total revenues			111,952				113,331
Expenses:
Net losses and loss adjustment expenses			28,581				29,588
Net commissions, brokerage and other underwriting expenses			52,788				54,278
Interest expense			281				418
Total expenses			81,650				84,284
Income before income taxes			30,302				29,047
Income tax expense			9,497				8,183
Net income		$	20,805			$	20,864
Earnings per common share		$	0.47			$	0.47
Earnings per common share, assuming dilution		$	0.47			$	0.47
Weighted average shares outstanding			44,280				44,206
Weighted average shares outstanding, assuming dilution			44,421				44,376

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

CNA SURETY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)

		Common																				Accumulated
		Stock								Additional												Other				Treasury				Total
		Shares				Common				Paid-in				Comprehensive				Retained				Comprehensive				Stock				Stockholders’
		Outstanding				Stock				Capital				Income				Earnings				Income (Loss)				At Cost				Equity
		(Amounts in thousands)
Balance, January 1, 2009			44,168			$	455			$	276,255							$	509,644			$	(4,286	)		$	(14,773	)		$	767,295
Comprehensive income:
Net income			—			$	—			$	—			$	20,864			$	20,864			$	—			$	—			$	20,864
Other comprehensive income:
Change in unrealized gains on securities, after income tax expense of $4,455 (net of reclassification adjustment of $0, after income tax benefit of $0)			—				—				—				8,272				—				8,272				—				8,272
Net change related to postretirement benefits, after income tax benefit of $12			—				—				—				(28	)			—				(28	)			—				(28	)
Total comprehensive income			—				—				—			$	29,108				—				—				—				—
Stock-based compensation			—				—				578								—				—				—				578
Stock options exercised and other			72				1				886								—				—				41				928
Balance, March 31, 2009			44,240			$	456			$	277,719							$	530,508			$	3,958			$	(14,732	)		$	797,909
Balance, January 1, 2010			44,268			$	456			$	279,388							$	627,505			$	30,406			$	(14,671	)		$	923,084
Comprehensive income:
Net income			—			$	—			$	—			$	20,805			$	20,805			$	—			$	—			$	20,805
Other comprehensive income:
Change in unrealized gains on securities, after income tax expense of $865 (net of reclassification adjustment of $228, after income tax expense of $123)			—				—				—				1,607				—				1,607				—				1,607
Other-than-temporary impairment losses not recognized in the Condensed Consolidated Statements of Income, after income tax expense of $41 (net of reclassification adjustment of ($353), after income tax benefit of $190)			—				—				—				77				—				77				—				77
Net change related to postretirement benefits, after income tax benefit of $9			—				—				—				(18	)			—				(18	)			—				(18	)
Total comprehensive income			—				—				—			$	22,471				—				—				—				—
Stock-based compensation			—				—				441								—				—				—				441
Stock options exercised and other			30				1				297								—				—				65				363
Balance, March 31, 2010			44,298			$	457			$	280,126							$	648,310			$	32,072			$	(14,606	)		$	946,359

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

CNA SURETY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Three Months Ended
		March 31,
		2010				2009
		(Amounts in thousands)
Cash Flows from Operating Activities:
Net income		$	20,805			$	20,864
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts			95				(48	)
Depreciation and amortization			1,476				1,524
Amortization of bond premium, net			1,492				1,126
Gain on disposal of property and equipment			(49	)			(3	)
Net realized investment (gains) losses			(323	)			66
Stock-based compensation			441				578
Deferred income tax expense			661				38
Changes in:
Insurance receivables			(10,291	)			(8,273	)
Reserve for unearned premiums			8,395				2,908
Reserve for unpaid losses and loss adjustment expenses			20,335				25,000
Deposit with affiliated ceding company			(26	)			2,382
Deferred policy acquisition costs			(2,824	)			(1,964	)
Reinsurance and other payables to affiliates			128				(1,609	)
Prepaid reinsurance premiums			13				(40	)
Accrued expenses			(6,417	)			(8,439	)
Other assets and liabilities			(7,599	)			(458	)
Net cash provided by operating activities			26,312				33,652
Cash Flows from Investing Activities:
Fixed income securities:
Purchases			(63,950	)			(68,727	)
Maturities			14,834				21,787
Sales			8,422				—
Purchases of equity securities			(274	)			(473	)
Proceeds from the sale of equity securities			65				336
Changes in short-term investments			9,036				24,689
Purchases of property and equipment, net			(682	)			(1,592	)
Changes in payables for securities purchased			2,070				(8,398	)
Net cash (used in) investing activities			(30,479	)			(32,378	)
Cash Flows from Financing Activities:
Employee stock option exercises and other			363				928
Net cash provided by financing activities			363				928
(Decrease) increase in cash			(3,804	)			2,202
Cash at beginning of period			5,822				9,596
Cash at end of period		$	2,018			$	11,798
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	288			$	437
Income taxes		$	14,404			$	2,312

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

CNA SURETY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)

1. Significant Accounting Policies

Formation of CNA Surety Corporation and Merger

     In December 1996, CNA Financial Corporation (“CNAF”) and Capsure Holdings Corp. (“Capsure”) agreed to merge (the “Merger”) the surety business of CNAF with Capsure’s insurance subsidiaries, Western Surety Company (“Western Surety”), Surety Bonding Company of America (“Surety Bonding”) and Universal Surety of America (“Universal Surety”), into CNA Surety Corporation (“CNA Surety” or the “Company”). CNAF, through its operating subsidiaries, writes multiple lines of property and casualty insurance, including surety business that is reinsured by Western Surety. The principal operating subsidiaries of CNAF that wrote the surety line of business for their own account prior to the Merger were Continental Casualty Company and its property and casualty affiliates (collectively, “CCC”) and The Continental Insurance Company and its property and casualty affiliates (collectively, “CIC”). Through its insurance subsidiaries, CNAF owns approximately 62% of the outstanding common stock of CNA Surety. Loews Corporation owns approximately 90% of the outstanding common stock of CNAF.

