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CNA SURETY CORP

SEC Form 10-Q filed 2010-07-30 for the period ending 2010-06-30

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Selected tables from the SEC filing

Table 0

Financial table in standard format

CNA SURETY CORPORATION AND SUBSIDIARIES
INDEX


	Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at June 30, 2010 and at December 31, 2009		3
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009		4
Condensed Consolidated Statements of Stockholders Equity for the Six Months Ended June 30, 2010 and 2009		5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		42
Item 4. Controls and Procedures		43
PART II. OTHER INFORMATION		43
Item 1. Legal Proceedings		43
Item 1A. Risk Factors		43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3. Defaults Upon Senior Securities		44
Item 4.		44
Item 5. Other Information		44
Item 6. Exhibits		44
EX-31.1
EX-31.2
EX-32.1
EX-32.2

CNA SURETY CORP CIK:1044566

Notes to Condensed Consolidated Financial Statements	7
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	42
Item 4. Controls and Procedures	43
PART II. OTHER INFORMATION	43
Item 1. Legal Proceedings	43
Item 1A. Risk Factors	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3. Defaults Upon Senior Securities	44
Item 4.	44
Item 5. Other Information	44
Item 6. Exhibits	44
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Data column 1: Unable to interpret date in column header
Row "EX-31.1": Multi-column field in a numeric row
Row "EX-31.2": Multi-column field in a numeric row
Row "EX-32.1": Multi-column field in a numeric row
Row "EX-32.2": Multi-column field in a numeric row

Table 1

Financial table in standard format

CNA SURETY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


	June 30,			December 31,
	2010			2009
	(Amounts in thousands, except per
	share data)
Assets
Invested assets:
Fixed income securities, at fair value (amortized cost: $1,252,987 and $1,219,270)	$	1,324,980		$	1,266,223
Equity securities, at fair value (cost: $1,687 and $1,429)		1,830			1,610
Short-term investments, at amortized cost (approximates fair value)		77,514			48,999

Total invested assets		1,404,324			1,316,832
Cash		4,875			5,822
Deferred policy acquisition costs		103,748			99,836
Insurance receivables:
Premiums, including $10,256 and $9,753 from affiliates, (net of allowance for doubtful accounts: $1,407 and $1,110)		47,224			33,392
Reinsurance		51,044			48,645
Deposit with affiliated ceding company		23,404			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: $38,525 and $37,514)		17,915			19,681
Prepaid reinsurance premiums		202			210
Accrued investment income		16,239			15,832
Other assets		2,258			3,122

Total assets	$	1,810,018		$	1,709,035


Liabilities
Reserves:
Unpaid losses and loss adjustment expenses	$	439,344		$	406,123
Unearned premiums		259,706			247,776

Total reserves		699,050			653,899
Long-term debt		30,930			30,930
Deferred income taxes, net		37,111			28,065
Reinsurance and other payables to affiliates		104			548
Accrued expenses		14,525			18,586
Liability for postretirement benefits		11,092			10,718
Payable for securities purchased					1,356
Income tax payable		3,481			13,389
Other liabilities		23,555			28,460

Total liabilities		819,848			785,951
Commitments and contingencies (See Notes 3, 5, 8)

Stockholders Equity
Common stock, par value $.01 per share, 100,000 shares authorized; 45,674 shares issued and 44,313 shares outstanding at June 30, 2010 and 45,635 shares issued and 44,268 shares outstanding at December 31, 2009		457			456
Additional paid-in capital		280,761			279,388
Retained earnings		676,935			627,505
Accumulated other comprehensive income		46,623			30,406
Treasury stock, 1,361 and 1,367 shares, at cost		(14,606	)		(14,671	)

