CNA FINANCIAL CORP - Quarter Report: 2005 September (Form 10-Q)

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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

For the Quarterly Period Ended September 30, 2005
OR


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

For the transition period from _____ to _____

Commission File Number 1-5823

CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		36-6169860 (I.R.S. Employer Identification No.)


CNA Center Chicago, Illinois (Address of principal executive offices)		60685 (Zip Code)

(312) 822-5000
(Registrant’s telephone number, including area 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....

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes þ No....

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes.... No þ

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


Class		Outstanding at October 24, 2005

Common Stock, Par value $2.50		255,963,918

CNA FINANCIAL CORPORATION
INDEX


Item		Page
Number		Number
	PART I. Financial Information

1.	Condensed Consolidated Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets at September 30, 2005 and at December 31, 2004		3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
	September 30, 2005 and 2004 (as restated)		4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
	September 30, 2005 and 2004 (as restated)		5

	Notes to Condensed Consolidated Financial Statements		6

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		53

3.	Quantitative and Qualitative Disclosures about Market Risk		111

4.	Controls and Procedures		115

	PART II. Other Information

1.	Legal Proceedings		116

5.	Other Information		116

6.	Exhibits		116

	Signatures		117
Employment Agreement with James R. Lewis
Employment Agreement with Stephen W. Lilienthal
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

CNA FINANCIAL CORPORATION

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30,			December 31,
(In millions, except share data)	2005			2004
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $31,785 and $30,266)	$	32,429		$	31,327
Equity securities at fair value (cost of $423 and $320)		549			456
Limited partnership investments		1,618			1,549
Other invested assets		34			36
Short-term investments at cost, which approximates fair value		7,153			5,863

Total investments		41,783			39,231
Cash		86			95
Reinsurance receivables (less allowance for uncollectible receivables of $552 and $546)		14,098			15,342
Insurance receivables (less allowance for doubtful accounts of $474 and $502)		1,875			2,065
Accrued investment income		317			297
Receivables for securities sold		635			496
Deferred acquisition costs		1,234			1,268
Prepaid reinsurance premiums		914			1,128
Federal income taxes recoverable (includes $216 and $7 due from Loews Corporation)		212			—
Deferred income taxes		908			709
Property and equipment at cost (less accumulated depreciation of $563 and $524)		230			235
Goodwill and other intangible assets		145			162
Other assets		985			815
Separate account business		554			568

Total assets	$	63,976		$	62,411


Liabilities and Stockholders’ Equity
Liabilities:
Insurance reserves:
Claim and claim adjustment expense	$	31,435		$	31,523
Unearned premiums		4,343			4,522
Future policy benefits		6,181			5,883
Policyholders’ funds		1,588			1,725
Collateral on loaned securities and derivatives		2,006			918
Payables for securities purchased		1,540			288
Participating policyholders’ funds		56			63
Short term debt		52			531
Long term debt		1,699			1,726
Reinsurance balances payable		2,649			2,980
Other liabilities		2,196			2,231
Separate account business		554			568

Total liabilities		54,299			52,958


Commitments and contingencies (Notes G, H, J and L)
Minority interest		283			275

Stockholders’ equity:
Preferred stock (12,500,000 shares authorized) Series H Issue (no par value; $100,000 stated value; 7,500 shares issued; held by Loews Corporation)		750			750
Common stock ($2.50 par value; 500,000,000 shares authorized; 258,177,285 shares issued; and 255,962,718 and 255,953,958 shares outstanding)		645			645
Additional paid-in capital		1,701			1,701
Retained earnings		6,041			5,572
Accumulated other comprehensive income		384			650
Treasury stock (2,214,567 and 2,223,327 shares), at cost		(69	)		(69	)

		9,452			9,249
Notes receivable for the issuance of common stock		(58	)		(71	)

Total stockholders’ equity		9,394			9,178

Total liabilities and stockholders’ equity	$	63,976		$	62,411

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions, except per share data)				Restated						Restated
				See Note R						See Note R

Revenues
Net earned premiums	$	1,873		$	1,947		$	5,684		$	6,221
Net investment income		500			360			1,345			1,216
Realized investment gains (losses), net of participating policyholders’ and minority interests		67			(62	)		74			(415	)
Other revenues		80			73			351			227


Total revenues		2,520			2,318			7,454			7,249


Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits		1,871			1,596			4,886			4,854
Amortization of deferred acquisition costs		416			374			1,168			1,114
Other operating expenses		241			393			766			1,100
Interest		29			28			96			94


Total claims, benefits and expenses		2,557			2,391			6,916			7,162


Income (loss) before income tax and minority interest		(37	)		(73	)		538			87
Income tax (expense) benefit		51			52			(53	)		74
Minority interest		(11	)		(6	)		(16	)		(19	)


Net income (loss)	$	3		$	(27	)	$	469		$	142



Basic and Diluted Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share available to common stockholders	$	(0.06	)	$	(0.16	)	$	1.63		$	0.37


Weighted average outstanding common stock and common stock equivalents		256.0			256.0			256.0			256.0

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


Nine months ended September 30	2005			2004
(In millions)				Restated
				See Note R