Principles of Consolidation

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

Estimates

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

Basis of Presentation

     These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s 2009 Form 10-K. Certain financial information that is included in annual financial statements prepared in accordance with GAAP is not required for interim reporting and has been condensed or omitted. The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. The financial results for interim periods may not be indicative of financial results for a full year.

Earnings Per Share

     Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is computed based on the weighted average number of shares outstanding plus the dilutive effect of common stock equivalents which is computed using the treasury stock method.

     The computation of earnings per common share is as follows (amounts in thousands, except for per share data):

		Three Months Ended
		March 31,
		2010				2009
Net income		$	20,805			$	20,864
Shares:
Weighted average shares outstanding			44,268				44,168
Weighted average shares of options exercised and additional stock issuance			12				38
Total weighted average shares outstanding			44,280				44,206
Effect of dilutive options			141				170
Total weighted average shares outstanding, assuming dilution			44,421				44,376
Earnings per share		$	0.47			$	0.47
Earnings per share, assuming dilution		$	0.47			$	0.47

     No adjustments were made to reported net income in the computation of earnings per share. Options to purchase shares of common stock of 0.7 million and 0.8 million were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2010 and 2009, respectively, because the exercise price of these options was greater than the average market price of CNA Surety’s common stock.

Adopted Accounting Pronouncements

     In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-16, “Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets”. This guidance removed the concept of a qualifying special-purpose entity and eliminated it from exceptions under the guidance for consolidation of variable interest entities. It also modified the de-recognition conditions related to legal isolation and effective control and added additional disclosure requirements for transfers of financial assets. This guidance was effective for annual reporting periods beginning after November 15, 2009. The adoption of this guidance did not have an impact on the Company’s financial condition or results of operations.

     In June 2009, the FASB issued ASU No. 2009-17, “Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities”. This guidance amended existing consolidation guidance applicable for variable interest entities as well as requirements for determination of the primary beneficiary of a variable interest entity, required an ongoing assessment of whether an entity is the primary beneficiary and required enhanced disclosures that will provide users of financial statements information regarding an enterprise’s involvement in a variable interest entity. This guidance was effective for annual reporting periods beginning after November 15, 2009. The Company evaluated its trust preferred security arrangement discussed further in Note 6., Debt, to these Condensed Consolidated Financial Statements and determined the issuer trust should remain unconsolidated under this guidance. As such, the adoption of this guidance did not have an impact on the Company’s financial condition or results of operations.

     In April 2009, the FASB issued updated accounting guidance, which amended the other-than-temporary impairment (“OTTI”) loss model for fixed income securities. A fixed income security is impaired if the fair value of the security is less than its amortized cost basis, which is its cost adjusted for accretion, amortization and previously recorded OTTI losses. The updated accounting guidance requires an OTTI loss equal to the difference between fair value and amortized cost to be recognized in earnings if the Company intends to sell the fixed income security or if it is more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis.

     The remaining fixed income securities in an unrealized loss position are evaluated to determine if a credit loss exists. If the Company does not expect to recover the entire amortized cost basis of a fixed income security, the security is deemed to be other-than-temporarily impaired for credit reasons. For these securities, the bifurcation of OTTI losses into a credit component and a non-credit component is required by the updated accounting guidance. The credit component is recognized in earnings and represents the difference between the present value of the future cash flows that the Company expects to collect and a fixed income security’s amortized cost basis. The non-credit component is recognized in other comprehensive income and represents the difference between fair value and the present value of the future cash flows that the Company expects to collect.

     Prior to the adoption of the updated accounting guidance, OTTI losses were not bifurcated between credit and non-credit components. The difference between fair value and amortized cost was recognized in earnings for all securities for which the

Company did not expect to recover the amortized cost basis, or for which the Company did not have the ability and intent to hold until recovery of fair value to amortized cost.