Total stockholders equity		990,170			923,084

Total liabilities and stockholders equity	$	1,810,018		$	1,709,035

CNA SURETY CORP CIK:1044566
	2010-06-30	2009-12-31
(Amounts in thousands, except per
share data)
Assets
Invested assets:
Fixed income securities, at fair value (amortized cost: $1,252,987 and $1,219,270)	$1,324,980	$1,266,223
Equity securities, at fair value (cost: $1,687 and $1,429)	1,830	1,610
Short-term investments, at amortized cost (approximates fair value)	77,514	48,999
Total invested assets	1,404,324	1,316,832
Cash	4,875	5,822
Deferred policy acquisition costs	103,748	99,836
Insurance receivables:
Premiums, including $10,256 and $9,753 from affiliates, (net of allowance for doubtful accounts: $1,407 and $1,110)	47,224	33,392
Reinsurance	51,044	48,645
Deposit with affiliated ceding company	23,404	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: $38,525 and $37,514)	17,915	19,681
Prepaid reinsurance premiums	202	210
Accrued investment income	16,239	15,832
Other assets	2,258	3,122
Total assets	$1,810,018	$1,709,035
Liabilities
Reserves:
Unpaid losses and loss adjustment expenses	$439,344	$406,123
Unearned premiums	259,706	247,776
Total reserves	699,050	653,899
Long-term debt	30,930	30,930
Deferred income taxes, net	37,111	28,065
Reinsurance and other payables to affiliates	104	548
Accrued expenses	14,525	18,586
Liability for postretirement benefits	11,092	10,718
Payable for securities purchased		1,356
Income tax payable	3,481	13,389
Other liabilities	23,555	28,460
Total liabilities	819,848	785,951
Commitments and contingencies (See Notes 3, 5, 8)
Stockholders Equity
Common stock, par value $.01 per share, 100,000 shares authorized; 45,674 shares issued and 44,313 shares outstanding at June 30, 2010 and 45,635 shares issued and 44,268 shares outstanding at December 31, 2009	457	456
Additional paid-in capital	280,761	279,388
Retained earnings	676,935	627,505
Accumulated other comprehensive income	46,623	30,406
Treasury stock, 1,361 and 1,367 shares, at cost	(14,606)	(14,671)
Total stockholders equity	990,170	923,084
Total liabilities and stockholders equity	$1,810,018	$1,709,035

Row "(Amounts in thousands, except per": Multi-column field in a numeric row
Row "share data)": Multi-column field in a numeric row

Table 2

Financial table in standard format

CNA SURETY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Amount in thousands, except per share data)
Revenues:
Net earned premium	$	105,214		$	105,695		$	203,466		$	206,846
Net investment income		12,787			12,577			26,164			24,823
Net realized investment gains (losses):
Other-than-temporary impairment losses					(1,824	)					(1,870	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (before taxes)		(28	)		1,708			(122	)		1,708

Net impairment losses recognized in earnings		(28	)		(116	)		(122	)		(162	)
Net realized investment gains, excluding impairment losses on available-for-sale securities		766			69			1,183			49

Total net realized investment gains (losses)		738			(47	)		1,061			(113	)

Total revenues		118,739			118,225			230,691			231,556


Expenses:
Net losses and loss adjustment expenses		21,596			30,975			50,177			60,563
Net commissions, brokerage and other underwriting expenses		55,805			55,917			108,593			110,195
Interest expense		291			359			572			777

Total expenses		77,692			87,251			159,342			171,535

Income before income taxes		41,047			30,974			71,349			60,021
Income tax expense		12,422			8,807			21,919			16,990

Net income	$	28,625		$	22,167		$	49,430		$	43,031


Earnings per common share	$	0.65		$	0.50		$	1.12		$	0.97

Earnings per common share, assuming dilution	$	0.64		$	0.50		$	1.11		$	0.97

Weighted average shares outstanding		44,307			44,251			44,294			44,229

Weighted average shares outstanding, assuming dilution		44,477			44,412			44,447			44,394