Cash Flows from Operating Activities
Net income	$	469		$	142
Adjustments to reconcile net income to net cash flows provided by operating activities:
Bad debt provision for insurance and reinsurance receivables		73			70
Minority interest		16			19
Loss (gain) on disposal of property and equipment		(9	)		19
Deferred income tax provision		(37	)		(39	)
Realized investment gains/losses, net of participating policyholders’ and minority interests		(74	)		415
Equity method income		(190	)		(134	)
Amortization of bond (discount) premium		(84	)		(1	)
Depreciation		41			58
Changes in:
Receivables, net		1,361			(506	)
Deferred acquisition costs		34			150
Accrued investment income		(20	)		(56	)
Federal income taxes payable/recoverable		(211	)		472
Prepaid reinsurance premiums		214			440
Reinsurance balances payable		(331	)		(257	)
Insurance reserves		(106	)		488
Other, net		(105	)		(19	)
Net purchases of trading securities		(7	)		(2	)

Total adjustments		565			1,117

Net cash flows provided by operating activities		1,034			1,259


Cash Flows from Investing Activities
Purchases of fixed maturity securities		(46,570	)		(44,581	)
Proceeds from fixed maturity securities:
Sales		42,235			35,641
Maturities, calls and redemptions		3,895			3,756
Purchases of equity securities		(360	)		(365	)
Proceeds from sales of equity securities		290			528
Change in short-term investments		(1,161	)		3,689
Change in collateral on loaned securities and derivatives		1,088			(326	)
Change in other investments		17			(79	)
Purchases of property and equipment		(28	)		(32	)
Dispositions		12			647
Other, net		42			(27	)

Net cash flows used by investing activities		(540	)		(1,149	)


Cash Flows from Financing Activities
Principal payments on debt		(507	)		(537	)
Proceeds from issuance of surplus notes		—			346
Returns and deposits of policyholder account balances on investment contracts		—			10
Other		4			3

Net cash flows used by financing activities		(503	)		(178	)


Net change in cash		(9	)		(68	)
Cash, beginning of period		95			139

Cash, end of period	$	86		$	71


Supplemental Disclosures of Cash Flow Information:
Cash paid (received):
Interest	$	86		$	67
Federal income taxes		289			(534	)

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. CNA’s property and casualty and the remaining life and group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company (CIC) and Continental Assurance Company (CAC). Loews Corporation (Loews) owned approximately 91% of the outstanding common stock and 100% of the Series H preferred stock of CNAF as of September 30, 2005.

The Company’s individual life insurance business, including its previously wholly owned subsidiary Valley Forge Life Insurance Company (VFL), was sold on April 30, 2004 to Swiss Re Life & Health America, Inc. (Swiss Re). The results of the individual life insurance business sold through the date of sale are included in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2004. See Note O for further information.

The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in CNAF’s Form 10-K/A filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2004. Certain amounts applicable to prior periods have been conformed to the current period presentation.

The interim financial data as of September 30, 2005 and for the three and nine months ended September 30, 2005 and 2004 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the Company’s results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated.

Note B. Accounting Pronouncements

In December of 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 153, Exchanges of Non-Monetary Assets – an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 amends the definition of “exchange” or “exchange transaction” and expands the list of transactions that would not meet the definition of non-monetary transfer. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. Adoption of this standard did not have a significant impact on the results of operations or equity of the Company.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note C. Earnings (Loss) Per Share

Earnings (loss) per share available to common stockholders is based on weighted-average outstanding shares. Basic and diluted earnings (loss) per share are computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock or common stock equivalents outstanding for the period. The weighted average number of shares outstanding for computing basic and diluted earnings per share was 256.0 million for the three and nine months ended September 30, 2005 and 2004.

The Series H Cumulative Preferred Stock Issue (Series H Issue) is held by Loews and accrues cumulative dividends at an initial rate of 8% per year, compounded annually. As of September 30, 2005, the Company had $179 million of undeclared but accumulated dividends. The Series H Issue dividend amounts for the three and nine months ended September 30, 2005 and 2004 have been subtracted from Net Income (Loss) to determine net income (loss) available to common stockholders.

Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Since the net results available to common stockholders for the three months ended September 30, 2005 and 2004, were losses, after deducting undeclared preferred stock dividends, no potentially dilutive common shares were included in the computation of diluted loss per share. For the nine months ended September 30, 2005 and 2004, approximately one million shares attributable to the exercise of outstanding options were excluded from the calculation of diluted earnings per share because the exercise price of these options was greater than the average market price of CNA common stock.

Earnings (Loss) Per Share


Period ended September 30	Three Months						Nine Months
(In millions, except per share amounts)	2005			2004			2005			2004

Net income (loss)	$	3		$	(27	)	$	469		$	142
Less: undeclared preferred stock dividend		(17	)		(16	)		(52	)		(48	)


Net income (loss) available to common stockholders	$	(14	)	$	(43	)	$	417		$	94


Weighted average outstanding common stock and common stock equivalents		256.0			256.0			256.0			256.0
Effect of dilutive securities, employee stock options		—			—			—			—


Adjusted weighted average outstanding common stock and common stock equivalents assuming conversions		256.0			256.0			256.0			256.0


Basic and diluted earnings (loss) per share available to common stockholders	$	(0.06	)	$	(0.16	)	$	1.63		$	0.37

The Company applies the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, in accounting for its stock-based compensation plan. Under the recognition and measurement principles of APB 25, no stock-based compensation cost has been recognized, as the exercise price of the granted options equaled the market price of the underlying stock at the grant date.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The following table illustrates the pro forma effect on net income (loss) and earnings (loss) per share, had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (SFAS 123), to stock-based employee compensation under the Company’s stock-based compensation plans.