2. Investments

     Major categories of net investment income were as follows (dollars in thousands):

		Three Months Ended
		March 31,
		2010				2009
Investment income:
Fixed income securities		$	13,666			$	12,303
Equity securities			8				9
Short-term investments			15				48
Other			13				19
Total investment income on available-for-sale securities			13,702				12,379
Investment income on deposit with affiliated ceding company			26				157
Investment expenses			351				290
Net investment income			13,377				12,246

     Net realized investment gains and losses and the net change in unrealized gains and losses of available-for-sale securities were as follows (dollars in thousands):

		Three Months Ended
		March 31,
		2010				2009
Net realized investment gains (losses):
Fixed income securities:
Gross realized investment gains		$	425			$	—
Gross realized investment losses:
Other-than-temporary impairment losses			(94	)			—
Realized losses from sales			(19	)			—
Total gross realized investment losses			(113	)			—
Net realized investment gains on fixed income securities			312				—
Equity securities:
Gross realized investment gains			11				—
Gross realized investment losses:
Other-than-temporary impairment losses			—				(46	)
Realized losses from sales			—				(20	)
Total gross realized investment losses			—				(66	)
Net realized investment gains (losses) on equity securities			11				(66	)
Other			—				—
Net realized investment gains (losses)			323				(66	)
Net change in unrealized gains (losses)
Fixed income securities		$	2,569			$	(12,727	)
Equity securities			21				—
Total net change in unrealized gains (losses)		$	2,590			$	(12,727	)
Net realized gains (losses) and change in unrealized gains (losses)		$	2,913			$	(12,793	)

     The amortized cost, gross unrealized gains, gross unrealized losses, estimated fair value and OTTI of fixed income securities and the cost, gross unrealized gains, gross unrealized losses and estimated fair value of equity securities held by CNA Surety at March 31, 2010, by investment category, were as follows (dollars in thousands):

						Gross				Gross Unrealized Losses
		Amortized Cost				Unrealized				Less Than				More Than				Estimated				Unrealized
March 31, 2010		or Cost				Gains				12 Months				12 Months				Fair Value				OTTI Losses(a)
Fixed income securities:
U.S. Treasury securities and obligations of U.S. Government and agencies:
U.S. Treasury		$	18,085			$	977			$	—			$	—			$	19,062			$	—
U.S. Agencies			6,528				315				—				––				6,843				––
Collateralized mortgage obligations — residential			29,832				1,715				—				––				31,547				––
Mortgage pass-through securities — residential			87,012				2,638				(45	)			––				89,605				––
Obligations of states and political subdivisions			699,069				33,738				(866	)			(2,505	)			729,436				––
Corporate bonds			382,765				13,572				(714	)			(150	)			395,473				––
Collateralized mortgage obligations — commercial			10,022				163				—				––				10,185				––
Other asset-backed securities:
Second mortgages/home equity loans — residential			4,989				—				—				(553	)			4,436				(1,207	)
Consumer credit receivables			10,767				482				—				––				11,249				––
Other			9,706				755				––				––				10,461				––
Total fixed income securities			1,258,775				54,355				(1,625	)			(3,208	)			1,308,297			$	(1,207	)
Equity securities			1,650				202				—				—				1,852
Total		$	1,260,425			$	54,557			$	(1,625	)		$	(3,208	)		$	1,310,149

     The amortized cost, gross unrealized gains, gross unrealized losses, estimated fair value and OTTI of fixed income securities and the cost, gross unrealized gains, gross unrealized losses and estimated fair value of equity securities held by CNA Surety at December 31, 2009, by investment category, were as follows (dollars in thousands):

						Gross				Gross Unrealized Losses
		Amortized Cost				Unrealized				Less Than				More Than				Estimated				Unrealized
December 31, 2009		or Cost				Gains				12 Months				12 Months				Fair Value				OTTI Losses(a)
Fixed income securities:
U.S. Treasury securities and obligations of U.S. Government and agencies:
U.S. Treasury		$	17,378			$	970			$	—			$	—			$	18,348			$	—
U.S. Agencies			9,794				337				—				––				10,131				––
Collateralized mortgage obligations — residential			30,709				1,383				—				––				32,092				––
Mortgage pass-through securities — residential			94,453				2,336				(232	)			––				96,557				––
Obligations of states and political subdivisions			696,505				35,847				(882	)			(2,902	)			728,568				––
Corporate bonds			334,136				11,478				(1,248	)			(257	)			344,109				––
Collateralized mortgage obligations — commercial			10,024				—				—				(351	)			9,673				––
Other asset-backed securities:
Second mortgages/home equity loans — residential			5,501				—				—				(740	)			4,761				(1,399	)
Consumer credit receivables			11,055				528				—				––				11,583				––
Other			9,715				686				––				––				10,401				––
Total fixed income securities			1,219,270				53,565				(2,362	)			(4,250	)			1,266,223			$	(1,399	)
Equity securities			1,429				181				—				—				1,610
Total		$	1,220,699			$	53,746			$	(2,362	)		$	(4,250	)		$	1,267,833

     A security is in an unrealized loss position, or impaired, if the fair value of the security is less than its amortized cost or cost, which includes adjustments for accretion, amortization and previously recorded other-than-temporary impairment losses. When a security is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

     A significant judgment in the valuation of investments is the determination of when an other-than-temporary decline in value has occurred. The Company follows a consistent and systematic process for identifying securities that sustain other-than-temporary

declines in value. The Company has established a watch list that is reviewed by the Chief Financial Officer and one other executive officer on at least a quarterly basis. The watch list includes individual securities that fall below certain thresholds or that exhibit evidence of impairment indicators including, but not limited to, a significant adverse change in the financial condition and near-term prospects of the investment or a significant adverse change in legal factors, the business climate or credit ratings.

     When a security is placed on the watch list, it is monitored for further market value changes and additional news related to the issuer’s financial condition. The focus is on objective evidence that may influence the evaluation of impairment factors. The decision to record an other-than-temporary impairment loss incorporates both quantitative criteria and qualitative information.