CNA SURETY CORP CIK:1044566
	2010-03-30 to 2010-06-30 (3-months)	2009-03-30 to 2009-06-30 (3-months)	2009-12-30 to 2010-06-30 (6-months)	2008-12-30 to 2009-06-30 (6-months)
(Amount in thousands, except per share data)
Revenues:
Net earned premium	$105,214	$105,695	$203,466	$206,846
Net investment income	12,787	12,577	26,164	24,823
Net realized investment gains (losses):
Other-than-temporary impairment losses		(1,824)		(1,870)
Portion of other-than-temporary impairment losses recognized in other comprehensive income (before taxes)	(28)	1,708	(122)	1,708
Net impairment losses recognized in earnings	(28)	(116)	(122)	(162)
Net realized investment gains, excluding impairment losses on available-for-sale securities	766	69	1,183	49
Total net realized investment gains (losses)	738	(47)	1,061	(113)
Total revenues	118,739	118,225	230,691	231,556
Expenses:
Net losses and loss adjustment expenses	21,596	30,975	50,177	60,563
Net commissions, brokerage and other underwriting expenses	55,805	55,917	108,593	110,195
Interest expense	291	359	572	777
Total expenses	77,692	87,251	159,342	171,535
Income before income taxes	41,047	30,974	71,349	60,021
Income tax expense	12,422	8,807	21,919	16,990
Net income	$28,625	$22,167	$49,430	$43,031
Earnings per common share	$0.65	$0.50	$1.12	$0.97
Earnings per common share, assuming dilution	$0.64	$0.50	$1.11	$0.97
Weighted average shares outstanding	44,307	44,251	44,294	44,229
Weighted average shares outstanding, assuming dilution	44,477	44,412	44,447	44,394

Row "(Amount in thousands, except per share data)": Multi-column field in a numeric row

Table 3

Financial table in standard format

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			$		$		$	43,031		$	43,031	$			$			$	43,031
Other comprehensive income:
Change in unrealized gains on securities, after income tax expense of $9,368 (net of reclassification adjustment of ($1,380), after income tax benefit of $743)								17,396					17,396						17,396
Other-than-temporary losses not recognized in the Condensed Consolidated Statements of Income, after income tax benefit of $598								(1,110	)				(1,110	)					(1,110	)
Net change related to postretirement benefits, after income tax benefit of $25								(56	)				(56	)					(56	)

Total comprehensive income							$	59,261

Stock-based compensation						1,022													1,022
Stock options exercised and other		86		1		1,056										42			1,099

Balance, June 30, 2009		44,254	$	456	$	278,333				$	552,675	$	11,944		$	(14,731	)	$	828,677


Balance, January 1, 2010		44,268	$	456	$	279,388				$	627,505	$	30,406		$	(14,671	)	$	923,084

Comprehensive income:
Net income			$		$		$	49,430		$	49,430	$			$			$	49,430
Other comprehensive income:
Change in unrealized gains on securities, after income tax expense of $8,664 (net of reclassification adjustment of $828, after income tax expense of $446)								16,090					16,090						16,090
Change in other-than-temporary impairment losses not recognized in the Condensed Consolidated Statements of Income, after income tax expense of $87 (net of reclassification adjustment of ($79), after income tax benefit of $43)								161					161						161
Net change related to postretirement benefits, after income tax benefit of $19								(34	)				(34	)					(34	)

Total comprehensive income							$	65,647

Stock-based compensation						885													885
Stock options exercised and other		45		1		488										65			554

Balance, June 30, 2010		44,313	$	457	$	280,761				$	676,935	$	46,623		$	(14,606	)	$	990,170

CNA SURETY CORP CIK:1044566

Comprehensive income:
Net income $ $	$43,031		$43,031
Other comprehensive income:
Change in unrealized gains on securities, after income tax expense of $9,368 (net of reclassification adjustment of ($1,380), after income tax benefit of $743)	17,396	17,396	17,396
Other-than-temporary losses not recognized in the Condensed Consolidated Statements of Income, after income tax benefit of $598	(1,110)	(1,110)	(1,110)
Net change related to postretirement benefits, after income tax benefit of $25	(56)	(56)	(56)
Total comprehensive income	$59,261
Stock-based compensation 1,022			1,022
Stock options exercised and other 86 1 1,056			1,099
Balance, June 30, 2009 44,254 $456 $278,333		$11,944	$828,677
Balance, January 1, 2010 44,268 $456 $279,388		$30,406	$923,084
Comprehensive income:
Net income $ $	$49,430		$49,430
Other comprehensive income:
Change in unrealized gains on securities, after income tax expense of $8,664 (net of reclassification adjustment of $828, after income tax expense of $446)	16,090	16,090	16,090
Change in other-than-temporary impairment losses not recognized in the Condensed Consolidated Statements of Income, after income tax expense of $87 (net of reclassification adjustment of ($79), after income tax benefit of $43)	161	161	161
Net change related to postretirement benefits, after income tax benefit of $19	(34)	(34)	(34)
Total comprehensive income	$65,647
Stock-based compensation 885			885
Stock options exercised and other 45 1 488			554
Balance, June 30, 2010 44,313 $457 $280,761		$46,623	$990,170

