Letter to Shareholders

Dear Fellow Shareholders:

Ten years ago, two successful and long-standing surety operations joined to become CNA Surety. The company has made great strides in the past decade. Our gross written premiums are close to double what they were 10 years ago. The company’s equity position has grown from $257 million to $668 million. Our book value has sharply increased from $5.93 per share to $15.13 per share. Today CNA Surety is in the best financial condition in its history.

We can attribute our decade of success to a number of factors, such as: preserving our controlled and consistent underwriting approach; continuing our focus on exposure management; and maintaining a diversified portfolio from a product, geographic, size, and account perspective. Underlying these achievements is the hard work and diligence of the hundreds of CNA Surety employees and agents that make it all possible.

HISTORIC RESULTS

Record earnings marked our 10-year milestone. Net income for 2007 was $92 million, an increase of 12 percent over 2006’s high results. In addition, we were able to achieve gross written premium growth of 4 percent, generate significant cash flow of $129 million, and deliver a respectable return on equity of 14 percent. Full-year gross written premiums increased to $472 million. Combined statutory surplus totaled $442 million. Stockholders’ equity increased by 18 percent to $668 million, and book value increased 17 percent over last year to $15.13 per share. CNA Surety’s balance sheet is now stronger than ever, and is built on a foundation of high-quality investments. Our expense and combined ratios improved even more over last year’s results, while the loss ratio remained relatively unchanged. The expense ratio decreased to 54.0 percent, once again reflecting strong premium growth with only a minimal increase in underwriting expenses. We maintained a reasonable loss ratio of 24.5 percent and ended 2007 with a combined ratio of 78.5 percent.

SOLID OPERATIONS

Contract surety gross written premiums increased 7 percent to $306 million primarily due to the strength of the non-residential construction economy and the success of our small contractor product. The majority of CNA Surety’s contract bonds are with public construction owners, and public construction remains solid. Commercial surety remained steady for the year with $135 million in gross written premiums. After significantly reducing our exposure in the large commercial segment in the past couple of years, the commercial line was further affected by our decision to reduce our exposure to certain long-tail bonds. We determined that reducing our exposure to these types of bonds would ultimately be better for the company than the short-term premium growth. However, we did add some new commercial surety business this year, and we expect this area to have modest growth going forward.

POSITIONED FOR CONTINUED SUCCESS

In general, 2007 was a very good year for CNA Surety and for the surety industry. After several years of underwriting losses, the industry enjoyed a second year of strong results. Competition is strong, but overall, underwriting and pricing discipline still exist. We are optimistic about 2008, but we are closely monitoring the competitive landscape. We may see new players entering the surety industry as a result of the profitable trend of the past two years. In addition, the decline in residential construction may result in even higher competition in the small- to mid-sized contract segments. The construction economy will also remain an area of focus. The private non-residential and public sectors are still solid; however, these areas may experience slower growth as the year progresses. We plan to offset these potential downward pressures by selectively expanding into geographic regions where we do not currently have a large presence. We are also putting additional emphasis on certain surety products that we have not focused on in the past few years. More importantly, however, is maintaining the credit quality of our business portfolio and this, along with exposure management, will continue to be our top priorities.

It is now more important than ever to maintain our strong capital base so that we are well-positioned for any market disruptions. Our approach to capital management will ensure that we have the flexibility to cushion against any downturn in the construction economy and/or its credit fundamentals. With the help of our people, CNA Surety has been able to prosper under many different economic conditions. We may be a little biased, but we feel CNA Surety is affiliated with the best people in the industry. In addition to our incredible employees, we are truly grateful for the outstanding partnerships we have with our agents, brokers and our many accounts. We are confident about our future and look forward to another “decade of success.”

Sincerely,

John F. Welch
President and Chief Executive Officer

March 5, 2008