     In determining whether an equity security is other-than-temporarily impaired, the Company considers a number of factors including, but not limited to: (a) the length of time and the extent to which the market value has been less than book value, (b) the financial condition and near-term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in value and (d) general market conditions and industry or sector specific factors. Currently, the Company’s equity portfolio is comprised solely of mutual funds related to the Company’s deferred compensation plan, which is an unfunded, nonqualified deferred compensation plan for a select group of management or highly compensated employees. Due to the nature of the plan, the Company does not assert the ability to hold these securities until their recovery in value. As such, if any of these securities are in an unrealized loss position, they are considered to be other-than-temporarily impaired.

     For equity securities for which an other-than-temporary impairment loss has been identified, the security is written down to fair value and the resulting losses are recognized in realized gains/losses in the Condensed Consolidated Statements of Income.

     Fixed income securities in an unrealized loss position that the Company intends to sell, or it more likely than not will be required to sell before recovery of amortized cost, are considered to be other-than-temporarily impaired. These securities are written down to fair value and the resulting losses are recognized in realized gains/losses in the Condensed Consolidated Statements of Income.

     The remaining fixed income securities in an unrealized loss position are evaluated to determine if a credit loss exists. To determine if a credit loss exists, the Company considers a number of factors including, but not limited to: (a) the financial condition and near-term prospects of the issuer, (b) credit ratings of the securities, (c) whether the debtor is current on interest and principal payments, (d) the length of time and the extent to which the market value has been less than book value and (e) general market conditions and industry or sector specific factors.

     In addition to these factors, the Company considers the results of discounted cash flow modeling using assumptions representative of current market conditions as well as those specific to the Company’s particular security holdings. For asset-backed and mortgage-backed securities, the focus of this analysis is on assessing the sufficiency and quality of underlying collateral and timing of cash flows. Significant assumptions considered by the Company in its cash flow projections include delinquency rates, probable risk of default, over collateralization and credit support from lower level tranches. If the discounted expected cash flows for a security equal or exceed the amortized cost of that security, no credit loss exists and the security is deemed to be temporarily impaired.

     Fixed income securities in an unrealized loss position for which management believes a credit loss exists are considered to be other-than-temporarily impaired. For these fixed income securities, the Company bifurcates OTTI losses into a credit component and a non-credit component. The credit component, which represents the difference between the discounted expected cash flows and the fixed income security’s amortized cost, is recognized in earnings. The non-credit component is recognized in other comprehensive income and represents the difference between fair value and the discounted cash flows that the Company expects to collect.

     Based on the Company’s evaluation of this quantitative criteria and qualitative information during the first quarter of 2010, the Company recorded additional credit-related OTTI losses of $0.1 million in earnings. The Company initially recorded credit-related OTTI losses on this security in the second quarter of 2009. This security is rated below investment grade by Standard & Poor’s (“S&P”) and collateralized by sub-prime home loans.

     The following table presents a roll-forward of the Company’s cumulative credit losses recognized in net realized gains (losses) on the Condensed Consolidated Statements of Income on fixed income securities held as of March 31, 2010 (in thousands of dollars):

Beginning balance at January 1, 2010		$	116
Credit losses for which an OTTI loss was not previously recognized			––
Credit losses for which an OTTI loss was previously recognized			94
Ending balance at March 31, 2010		$	210

     For the three months ended March 31, 2010, the Company has recorded no OTTI losses on equity securities. For the three months ended March 31, 2009, the Company recorded OTTI losses of less than $0.1 million on the equity securities that are related to the Company’s nonqualified deferred compensation plan.

     The amortized cost and estimated fair value of fixed income securities, by contractual maturity, at March 31, 2010 and December 31, 2009 are shown below. Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):

		March 31, 2010								December 31, 2009
		Amortized				Estimated Fair				Amortized				Estimated Fair
		Cost				Value				Cost				Value
Fixed income securities:
Due within one year		$	33,239			$	34,664			$	13,006			$	13,224
Due after one year but within five years			337,092				352,962				304,654				321,144
Due after five years but within ten years			450,617				473,081				447,485				468,254
Due after ten years			285,499				290,107				292,668				298,534
			1,106,447				1,150,814				1,057,813				1,101,156
Mortgage pass-through securities, collateralized mortgage obligations and asset-backed securities			152,328				157,483				161,457				165,067
		$	1,258,775			$	1,308,297			$	1,219,270			$	1,266,223

     The following table provides the composition of fixed income securities with an unrealized loss at March 31, 2010 in relation to the total of all fixed income securities in an unrealized loss position by contractual maturities:

		% of
		Estimated				% of
		Fair				Unrealized
Contractual Maturity		Value				Loss
Due after one year through five years			20	%			6	%
Due after five years through ten years			33				19
Due after ten years			39				63
Asset-backed securities			8				12
Total			100	%			100	%

     The following table summarizes for fixed income securities in an unrealized loss position at March 31, 2010 and December 31, 2009, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

		March 31, 2010								December 31, 2009
						Gross								Gross
		Estimated				Unrealized				Estimated				Unrealized
Unrealized Loss Aging		Fair Value				Loss				Fair Value				Loss
Fixed income securities:
Investment grade (a):
0-6 months		$	143,354			$	1,625			$	162,087			$	2,362
7-12 months			—				—				—				—
13-24 months			—				—				11,176				469
Greater than 24 months			34,695				1,656				32,932				2,065
Total investment grade			178,049				3,281				206,195				4,896
Non-investment grade:
Greater than 24 months			17,205				1,552				17,346				1,716
Total		$	195,254			$	4,833			$	223,541			$	6,612

     At March 31, 2010, the Company holds 271 fixed income securities in an unrealized gain position with a total estimated fair value of $1,113.0 million and an aggregate gross unrealized gain of $54.4 million.