Data column 1: Unable to interpret date in column header
Data column 2: Unable to interpret date in column header
Data column 3: Unable to interpret date in column header
Row "Net income $ $": Multi-column field in a numeric row
Row "Net income $ $": Multi-column field in a numeric row
Row "Net income $ $": Multi-column field in a numeric row
Row "Stock options exercised and other 86 1 1,056": Multi-column field in a numeric row
Row "Balance, June 30, 2009 44,254 $456 $278,333": Multi-column field in a numeric row
Row "Balance, June 30, 2009 44,254 $456 $278,333": Multi-column field in a numeric row
Row "Balance, January 1, 2010 44,268 $456 $279,388": Multi-column field in a numeric row
Row "Balance, January 1, 2010 44,268 $456 $279,388": Multi-column field in a numeric row
Row "Net income $ $": Multi-column field in a numeric row
Row "Net income $ $": Multi-column field in a numeric row
Row "Net income $ $": Multi-column field in a numeric row
Row "Stock options exercised and other 45 1 488": Multi-column field in a numeric row
Row "Balance, June 30, 2010 44,313 $457 $280,761": Multi-column field in a numeric row
Row "Balance, June 30, 2010 44,313 $457 $280,761": Multi-column field in a numeric row

Table 4

Financial table in standard format

The following table presents a roll-forward of the Companys cumulative credit losses recognized in net realized gains (losses) on the Condensed Consolidated Statements of Income on fixed income securities held as of June 30, 2010 (in thousands of dollars):


	Three Months		Six Months
	Ended June 30		Ended June 30
Beginning balance	$	210	$	116
Credit losses for which an OTTI loss was not previously recognized
Credit losses for which an OTTI loss was previously recognized		28		122

Ending balance	$	238	$	238

CNA SURETY CORP CIK:1044566

Beginning balance	$210	$116
Credit losses for which an OTTI loss was not previously recognized
Credit losses for which an OTTI loss was previously recognized	28	122
Ending balance	$238	$238

Data column 1: Unable to interpret date in column header
Data column 2: Unable to interpret date in column header

Table 5

Financial table in standard format

Three Months

Six Months

Ended June 30

Ended June 30

Beginning balance

$
210

$
116

Credit losses for which an OTTI loss was not previously recognized

Credit losses for which an OTTI loss was previously recognized

28

122

Ending balance

$
238

$
238

The following table presents a roll-forward of the Companys cumulative credit losses recognized in net realized gains (losses) on the Condensed Consolidated Statements of Income on fixed income securities held as of June 30, 2009 (in thousands of dollars):


	Three Months
	Ended June 30
Beginning balance	$
Credit losses for which an OTTI loss was not previously recognized		116
Credit losses for which an OTTI loss was previously recognized

Ending balance	$	116

CNA SURETY CORP CIK:1044566

Beginning balance
Credit losses for which an OTTI loss was not previously recognized	116
Credit losses for which an OTTI loss was previously recognized
Ending balance	$116

