Letter to Shareholders

Dear Fellow Shareholders:

In a year of surprises and economic challenges, CNA Surety ended 2008 with record earnings for the third consecutive year and a balance sheet that is stronger than ever. Our success is certainly not born of last year’s business climate; it is the result of applying a disciplined approach to everything we do. Our controlled and consistent underwriting; our skilled and proficient claims handling; our conservative investment philosophy; and a cautious approach to capital management all contributed to our outstanding 2008 results and robust year-end balance sheet.

STRONG 2008 RESULTS

CNA Surety’s net income increased 19 percent in 2008 to $110 million. The increase reflects continued favorable loss development on prior accident years and higher earned premiums. Despite a low level of current loss activity, we acknowledged future uncertainty and strengthened reserves for the 2007 and 2008 accident years. We feel very positive about the healthy level of capital and reserves we have built.

Across the past five years, we have significantly lowered our expense ratio 16 percent while growing our revenues 20 percent. Our year-end 2008 expense ratio was 54.5 percent, compared to 62.6 percent back in 2003. This improvement was primarily due to lowered reinsurance costs and increased productivity on the part of our dedicated staff.

Our loss ratio in 2008 improved to 18.7 percent, contributing to an outstanding year-end combined ratio of 73.2 percent.

We enter 2009 with a strong balance sheet that provides us with capital flexibility. Debt outstanding at year-end remained at a very modest $31 million and cashflow from operations was $124 million.

Shareholder value was also further enhanced in 2008 with a 15 percent increase to stockholders’ equity to $767 million. Book value rose to $17.37 per share, and our return on equity increased to 15.4 percent.

Although not completely immune to market dynamics, our investment portfolio performed extremely well given the turmoil in the financial markets. The portfolio follows our consistent and conservative philosophy and focuses on high quality bonds, with only minimal exposure to sub-prime home loans. We certainly compliment our investment managers and Board for maintaining discipline in this area.

SOLID OPERATIONS

Given the difficult economic circumstances, we are pleased with our premium production numbers. Gross written premiums decreased slightly to $467 million in 2008. Contract surety contributed $300 million to gross written premiums, a decrease of about 2 percent. Commercial surety gross written premiums increased slightly to $136 million. Our production was supported by continued spending on public construction.

From a contract surety underwriting perspective, our largest account exposures have not increased over the past five years, despite the growth in the construction economy. We have generally managed the exposure levels so that expected losses could be contained within our reinsurance protection, with our capital providing any additional cushion if necessary.

We have also managed our commercial surety exposures to more reasonable levels and are significantly less exposed to large corporate risks than we were five years ago. As an added precaution, we have strengthened our credit analyses and have intensified our evaluation of the cashflow and leveraging characteristics of each client. We continue to stay close to our clients in order to monitor their financial situations and understand their plans for addressing potential downturns in their businesses.

POSITIONED FOR CONTINUED SUCCESS

The surety line of business has been very profitable for almost all carriers the past few years. Entering 2009, the surety market remains fairly steady with little, if any, deterioration in underwriting and pricing to date. The current economic circumstances have, however, had a dampening effect on aggressive production efforts.

To mitigate the slowdown, we will continue our efforts to find new sources of business in territories and/or product niches where we have had less presence in the past. Any government stimulus package that includes infrastructure spending should also be beneficial to us.

As premiums level out, we are beginning to see pressure on the expense ratio. We will continue to identify efficiencies within CNA Surety to keep our costs at a reasonable level. At the same time, we are committed to protecting the underwriting talent and infrastructure we have in place that allow us to grow and succeed.

Going forward, we will continue to underwrite appropriately and manage our investments, reserves and capital in a manner that will allow us to not only survive, but produce profitable results and respectable returns. While we may not be able to totally escape the potential challenges that lie ahead, we are confident that the discipline we have exercised in the past leaves CNA Surety in a strong position as we head into the future.

Sincerely,

John F. Welch
President and Chief Executive Officer

March 5, 2009