     The following table summarizes securities in a gross unrealized loss position by investment category and by credit rating. The table also discloses the corresponding count of securities in an unrealized loss position and estimated fair value by category (in thousands of dollars):

		Gross Unrealized Losses																								Estimated
March 31, 2010		AAA				AA				A				BBB				Total				Count				Fair Value
Fixed income securities:
Investment grade(a):
U.S. Treasury securities and obligations of U. S. Government and agencies:
Mortgage pass-through securities — residential		$	45			$	—			$	—			$	—			$	45				1			$	10,529
Obligations of states and political subdivisions			457				997				791				—				2,245				16				82,271
Corporate bonds			10				181				394				279				864				19				82,955
Other asset-backed securities:
Second mortgages/home equity loans — residential			127				—				—				—				127				1				2,294
Total investment grade			639				1,178				1,185				279				3,281				37				178,049
Non-investment grade:
Obligations of states and political subdivisions			—				—				—				—				1,126				2				15,063
Other asset-backed securities:
Second mortgages/home equity loans — residential			—				—				—				—				426				1				2,142
Total non-investment grade			—				—				—				—				1,552				3				17,205
Total		$	639			$	1,178			$	1,185			$	279			$	4,833				40			$	195,254

     As of March 31, 2010, the Company’s fixed income securities included one U.S. Government agency collateralized mortgage obligation backed by residential mortgages in a nominal unrealized loss position. The Company has no current intent to sell this security, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. The Company does not believe this unrealized loss is indicative of a credit loss and, as such, has not recorded an OTTI loss on this security at March 31, 2010.

     The unrealized losses on the Company’s investments in obligations of states and political subdivisions are due to changes in credit spreads and rising interest rates. Of the sixteen investment grade obligations of states and political subdivisions that were in an

unrealized loss position at March 31, 2010, only one was in an unrealized loss position exceeding 5% of the security’s amortized cost. This security, issued by a governmental utility authority, had an unrealized loss of $0.6 million, which was 10.6% of the security’s amortized cost. Although the unrealized loss on this security remained flat compared to December 31, 2009, improving market conditions resulted in an improvement of $0.3 million in the unrealized losses on the Company’s other investment grade obligations of states and political subdivisions at March 31, 2010. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. The Company does not believe the unrealized losses on these securities are indicative of credit losses and, as such, has not recorded an OTTI loss on these securities at March 31, 2010.

     The Company’s investments in two other obligations of states and political subdivisions, issued by governmental utility authorities, are below investment grade. At March 31, 2010, one of these securities had an unrealized loss of $0.2 million, or 4.7% of its amortized cost, and the other had an unrealized loss of $0.9 million, or 8.1% of its amortized cost. The unrealized loss position of each of these securities improved slightly at March 31, 2010 compared to December 31, 2009. Based on the underlying fundamentals of these securities, the Company continues to believe that all interest and principal will be paid according to their contractual terms. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. As such, the Company has not recorded an OTTI loss on these securities at March 31, 2010.

     Only one of the nineteen corporate bond investments in an unrealized loss position at March 31, 2010 had an unrealized loss of 5% or more. This security, which was issued by a large student loan provider, had an unrealized loss of $0.2 million, or 5.0% of its amortized cost. The unrealized loss position of this security was 8.5% ($0.3 million) of amortized cost at December 31, 2009. Further, the overall unrealized loss position on the Company’s corporate bond holdings improved $0.6 million compared to December 31, 2009. The unrealized losses on the Company’s corporate bond investments are primarily attributable to increases in interest rates beginning in the fourth quarter of 2009. The Company has no current intent to sell these securities, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost. The Company does not believe the unrealized losses on these securities are indicative of credit losses and, as such, has not recorded any OTTI losses on these securities at March 31, 2010.

     At March 31, 2010 the Company’s exposure to sub-prime home loans is limited to two asset-backed securities collateralized by sub-prime home loans originated prior to 2005. Both of these securities are in an unrealized loss position. One of these securities, which is rated investment grade, has an estimated fair value of $2.3 million and is in an unrealized loss position of $0.1 million, or 5.3% of its amortized cost, at March 31, 2010. The Company believes the unrealized loss on this security is primarily attributable to broader economic conditions and liquidity concerns and is not indicative of the quality of the underlying collateral. The Company has no current intent to sell this security, nor is it more likely than not that it will be required to sell prior to recovery of amortized cost.