Pro Forma Effect of SFAS 123 on Results


Period ended September 30	Three Months						Nine Months
(In millions, except per share amounts)	2005			2004			2005			2004

Net income (loss) available to common stockholders	$	(14	)	$	(43	)	$	417		$	94

Less: Total stock-based compensation cost determined under the fair value method, net of tax		—			—			(1	)		(1	)


Pro forma net income (loss) available to common stockholders	$	(14	)	$	(43	)	$	416		$	93


Basic and diluted earnings (loss) per share, as reported	$	(0.06	)	$	(0.16	)	$	1.63		$	0.37


Basic and diluted earnings (loss) per share, pro forma	$	(0.06	)	$	(0.16	)	$	1.63		$	0.37

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note D. Investments

The significant components of net investment income are presented in the following table.

Net Investment Income


Period ended September 30	Three Months						Nine Months
(In millions)	2005			2004			2005			2004

Fixed maturity securities	$	393		$	396		$	1,167		$	1,189
Short term investments		42			14			103			39
Limited partnerships		72			26			189			131
Equity securities		6			3			18			11
Income (loss) from trading portfolio (a)		41			(21	)		25			13
Interest on funds withheld and other deposits		(50	)		(54	)		(139	)		(157	)
Other		5			4			16			15


Gross investment income		509			368			1,379			1,241
Investment expense		(9	)		(8	)		(34	)		(25	)


Net investment income	$	500		$	360		$	1,345		$	1,216

(a) The change in net unrealized gains (losses) on trading securities, included in net investment income, was $3 million and $(4) million for the three and nine months ended September 30, 2005 and $(4) million and $(2) million for the three and nine months ended September 30, 2004.

The components of realized investment results for available-for-sale securities are presented in the following table.

Realized Investment Gains (Losses)


Period ended September 30	Three Months						Nine Months
(In millions)	2005			2004			2005			2004

Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds	$	2		$	4		$	(10	)	$	13
Corporate and other taxable bonds		9			(35	)		(36	)		(2	)
Tax-exempt bonds		4			42			38			23
Asset-backed bonds		7			9			18			44
Redeemable preferred stock		—			6			10			11


Total fixed maturity securities		22			26			20			89
Equity securities		6			10			45			187
Derivative securities		53			(105	)		34			(88	)
Short term investments		1			—			1			—
Other, including disposition of businesses net of participating policyholders’ interest		(15	)		10			(28	)		(594	)

Realized investment gains (losses) before allocation to participating policyholders’ and minority interests		67			(59	)		72			(406	)
Allocated to participating policyholders’ and minority interest		—			(3	)		2			(9	)


Realized investment gains (losses)	$	67		$	(62	)	$	74		$	(415	)

Realized investment gains were $67 million for the three months ended September 30, 2005 as compared to realized investment losses of $62 million for the three months ended September 30, 2004. The increase in realized gains was primarily driven by favorable results in derivative securities and improved results in corporate and other taxable bonds, partially offset by less favorable results from tax-exempt bonds. Impairment losses of $17 million and $19 million were recorded for the three months ended September 30, 2005 and 2004.

Realized investment gains were $74 million for the nine months ended September 30, 2005 as compared to realized investment losses of $415 million for the nine months ended September 30, 2004. The improvement in the realized

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

investment results was due primarily to a $622 million pretax loss on the sale of the individual life insurance business in 2004. This improvement was partially offset by reduced gains for equities securities, which was largely attributable to the 2004 gain of $162 million pretax on the disposition of Canary Wharf. Impairment losses of $71 million were recorded for the nine months ended September 30, 2005 across various sectors, including an impairment loss of $34 million related to loans made under a credit facility to a national contractor. See Note P for further details. Impairment losses were $19 million for other-than-temporary declines in fair value for fixed maturity and equity securities for the nine months ended September 30, 2004.

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities


	Cost or		Gross		Gross Unrealized Losses				Net
	Amortized		Unrealized		Less than		Greater than		Unrealized
September 30, 2005	Cost		Gains		12 Months		12 Months		Gain/(Loss)
(In millions)

Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies	$	3,182	$	124	$	18	$	1	$	105
Asset-backed securities		10,616		42		102		14		(74	)
States, municipalities and political subdivisions – tax-exempt		8,945		181		44		7		130
Corporate securities		5,722		326		70		14		242
Other debt securities		2,697		255		14		2		239
Redeemable preferred stock		212		4		2		—		2
Options embedded in convertible debt securities		1		—		—		—		—


Total fixed maturity securities available-for-sale		31,375		932		250		38		644

Total fixed maturity securities trading		410		—		—		—		—


Equity securities available-for-sale:
Common stock		171		112		2		—		110
Non-redeemable preferred stock		210		16		—		—		16


Total equity securities available-for-sale		381		128		2		—		126


Total equity securities trading		42		—		—		—		—


Total fixed maturity and equity securities	$	32,208	$	1,060	$	252	$	38	$	770

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)


	Cost or		Gross		Gross Unrealized Losses				Net
	Amortized		Unrealized		Less than		Greater than		Unrealized
December 31, 2004	Cost		Gains		12 Months		12 Months		Gain
(In millions)

Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies	$	4,233	$	126	$	13	$	—	$	113
Asset-backed securities		7,706		105		19		4		82
States, municipalities and political subdivisions – tax-exempt		8,699		189		28		3		158
Corporate securities		6,093		477		52		5		420
Other debt securities		2,769		295		11		—		284
Redeemable preferred stock		142		6		—		2		4
Options embedded in convertible debt securities		234		—		—		—		—


Total fixed maturity securities available-for-sale		29,876		1,198		123		14		1,061


Total fixed maturity securities trading		390		—		—		—		—


Equity securities available-for-sale:
Common stock		148		112		—		—		112
Non-redeemable preferred stock		126		24		—		—		24


Total equity securities available-for-sale		274		136		—		—		136


Total equity securities trading		46		—		—		—		—


Total fixed maturity and equity securities	$	30,586	$	1,334	$	123	$	14	$	1,197

Note E. Derivative Financial Instruments

A summary of the recognized gains (losses) related to derivative financial instruments follows.

Derivative Financial Instruments Recognized Gains (Losses)


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

General account
Swaps	$	52		$	3		$	32		$	26
Futures purchased		31			(25	)		5			3
Futures sold, not yet purchased		1			(107	)		1			(113	)
Forwards		—			(2	)		1			(1	)
Forwards sold, not yet purchased		—			(1	)		—			4
Commitments to purchase government and municipal securities		—			—			—			(12	)
Equity warrants		—			—			—			1
Options purchased		(1	)		(1	)		(2	)		(1	)
Options written		1			—			2			2
Collateralized debt obligation liabilities		—			1			—			5
Options embedded in convertible debt securities		(6	)		(48	)		(33	)		(33	)


Total	$	78		$	(180	)	$	6		$	(119	)

A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments follows. The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential for gain or loss on these instruments.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Derivative Financial Instruments


	Contractual/		Estimated		Estimated
September 30, 2005	Notional		Fair Value		Fair Value
(In millions)	Amount		Asset		(Liability)

General account
Swaps	$	1,581	$	—	$	(2	)
Futures purchased		1,179		2		—
Futures sold, not yet purchased		127		—		—
Forwards purchased		42		—		—
Forwards sold, not yet purchased		41		—		—
Commitments to purchase government and municipal securities		22		—		—
Commitments to sell government and municipal securities		35		—		—
Equity warrants		6		2		—
Options purchased		87		—		—
Options written		88		—		—
Options embedded in convertible debt securities		12		1		—


Total	$	3,220	$	5	$	(2	)


Separate accounts
Options written	$	4	$	—	$	—


Total	$	4	$	—	$	—


	Contractual/		Estimated		Estimated
December 31, 2004	Notional		Fair Value		Fair Value
(In millions)	Amount		Asset		(Liability)

General account
Swaps	$	489	$	—	$	(8	)
Futures purchased		1,230		—		(1	)
Futures sold, not yet purchased		124		—		—
Forwards purchased		139		1		—
Forwards sold, not yet purchased		9		—		—
Commitments to purchase government and municipal securities		25		—		—
Equity warrants		11		1		—
Options purchased		103		1		—
Options written		102		—		—
Options embedded in convertible debt securities		701		234		—


Total	$	2,933	$	237	$	(9	)


Separate accounts
Options written	$	9	$	—	$	—


Total	$	9	$	—	$	—

Options embedded in convertible debt securities are classified as fixed maturity securities in the Condensed Consolidated Balance Sheets, consistent with the host instruments.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note F. Income Taxes

CNA and its eligible subsidiaries (CNA Tax Group) are included in the consolidated Federal income tax return of Loews and its eligible subsidiaries.

The Loews consolidated Federal income tax returns have been settled with the Internal Revenue Service (IRS) through 2001 as the tax returns for 1998-2001, including related carryback claims and prior claims for refund, were approved by the Joint Committee on Taxation in the second quarter of 2005. As a result, the Company has recorded a Federal income tax benefit of $36 million and net refund interest of $79 million, net of tax, in the second quarter of 2005. The tax benefit related primarily to the release of Federal income tax reserves.

The Company has paid Loews $37 million related to the net tax deficiency for the 1998-2001 tax returns and has received from Loews $121 million related to net refund interest. The net refund interest is included in Other Revenues on the Condensed Consolidated Statements of Operations and is reflected in the Corporate and Other Non-Core segment.

The Federal income tax returns for 2002 through 2004 are currently under examination by the IRS. The Company believes the outcome of this examination will not have a material effect on the financial condition or results of operations of the Company.

Note G. Legal Proceedings and Contingent Liabilities

Insurance Brokerage Antitrust Litigation

On August 1, 2005, CNAF and several of its insurance subsidiaries were joined as defendants, along with other insurers and brokers, in multidistrict litigation pending in the United States District Court for the District of New Jersey, In re Insurance Brokerage Antitrust Litigation, Civil No. 04-5184 (FSH). The plaintiffs in this litigation allege improprieties in the payment of contingent commissions to brokers and bid rigging in connection with the sale of various lines of insurance. The plaintiffs further allege the existence of a conspiracy and assert claims for federal and state antitrust law violations, for violations of the federal Racketeer Influenced and Corrupt Organizations Act and for recovery under various state common law theories. This litigation is in its early stages. The Company intends to vigorously contest and defend against plaintiffs’ claims.

