Letter to Shareholders

Dear Fellow Shareholders:

Once again, CNA Surety had a very good year. We experienced our fourth consecutive year of record earnings in 2009 despite challenging economic conditions. We’re very proud of our results, yet we are even more proud of what’s behind them… a solid foundation that will carry us into the future.

AN ESTABLISHED INFRASTRUCTURE

For the past six years, we at CNA Surety have been establishing a solid infrastructure that would allow us to succeed in both good times and bad. Adhering to four key cornerstones – controlled and consistent underwriting, skilled and proficient claims handling, a conservative investment philosophy and a cautious approach to capital management – has led to our success and places us in a strong position to deal with challenges that may come our way.

A FIRM FOUNDATION

We entered 2009 with a very strong balance sheet; we ended the year with an even stronger one. Expenses were kept under control, our loss activity remained relatively light and our investment portfolio ended the year in a net unrealized gain position.

Debt outstanding remained at a very modest $31 million and cash flow from operations increased 27 percent to $158 million.

Our investment portfolio performed extremely well in 2009 as we maintained our conservative investment philosophy. At year end, invested assets and cash totaled $1.3 billion, and our bond portfolio retained an overall credit quality of AA–.

Total stockholders’ equity rose to $923 million, a 20 percent increase. Book value rose to $20.85 per share, and our return on equity was 13.9 percent.

Our loss ratio of 16.5 percent reflects both favorable loss development and relatively light loss activity in 2009. Our expense ratio rose only slightly to 55.3 percent despite lower revenues which typically put pressure on the expense ratio. We ended the year with an outstanding combined ratio of 71.8 percent.

CNA Surety’s net income increased 6.8 percent to $118 million, significantly bolstered by favorable loss reserve development of $54 million. The reserve release pertains to accident years 2007 and before. We chose to maintain our original loss estimates for 2008 and 2009 due to the significant change in economic conditions in recent years.

We enter 2010 in an extremely strong financial position. However, we continue to operate in an uncertain economic environment. Our robust balance sheet and capital flexibility will allow us to weather the uncertainty in the marketplace and capture future opportunities as they become available.

QUALITY OPERATIONS

Although our financial results were impressive, our top line declined during the year due to the struggling economy. The construction environment where we generate a good deal of our revenue has clearly suffered, and construction spending for the year was down considerably.

For the full year, gross written premiums were $438 million, down 6.2 percent. Commercial surety gross written premiums ended the year at $134 million, a decrease of 1.8 percent. Contract surety gross written premiums were down 8.5 percent to $275 million. Still, we remained competitive in the market and performed well against our peers.

The credit modeling, underwriting due diligence and monitoring of our contractors conducted in past years is paying off. Most of the contractors we bond continue to have strong balance sheets even in these difficult times. We have been impressed by the timely and decisive action taken by many of the firms we bond to rightsize their organizations to the current market realities. When the construction economy improves, many of these firms will be well positioned to capitalize on the opportunities.

Though revenues were down in 2009, loss activity remained relatively light. A turnaround of the construction industry will certainly help stabilize our revenues as well as lead to potentially fewer defaults under our bonds.

We are also identifying additional sources of surety business that could have a positive impact on both our revenue and our bottom line. We continue to pursue opportunities that will allow us to strengthen our presence in certain areas and strategically grow our business. Rest assured, our focus remains on profitable growth within the surety industry.

As we move into 2010, adhering to consistent underwriting standards and closely working with our accounts will be more important than ever. While our business will continue to be affected by economic factors, we have a strong, geographically diverse book of business that positions us well for future success.

ON SOLID GROUND

Overall, the surety industry enjoyed another great year. Underwriting remained disciplined and rates held fairly steady. Most sureties faced declining revenue, but there has not been an irresponsible rush to replace lost premium.

While it is very difficult to predict the coming year, our employees and business partners understand the challenges we face and are very capable of working through these times with us. We have built a very strong balance sheet over the past six years and are well positioned financially to not only manage through a more difficult construction and credit environment, but also to capitalize on new opportunities as they arise.

We have a great organization. We are confident that we can continue generating respectable returns into the future. Our business is built on solid ground.

Sincerely,

John F. Welch
President and Chief Executive Officer

March 5, 2010