     The other security with sub-prime exposure is rated below investment grade. During 2010, the Company received repayments on this security of $0.2 million, or approximately 6% of the par value outstanding at December 31, 2009. As discussed previously, this security was determined to have an additional credit loss of $0.1 million during the three months ended March 31, 2010. The non-credit component of this security’s OTTI recognized in accumulated other comprehensive income at March 31, 2010 was $0.4 million. The Company believes the unrealized loss on this security is primarily attributable to broader economic conditions and liquidity concerns and is not indicative of the quality of the underlying collateral. The unrealized loss on this security at December 31, 2009 was $0.5 million. The Company also recognized a credit-related loss of $0.1 million on this security in the second quarter of 2009. The Company has no current intent to sell this security, nor is it more likely than not that it will be required to sell prior to recovery of the adjusted amortized cost.

     Based on the current facts and circumstances discussed above for the Company’s securities in an unrealized loss position, the Company has determined that no additional OTTI losses related to the securities in an unrealized loss position are required to be recorded at March 31, 2010.

     Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain of these invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term may significantly affect the amounts reported in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Income.

3. Reinsurance

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

		Three Months Ended March 31,
		2010								2009
		Written				Earned				Written				Earned
Direct		$	91,963			$	81,879			$	89,128			$	83,341
Assumed			20,564				22,253				21,997				24,876
Ceded			(5,867	)			(5,880	)			(7,106	)			(7,066	)
Net premiums		$	106,660			$	98,252			$	104,019			$	101,151

     Assumed premiums primarily include surety business written or renewed, net of reinsurance, by CCC and CIC after September 30, 1997 that is reinsured by Western Surety pursuant to reinsurance and related agreements. Because of certain regulatory restrictions that limit Western Surety’s ability to write certain business on a direct basis, the Company utilizes the underwriting capacity available through these agreements while retaining control of the underwriting and claim management of this assumed business.

     Assumed premium also includes surety business written by another affiliate, First Insurance Company of Hawaii, Ltd. and its subsidiaries First Indemnity Insurance of Hawaii, Inc., First Fire and Casualty Insurance of Hawaii, Inc. and First Security Insurance of Hawaii, Inc. (collectively, “FICOH”). Through its insurance subsidiaries, CNAF owns approximately 50% of the outstanding common stock of First Insurance Company of Hawaii, Ltd. Under the terms of this excess of loss agreement that covers certain contract surety business, FICOH retains losses of $2 million per principal and Western Surety assumes 80% of $5 million per principal in excess of $2 million subject to an aggregate annual limit of $8 million. Premiums assumed by Western Surety under this agreement were less than $0.1 million for both the three months ended March 31, 2010 and 2009.

     CNA Surety also assumes premium on contract and commercial surety bonds for international risks. Such premiums are assumed pursuant to the terms of reinsurance treaties or as a result of specific international bond requirements of domestic customers. For the three month periods ended March 31, 2010 and 2009, premiums assumed under such arrangements were $1.3 million and $0.5 million, respectively.

     The effect of reinsurance on the Company’s provision for loss and loss adjustment expenses and the corresponding ratio to earned premium was as follows (dollars in thousands):

		Three Months Ended March 31,
		2010								2009
		$				Ratio				$				Ratio
Gross losses and loss adjustment expenses		$	27,815				26.7	%		$	31,308				28.9	%
Ceded amounts			766				(13.0	)%			(1,720	)			24.3	%
Net losses and loss adjustment expenses		$	28,581				29.1	%		$	29,588				29.3	%

     The unusual impact of ceded amounts as an increase in net loss and loss adjustment expenses for the three months ended March 31, 2010 resulted from large indemnification recoveries on claims subject to excess of loss reinsurance contracts.

Excess of Loss Reinsurance

     The Company’s ceded reinsurance program is predominantly comprised of excess of loss reinsurance contracts that limit the Company’s retention on a per principal basis. The Company’s reinsurance coverage is provided by third party reinsurers and related parties. Due to the terms of these excess of loss treaties, reinsurers may cover some principals in one year but then exclude these same principals in subsequent years. As a result, the Company may have exposures to these principals that have limited or no reinsurance coverage. Only the large national contractor discussed below was excluded from the third party reinsurance agreements effective for the treaty periods discussed; however, as discussed below, the Company has no further exposure to this principal.

2009 Third Party Reinsurance

     Effective January 1, 2009, CNA Surety entered into an excess of loss treaty (“2009 Excess of Loss Treaty”) with a group of third party reinsurers on terms similar to the excess of loss treaty effective in 2008. Under the 2009 Excess of Loss Treaty, the Company’s net retention per principal was $15 million with a 5% co-participation in the $90 million layer of third party reinsurance coverage above the Company’s retention. The contract provided aggregate coverage of $185 million and included an optional extended

discovery period, which was not exercised. The contract also included a provision for additional premiums of up to $13.8 million based on losses ceded under the contract. The actual ceded premiums for the 2009 Excess of Loss Treaty were $26.6 million.

     2010 Third Party Reinsurance

     Effective January 1, 2010, CNA Surety entered into an excess of loss treaty (“2010 Excess of Loss Treaty”) with a group of third party reinsurers on terms similar to the 2009 Excess of Loss Treaty. Under the 2010 Excess of Loss Treaty, the Company’s net retention per principal remains at $15 million with a 5% co-participation in the $90 million layer of third party reinsurance coverage above the Company’s retention. The contract provides aggregate coverage of $185 million and includes an optional extended discovery period, for an additional premium (a percentage of the original premium based on any unexhausted aggregate limit by layer), which will provide coverage for losses discovered beyond 2010 on bonds that were in force during 2010. The contract also includes a provision for additional premiums of up to $12.3 million based on losses ceded under the contract. The base annual premium for the 2010 Excess of Loss Treaty is $24.6 million.