Global Crossing Limited Litigation

CCC has been named as a defendant in an action brought by the bankruptcy estate of Global Crossing Limited (Global Crossing) in the United States Bankruptcy Court for the Southern District of New York. In the Complaint, served on CCC on May 24, 2005, plaintiff seeks unspecified monetary damages from CCC and the other defendants for alleged fraudulent transfers and alleged breaches of fiduciary duties arising from actions taken by Global Crossing while CCC was a shareholder of Global Crossing. CCC believes it has meritorious defenses to this action and intends to defend the case vigorously.

Numerous unresolved factual and legal issues remain that are critical to the final result, the outcome of which cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. However, based on facts and circumstances presently known in the opinion of management an unfavorable outcome will not materially affect the equity of the Company, although results of operations may be adversely affected.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

IGI Contingency

In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an arrangement with IOA Global, Ltd. (IOA), an independent managing general agent based in Philadelphia, Pennsylvania, to develop and manage a book of accident and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies, Ltd. (IGI), a personal accident reinsurance managing general underwriter, was appointed to underwrite and market the book under the supervision of IOA. Between April 1, 1997 and December 1, 1999, IGI underwrote a number of reinsurance arrangements with respect to personal accident insurance worldwide (the IGI Program). Under various arrangements, CNA Re Ltd. both assumed risks as a reinsurer and also ceded a substantial portion of those risks to other companies, including other CNA insurance subsidiaries and ultimately to a group of reinsurers participating in a reinsurance pool known as the Associated Accident and Health Reinsurance Underwriters (AAHRU) Facility. CNA’s group operations business unit participated as a pool member in the AAHRU Facility in varying percentages between 1997 and 1999.

A portion of the premiums assumed under the IGI Program related to United States workers compensation “carve-out” business. Some of these premiums were received from John Hancock Mutual Life Insurance Company (John Hancock) under four excess of loss reinsurance treaties (the Treaties) issued by CNA Re Ltd. While John Hancock has indicated that it is not able to accurately quantify its potential exposure to its cedents on business which is retroceded to CNA, John Hancock has reported $199 million of paid and unpaid losses, under these Treaties. John Hancock is disputing portions of its assumed obligations resulting in these reported losses, and has advised CNA that it is, or has been, involved in multiple arbitrations with its own cedents, in which proceedings John Hancock is seeking to avoid and/or reduce risks that would otherwise arguably be ceded to CNA through the Treaties. John Hancock has further informed CNA that it has settled several of these disputes, but has not provided CNA with details of the settlements. To the extent that John Hancock is successful in reducing its liabilities in these disputes, that development may have an impact on the recoveries it is seeking under the Treaties from CNA.

As indicated, CNA arranged substantial reinsurance protection to manage its exposures under the IGI Program, including the United States workers compensation carve-out business ceded from John Hancock and other reinsurers. While certain reinsurers of CNA, including participants in the AAHRU Facility, disputed their liabilities under the reinsurance contracts with respect to the IGI Program, those disputes have been resolved and substantial reinsurance coverage exists for those exposures.

In addition, CNA has instituted arbitration proceedings against John Hancock in which CNA is seeking rescission of the Treaties as well as access to and the right to inspect the books and records relating to the Treaties. Based on information known at this time, CNA believes it has strong grounds to successfully challenge its alleged exposure derived from John Hancock through the ongoing arbitration proceedings. CNA has also undertaken legal action seeking to avoid portions of the remaining exposure arising out of the IGI Program.

CNA has established reserves for its estimated exposure under the IGI Program, other than that derived from John Hancock, and an estimate for recoverables from retrocessionaires. CNA has not established any reserve for any exposure derived from John Hancock because, as indicated, CNA believes the contract will be rescinded. Although the results of the Company’s various loss mitigation strategies with respect to the entire IGI Program to date support the recorded reserves, the estimate of ultimate losses is subject to considerable uncertainty due to the complexities described above. As a result of these uncertainties, the results of operations in future periods may be adversely affected by potentially significant reserve additions. However, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. Management does not believe that any such reserve additions would be material to the equity of the Company, although results of operations may be adversely affected. The Company’s position in relation to the IGI Program was unaffected by the sale of CNA Re Ltd. in 2002.

California Wage and Hour Litigation

Ernestine Samora, et al. v. CCC, Case No. BC 242487, Superior Court of California, County of Los Angeles, California and Brian Wenzel v. Galway Insurance Company, Superior Court of California, County of Orange No. BC01CC08868 are purported class actions on behalf of present and former CNA employees asserting they worked

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

hours for which they should have been compensated at a rate of one and one-half times their base hourly wage over a four-year period. Plaintiffs seek “overtime compensation,” “penalty wages,” and “other statutory penalties” without specifying any particular amounts. The Company has denied the material allegations of the amended complaint and intends to vigorously contest the claims.

Numerous unresolved factual and legal issues remain that are critical to the final result, the outcome of which cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. However, based on facts and circumstances presently known in the opinion of management, an unfavorable outcome would not materially adversely affect the equity of the Company, although results of operations may be adversely affected.