Data column 1: Unable to interpret date in column header

Table 6

Financial table in standard format

basis points with a 30-year term. Beginning in May 2009, these securities may be redeemed, in whole or in part, at par value at any scheduled quarterly interest payment date. As of June 30, 2010, none of these preferred securities have been redeemed.
     The Companys investment of $0.9 million in the Issuer Trust is carried at cost in Other assets in the Companys Condensed Consolidated Balance Sheets. The sole asset of the Issuer Trust consists of a $30.9 million junior subordinated debenture issued by the Company to the Issuer Trust. Due to the underlying characteristics of this debt, the carrying value of the debenture approximates its estimated fair value.
     The Company has also guaranteed the dividend payments and redemption of the preferred securities issued by the Issuer Trust. The maximum amount of undiscounted future payments the Company could make under the guarantee is approximately $57.4 million, consisting of annual dividend payments of approximately $1.2 million until maturity and the redemption value of the preferred securities of $30.0 million. Because payment under the guarantee would only be required if the Company does not fulfill its obligations under the debentures held by the Issuer Trust, the Company has not recorded any additional liabilities related to this guarantee.
     The junior subordinated debenture bears interest at a rate of LIBOR plus 337.5 basis points and matures in April 2034. As of June 30, 2010 and 2009, the interest rate on the junior subordinated debenture was 3.811% and 4.258%, respectively.
     The Company does not have any material off-balance sheet arrangements as defined by Item 303 of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934.
     A summary of the Companys commitments as of June 30, 2010 is presented in the following table (in millions):


Contractual Obligations as of June 30, 2010	2010		2011		2012		2013		2014		Thereafter		Total
Debt ^(a)	$	0.6	$	1.2	$	1.2	$	1.2	$	1.2	$	53.7	$	59.1
Operating leases		1.0		1.9		1.0		0.1		0.1				4.1
Loss and loss adjustment expense reserves		49.6		121.5		85.0		58.8		49.7		74.7		439.3
Other long-term liabilities^(b)		0.2		1.4		1.1		0.5		0.4		10.4		14.0

Total	$	51.4	$	126.0	$	88.3	$	60.6	$	51.4	$	138.8	$	516.5

CNA SURETY CORP CIK:1044566

Debt (a)	$0.6	$1.2	$1.2	$1.2	$1.2	$53.7	$59.1
Operating leases	1.0	1.9	1.0	0.1	0.1		4.1
Loss and loss adjustment expense reserves	49.6	121.5	85.0	58.8	49.7	74.7	439.3
Other long-term liabilities (b)	0.2	1.4	1.1	0.5	0.4	10.4	14.0
Total	$51.4	$126.0	$88.3	$60.6	$51.4	$138.8	$516.5

Data column 1: Unable to interpret date in column header
Data column 2: Unable to interpret date in column header
Data column 3: Unable to interpret date in column header
Data column 4: Unable to interpret date in column header
Data column 5: Unable to interpret date in column header
Data column 6: Unable to interpret date in column header
Data column 7: Unable to interpret date in column header

Table 7

Financial table in standard format

factors. Currently, the Companys equity portfolio is comprised solely of mutual funds related to the Companys 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 Companys 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. 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 securitys 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.
     At June 30, 2010, the Company holds 294 fixed income securities in an unrealized gain position with a total estimated fair value of $1,251.4 million and an aggregate gross unrealized gain of $75.3 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
June 30, 2010	AAA		AA		A		BBB		Total		Count		Fair Value
Fixed income securities:
Investment grade^(a):
Obligations of states and political subdivisions	$	166	$	555	$	706	$		$	1,427		7	$	44,597
Corporate bonds						148		147		295		2		9,780
Other asset-backed securities:
Second mortgages/home equity loans residential		6								6		1		2,191

Total investment grade		172		555		854		147		1,728		10		56,568
Non-investment grade:
Obligations of states and political subdivisions										1,266		2		14,906
Other asset-backed securities:
Second mortgages/home equity loans residential										295		1		2,113

Total non-investment grade										1,561		3		17,019

Total	$	172	$	555	$	854	$	147	$	3,289		13	$	73,587

CNA SURETY CORP CIK:1044566
	2010-06-30	2010-06-30	2010-06-30
Fixed income securities:
Investment grade(a):
Obligations of states and political subdivisions $166 $555 $706 $	$1,427	7	$44,597
Corporate bonds 148 147	295	2	9,780
Other asset-backed securities:
Second mortgages/home equity loans residential 6	6	1	2,191
Total investment grade 172 555 854 147	1,728	10	56,568
Non-investment grade:
Obligations of states and political subdivisions	1,266	2	14,906
Other asset-backed securities:
Second mortgages/home equity loans residential	295	1	2,113
Total non-investment grade	1,561	3	17,019
Total $172 $555 $854 $147	$3,289	13	$73,587

Original filing from SEC EDGAR system.