Related Party Reinsurance

     Reinsurance agreements together with the Services and Indemnity Agreement described below provide for the transfer of the surety business written by CCC and CIC to Western Surety. Many of these agreements originally were entered into on September 30, 1997 (the “Merger Date”) and include: (i) the Surety Quota Share Treaty (the “Quota Share Treaty”); (ii) the Aggregate Stop Loss Reinsurance Contract (the “Stop Loss Contract”) and (iii) the Surety Excess of Loss Reinsurance Contract. Although the contracts entered on the Merger Date have expired, some have been renewed on different terms as described below.

     Through the Quota Share Treaty, CCC and CIC transfer to Western Surety surety business written or renewed by CCC and CIC after the Merger Date. The Quota Share Treaty was renewed on January 1, 2010 and expires on December 31, 2010 and is annually renewable thereafter. CCC and CIC transfer the related liabilities of such business and pay to Western Surety an amount in cash equal to CCC’s and CIC’s net written premiums written on all such business, minus a quarterly ceding commission to be retained by CCC and CIC equal to $50,000 plus 25% of net written premiums written on all such business. For 2009 this resulted in an override commission on their actual direct acquisition costs of 4.8% to CCC and CIC.

     Under the terms of the Quota Share Treaty, CCC has guaranteed the loss and loss adjustment expense reserves transferred to Western Surety as of the Merger Date by agreeing to pay Western Surety, within 30 days following the end of each calendar quarter, the amount of any adverse development on such reserves, as re-estimated as of the end of such calendar quarter. There was no adverse reserve development for the period from the Merger Date through March 31, 2010.

     Through the Stop Loss Contract, the Company’s insurance subsidiaries were protected from adverse loss development on certain business underwritten after the Merger Date. The Stop Loss Contract between the Company’s insurance subsidiaries and CCC limited the insurance subsidiaries’ prospective net loss ratios with respect to certain accounts and lines of insured business for three full accident years following the Merger Date. In the event the insurance subsidiaries’ accident year net loss ratio exceeds 24% in any of the accident years 1997 through 2000 on certain insured accounts (the “Loss Ratio Cap”), the Stop Loss Contract requires CCC at the end of each calendar quarter following the Merger Date, to pay to the insurance subsidiaries a dollar amount equal to (i) the amount, if any, by which the Company’s actual accident year net loss ratio exceeds the applicable Loss Ratio Cap, multiplied by (ii) the applicable net earned premiums. In consideration for the coverage provided by the Stop Loss Contract, the Company’s insurance subsidiaries paid CCC an annual premium of $20,000. The CNA Surety insurance subsidiaries have paid CCC all required annual premiums. Through March 31, 2010 and December 31, 2009, losses incurred under the Stop Loss Contract were $47.2 million and $49.1 million, respectively. The decrease is a result of favorable development on claims subject to the Stop Loss Contract during the first quarter of 2010. As a result of this favorable development, the Company paid CCC $1.9 million under the Stop Loss Contract. At March 31, 2010, the amount received under the Stop Loss Contract included $2.8 million held by the Company for losses covered under this contract that were incurred but not paid.

     The Services and Indemnity Agreement provides the Company’s insurance subsidiaries with the authority to perform various administrative, management, underwriting and claim functions in order to conduct the surety business of CCC and CIC and to be reimbursed by CCC for services rendered. In consideration for providing the foregoing services, CCC has agreed to pay Western Surety a quarterly fee of $50,000. In 2009, this agreement was amended so that the Company’s authority to conduct administrative, management, underwriting and claim functions for bonds written for the large national contractor discussed below shall continue until CCC’s bonds for such contractor have expired and claims have been settled or closed. This agreement was renewed on January 1,

2010 and expires on December 31, 2010 and is annually renewable thereafter. As of March 31, 2010 there were no amounts due to the CNA Surety insurance subsidiaries under this agreement.

     From January 1, 2005 to June 30, 2009, the Company and CCC were parties to an excess of loss contract, and extensions to that contract, that provided unlimited reinsurance coverage in excess of $60 million retention for the life of bonds either in force or written during the contract periods exclusively for the one large national contractor excluded from the Company’s third party reinsurance. Premiums for these contracts totaled $8.6 million and included an initial premium of $7.0 million and premiums of $1.6 million based on the level of premiums written on bonds for the large national contractor.

     In 2009, the Company and CCC terminated the excess of loss contract discussed in the preceding paragraph. Related to the termination of this contract, the Company and CCC also commuted the Quota Share Treaty as regards the premium and losses for the large national contractor. The impact of this commutation was a decrease of gross loss reserves of $51.8 million. Under the terms of the agreements effecting this commutation, the Company paid CCC $1.8 million. This settlement reflected the difference between the Company’s $60.0 million retention under the excess of loss contract and the $58.2 million paid by the Company for losses of the large national contractor through 2009.