Voluntary Market Premium Litigation

CNA, along with dozens of other insurance companies, is currently a defendant in nine cases, including eight purported class actions, brought by large policyholders. The complaints differ in some respects, but generally allege that the defendants, as part of an industry-wide conspiracy, included improper charges in their retrospectively rated and other loss-sensitive insurance programs. Among the claims asserted are violations of state antitrust laws, breach of contract, fraud and unjust enrichment. In one federal court case, Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance Co., 202 F.R.D. 480 (S.D. Tex. 2001), rev’d, 319 F.3d 205 (5th Cir. 2003), cert. denied, 72 USLW 3235 (U.S. Oct 6, 2003), the United States Court of Appeals for the Fifth Circuit reversed a decision by the District Court for the Southern District of Texas certifying a multi-state class. The Company intends to vigorously contest these claims.

Asbestos, Environmental Pollution and Mass Tort (APMT) Reserves

CNA is also a party to litigation and claims related to APMT cases arising in the ordinary course of business. See Note H for further discussion.

Other Litigation

CNA is also a party to other litigation arising in the ordinary course of business. Based on the facts and circumstances currently known, such other litigation will not, in the opinion of management, materially affect the results of operations or equity of CNA.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note H. Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to settle all outstanding claims, including claims that are incurred but not reported (IBNR) as of the reporting date. The Company’s reserve projections are based primarily on detailed analysis of the facts in each case, CNA’s experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined.

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company’s results of operations and/or equity. The level of catastrophe losses experienced in any period cannot be predicted and can be material to the results of operations and/or equity of the Company. Catastrophe losses, net of reinsurance, were $437 million and $258 million for the three months ended September 30, 2005 and 2004 and $443 million and $271 million for the nine months ended September 30, 2005 and 2004. The catastrophe losses in 2005 related primarily to Hurricanes Katrina, Dennis, Ophelia and Rita. The 2005 loss estimate was developed after consideration of reported claims, the insured values of properties in the affected areas, modeled losses, industry loss estimates and the Company’s reinsurance coverage. Because of the nature of the four hurricanes, the estimate involves significant judgment due in part to the limited ability to access portions of the affected area, legal and regulatory uncertainties, the complexity of factors contributing to the losses and the preliminary nature of the information available. Accordingly, there can be no assurance that CNA’s ultimate cost for these catastrophes will not exceed this estimate. The catastrophe losses in 2004 related primarily to Hurricanes Charley, Frances, Ivan and Jeanne.

Commercial catastrophe losses, gross of reinsurance, were $797 million and $280 million for the three months ended September 30, 2005 and 2004 and $803 million and $293 million for the nine months ended September 30, 2005 and 2004. See Note I for further discussion of the Company’s catastrophe reinsurance program.

Claim and claim adjustment expense reserves are presented net of amounts due from insureds related to losses under high deductible policies. The Company has an allowance for uncollectible deductible amounts, which is presented as a component of the allowance for doubtful accounts for insurance receivables.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The following tables summarize the gross and net carried reserves as of September 30, 2005 and December 31, 2004.

September 30, 2005


Gross and Net Carried
Claim and Claim Adjustment Expense Reserves					Life and		Corporate
	Standard		Specialty		Group		and Other
(In millions)	Lines		Lines		Non-Core		Non-Core		Total

Gross Case Reserves	$	6,764	$	1,820	$	2,714	$	3,477	$	14,775
Gross IBNR Reserves		8,023		3,287		782		4,568		16,660


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	14,787	$	5,107	$	3,496	$	8,045	$	31,435


Net Case Reserves	$	4,289	$	1,214	$	1,442	$	1,483	$	8,428
Net IBNR Reserves		5,756		2,339		386		1,684		10,165


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	10,045	$	3,553	$	1,828	$	3,167	$	18,593

December 31, 2004


Gross and Net Carried
Claim and Claim Adjustment Expense Reserves					Life and		Corporate
	Standard		Specialty		Group		and Other
(In millions)	Lines		Lines		Non-Core		Non-Core		Total

Gross Case Reserves	$	6,904	$	1,659	$	2,800	$	3,806	$	15,169
Gross IBNR Reserves		7,398		3,201		880		4,875		16,354


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	14,302	$	4,860	$	3,680	$	8,681	$	31,523


Net Case Reserves	$	4,761	$	1,191	$	1,394	$	1,588	$	8,934
Net IBNR Reserves		4,547		2,042		430		1,691		8,710


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	9,308	$	3,233	$	1,824	$	3,279	$	17,644

APMT Reserves

CNA’s property and casualty insurance subsidiaries have actual and potential exposures related to APMT claims.

Establishing reserves for APMT claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment expense reserves for APMT, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial, and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimating techniques and methodologies, many of which involve significant judgments that are required of management. Accordingly, a high degree of uncertainty remains for the Company’s ultimate liability for APMT claim and claim adjustment expenses.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others: the number and outcome of direct actions against the Company; coverage issues, including whether certain costs are covered under the policies and whether policy limits apply; allocation of liability among numerous parties, some of whom may be in bankruptcy proceedings, and in particular the application of “joint and several” liability to specific insurers on a risk; inconsistent court decisions and developing legal theories; increasingly aggressive tactics of plaintiffs’ lawyers; the risks and lack of predictability inherent in major litigation; increased filings of claims in certain states; enactment of national federal legislation to address asbestos claims; a further increase in asbestos and environmental pollution claims which cannot now be anticipated; increase in number of mass tort claims relating to silica and silica-containing products, and the outcome of ongoing disputes as to coverage in relation to these claims; a further increase of claims and claims payment that may exhaust underlying umbrella and excess coverage at accelerated rates; and future developments pertaining to the Company’s ability to recover reinsurance for asbestos, pollution and mass tort claims.

CNA has regularly performed ground up reviews of all open APMT claims to evaluate the adequacy of the Company’s APMT reserves. In performing its comprehensive ground up analysis, the Company considers input from its professionals with direct responsibility for the claims, inside and outside counsel with responsibility for representation of the Company, and its actuarial staff. These professionals review, among many factors, the policyholder’s present and predicted future exposures, including such factors as claims volume, trial conditions, prior settlement history, settlement demands and defense costs; the impact of asbestos defendant bankruptcies on the policyholder; the policies issued by CNA, including such factors as aggregate or per occurrence limits, whether the policy is primary, umbrella or excess, and the existence of policyholder retentions and/or deductibles; the existence of other insurance; and reinsurance arrangements.

With respect to other court cases and how they might affect the Company’s reserves and reasonably possible losses, the following should be noted: State and federal courts issue numerous decisions each year, which potentially impact losses and reserves in both a favorable and unfavorable manner. Examples of favorable developments include decisions to allocate defense and indemnity payments in a manner so as to limit carriers’ obligations to damages taking place during the effective dates of their policies; decisions holding that injuries occurring after asbestos operations are completed are subject to the completed operations aggregate limits of the policies; and decisions ruling that carriers’ loss control inspections of their insured’s premises do not give rise to a duty to warn third parties to the dangers of asbestos.

Examples of unfavorable developments include decisions limiting the application of the “absolute pollution” exclusion; and decisions holding carriers liable for defense and indemnity of asbestos, pollution and mass tort claims on a joint and several basis.

The Company’s ultimate liability for its environmental pollution and mass tort claims is impacted by several factors including ongoing disputes with policyholders over scope and meaning of coverage terms and, in the area of environmental pollution, court decisions that continue to restrict the scope and applicability of the absolute pollution exclusion contained in policies issued by the Company. Due to the inherent uncertainties described above, including the inconsistency of court decisions, the number of waste sites subject to cleanup, and in the area of environmental pollution, the standards for cleanup and liability, the ultimate liability of CNA for environmental pollution and mass tort claims may vary substantially from the amount currently recorded.

Due to the inherent uncertainties in estimating claim and claim adjustment expense reserves for APMT and due to the significant uncertainties previously described related to APMT claims, the ultimate liability for these cases, both individually and in aggregate, may exceed the recorded reserves. Any such potential additional liability, or any range of potential additional amounts, cannot be reasonably estimated currently, but could be material to the Company’s business, results of operations, equity, insurer financial strength and debt ratings. Due to, among other things, the factors described above, it may be necessary for the Company to record material changes in its APMT claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The following table provides data related to CNA’s APMT claim and claim adjustment expense reserves.

Asbestos and Environmental Pollution and Mass Tort Reserves


	September 30, 2005						December 31, 2004
				Environmental						Environmental
				Pollution and						Pollution and
(In millions)	Asbestos			Mass Tort			Asbestos			Mass Tort

Gross reserves	$	3,072		$	634		$	3,218		$	755
Ceded reserves		(1,493	)		(232	)		(1,532	)		(258	)


Net reserves	$	1,579		$	402		$	1,686		$	497

Asbestos

CNA’s property and casualty insurance subsidiaries have exposure to asbestos-related claims. Estimation of asbestos-related claim and claim adjustment expense reserves involves limitations such as inconsistency of court decisions, specific policy provisions, allocation of liability among insurers and insureds and additional factors such as missing policies and proof of coverage. Furthermore, estimation of asbestos-related claims is difficult due to, among other reasons, the proliferation of bankruptcy proceedings and attendant uncertainties, the targeting of a broader range of businesses and entities as defendants, the uncertainty as to which other insureds may be targeted in the future and the uncertainties inherent in predicting the number of future claims.

As of September 30, 2005 and December 31, 2004, CNA carried approximately $1,579 million and $1,686 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported asbestos-related claims. The Company recorded $8 million and $44 million of unfavorable asbestos-related net claim and claim adjustment expense reserve development for the nine months ended September 30, 2005 and 2004. The unfavorable net prior year development for the nine months ended September 30, 2004 was primarily related to a commutation. The Company paid asbestos-related claims, net of reinsurance recoveries, of $115 million and $104 million for the nine months ended September 30, 2005 and 2004.

Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. CNA has such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called “non-products” liability coverage contained within their policies rather than products liability coverage, and that the claimed “non-products” coverage is not subject to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what extent, if any, the attempts to assert “non-products” claims outside the products liability aggregate will succeed. The Company’s policies also contain other limits applicable to these claims, and the Company has additional coverage defenses to certain claims. The Company has attempted to manage its asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to CNA. Where CNA cannot settle a claim on acceptable terms, the Company aggressively litigates the claim. A recent court ruling by the United States Court of Appeals for the Fourth Circuit has supported certain of the Company’s positions with respect to coverage for “non-products” claims. However, adverse developments with respect to such matters could have a material adverse effect on CNA’s results of operations and/or equity.