     On January 1, 2010, the Company and CCC entered into separate agreements that provide for the transfer of the Canadian surety business of CCC to Western Surety. These agreements, which include a quota share treaty (the “Canadian Quota Share Treaty”) and a services and indemnity agreement (the “Canadian Services and Indemnity Agreement”), are substantially similar to the Quota Share Treaty and the Services and Indemnity Agreement discussed above. The Canadian Services and Indemnity Agreement provides Western Surety with the authority to supervise various administrative, underwriting and claim functions associated with the surety business written by CCC, through its Canadian branch, on behalf of the Company. Through the Canadian Quota Share Treaty, this Canadian surety business is transferred to Western Surety. Pursuant to these agreements, CCC will transfer the subject premium and related liabilities of such business and pay to Western Surety an amount equal to CCC’s net written premiums on all such business, minus a ceding commission of 33.5% of net written premiums. Further, Western Surety will pay an additional ceding commission to CCC in the amount of actual direct expense in producing such premium. These agreements expire on December 31, 2010 and are annually renewable thereafter.

     As of March 31, 2010 and December 31, 2009, CNA Surety had an insurance receivable balance from CCC and CIC of $9.2 million and $9.8 million, respectively, comprised of premiums receivable.

     The Company’s Condensed Consolidated Balance Sheets also include a “Deposit with affiliated ceding company” of $26.9 million at both March 31, 2010 and December 31, 2009. In 2005, pursuant to an agreement with the claimant on a bond regarding certain aspects of the claim resolution, the Company deposited $32.7 million with an affiliate to enable the affiliate to establish a trust to fund future payments under the bond. The bond was written by the affiliate and assumed by one of the Company’s insurance subsidiaries pursuant to the Quota Share Treaty. The Company is entitled to the interest income earned by the trust. Prior to the establishment of the trust, the Company had fully reserved its obligation under the bond and the claim remains fully reserved.

4. Fair Value of Financial Instruments

     Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

	•		Level 1 — Quoted prices for identical instruments in active markets.
	•		Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
	•		Level 3 — Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

     The Company utilizes a pricing service for the valuation of the majority of securities held. This pricing service is an independent, third party vendor recognized to be an industry leader with access to market information who obtains or computes fair market values from quoted market prices, pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models. For valuations obtained from the pricing service, the Company performs due diligence to understand how the valuation was calculated or derived, focusing on the valuation technique used and the nature of the inputs.

     The following section describes the valuation methodologies used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instrument is generally classified.

Fixed Income Securities

     Securities valued using Level 1 inputs include highly liquid government bonds for which quoted market prices are available. Securities using Level 2 inputs are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs. Most fixed income securities are valued using Level 2 inputs. Level 2 includes corporate bonds, municipal bonds, asset-backed securities and mortgage pass-through securities.

Equity Securities

     Level 1 includes publicly traded securities valued using quoted market prices.

Short-Term Investments

     The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and U.S. Treasury bills. Level 2 includes securities for which all significant inputs are observable, such as commercial paper and discount notes.

     Assets measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009 are summarized below (amounts in thousands):

		March 31, 2010
		Fair Value Measurement Using												Assets at Fair
		Level 1				Level 2				Level 3				Value
Assets:
Fixed income securities:
U.S. Treasury securities and obligations of U.S. Government and agencies:
U.S. Treasury		$	19,062			$	—			$	—			$	19,062
U.S. Agencies			—				6,843				—				6,843
Collateralized mortgage obligations — residential			—				31,547				—				31,547
Mortgage pass-through securities — residential			—				89,605				—				89,605
Obligations of states and political subdivisions			—				729,436				—				729,436
Corporate bonds			—				395,473				—				395,473
Collateralized mortgage obligations — commercial			—				10,185				—				10,185
Other asset-backed securities:
Second mortgages/home equity loans — residential			—				4,436				—				4,436
Consumer credit receivables			—				11,249				—				11,249
Other			—				10,461				—				10,461
Total fixed income securities			19,062				1,289,235				—				1,308,297
Equity securities at fair value			1,852				—				—				1,852
Short-term investments at fair value (a)			34,900				5,070				—				39,970
Total assets		$	55,814			$	1,294,305			$	—			$	1,350,119

		December 31, 2009
		Fair Value Measurement Using												Assets at Fair
		Level 1				Level 2				Level 3				Value
Assets:
Fixed income securities:
U.S. Treasury securities and obligations of U.S. Government and agencies:
U.S. Treasury		$	18,348			$	—			$	—			$	18,348
U.S. Agencies			—				10,131				—				10,131
Collateralized mortgage obligations — residential			—				32,092				—				32,092
Mortgage pass-through securities — residential			—				96,557				—				96,557
Obligations of states and political subdivisions			—				728,568				—				728,568
Corporate bonds			—				344,109				—				344,109
Collateralized mortgage obligations — commercial			—				9,673				—				9,673
Other asset-backed securities:
Second mortgages/home equity loans — residential			—				4,761				—				4,761
Consumer credit receivables			—				11,583				—				11,583
Other			—				10,401				—				10,401
Total fixed income securities			18,348				1,247,875				—				1,266,223
Equity securities at fair value			1,610				—				—				1,610
Short-term investments at fair value (a)			15,412				33,587				—				48,999
Total assets		$	35,370			$	1,281,462			$	—			$	1,316,832