Certain asbestos litigation in which CNA is currently engaged is described below:

The ultimate cost of reported claims, and in particular APMT claims, is subject to a great many uncertainties, including future developments of various kinds that CNA does not control and that are difficult or impossible to foresee accurately. With respect to the litigation identified below in particular, numerous factual and legal issues

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

remain unresolved. Rulings on those issues by the courts are critical to the evaluation of the ultimate cost to the Company. The outcome of the litigation cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

On February 13, 2003, CNA announced it had resolved asbestos related coverage litigation and claims involving A.P. Green Industries, A.P. Green Services and Bigelow – Liptak Corporation. Under the agreement, CNA is required to pay $74 million, net of reinsurance recoveries, over a ten year period commencing after the final approval of a bankruptcy plan of reorganization. The settlement resolves CNA’s liabilities for all pending and future asbestos claims involving A.P. Green Industries, Bigelow – Liptak Corporation and related subsidiaries, including alleged “non-products” exposures. The settlement received initial bankruptcy court approval on August 18, 2003 and CNA expects to procure confirmation of a bankruptcy plan containing an injunction to protect CNA from any future claims.

CNA is engaged in insurance coverage litigation in New York State Court, filed in 2003, with a defendant class of underlying plaintiffs who have asbestos bodily injury claims against the former Robert A. Keasbey Company (Keasbey) (Continental Casualty Co. v. Employers Ins. of Wausau et al., No. 601037/03 (N.Y. County)). Keasbey, a currently dissolved corporation, was a seller and installer of asbestos-containing insulation products in New York and New Jersey. Thousands of plaintiffs have filed bodily injury claims against Keasbey; however, Keasbey’s involvement at a number of work sites is a highly contested issue. Therefore, the defense disputes the percentage of valid claims against Keasbey. CNA issued Keasbey primary policies for 1970-1987 and excess policies for 1972-1978. CNA has paid an amount substantially equal to the policies’ aggregate limits for products and completed operations claims in the confirmed CNA policies. Claimants against Keasbey allege, among other things, that CNA owes coverage under sections of the policies not subject to the aggregate limits, an allegation CNA vigorously contests in the lawsuit. In the litigation, CNA and the claimants seek declaratory relief as to the interpretation of various policy provisions. The court dismissed a claim alleging bad faith and seeking unspecified damages on March 21, 2004; that ruling was affirmed on March 31, 2005 by Appellate Division, First Department. The trial in the Keasbey coverage action continues. It is unclear when the Company will have a decision from the trial court. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether the Company has any further responsibility to compensate claimants against Keasbey under its policies and, if so, under which policies; (b) whether the Company’s responsibilities extend to a particular claimant’s entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions in some of the policies apply to exclude certain claims; (e) the extent to which claimants can establish exposures to asbestos materials as to which Keasbey has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Keasbey and whether such theories can, in fact, be established; (g) the diseases and damages alleged by such claimants; and (h) the extent that such liability would be shared with other responsible parties. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CNA has insurance coverage disputes related to asbestos bodily injury claims against Burns & Roe Enterprises, Inc. (Burns & Roe). Originally raised in litigation, now stayed, these disputes are currently part of In re: Burns & Roe Enterprises, Inc., pending in the U.S. Bankruptcy Court for the District of New Jersey, No. 00-41610. Burns & Roe provided engineering and related services in connection with construction projects. At the time of its bankruptcy filing, on December 4, 2000, Burns & Roe faced approximately 11,000 claims alleging bodily injury resulting from exposure to asbestos as a result of construction projects in which Burns & Roe was involved. CNA allegedly provided primary liability coverage to Burns & Roe from 1956-1969 and 1971-1974, along with certain project-specific policies from 1964-1970. The parties in the litigation are seeking a declaration of the scope and extent of coverage, if any, afforded to Burns & Roe for its asbestos liabilities. The litigation has been stayed since May 14, 2003 pending resolution of the bankruptcy proceedings. A confirmation hearing in the bankruptcy proceeding has been scheduled for April 2006. With respect to the Burns & Roe litigation and the pending bankruptcy proceeding, numerous unresolved factual and legal issues will impact the ultimate exposure to the Company. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether the Company has

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

any further responsibility to compensate claimants against Burns & Roe under its policies and, if so, under which; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions, including professional liability exclusions, in some of the Company’s policies apply to exclude certain claims; (e) the extent to which claimants can establish exposures to asbestos materials as to which Burns & Roe has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Burns & Roe and whether such theories can, in fact, be established; (g) the diseases and damages alleged by such claimants; (h) the extent that any liability of Burns & Roe would be shared with other potentially responsible parties; and (i) the impact of bankruptcy proceedings on claims and coverage issue resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CIC issued certain primary and excess policies to Bendix Corporation (Bendix), now part of Honeywell International, Inc. (Honeywell). Honeywell faces approximately 77,708 pending asbestos bodily injury claims resulting from alleged exposure to Bendix friction products. CIC’s primary policies allegedly covered the period from at least 1939 (when Bendix began to use asbestos in its friction products) to 1983, although the parties disagree about whether CIC’s policies provided product liability coverage before 1940 and from 1945 to 1956. CIC asserts that it owes no further material obligations to Bendix under any primary policy. Honeywell alleges that two primary policies issued by CIC covering 1969-1975 contain occurrence limits but not product liability aggregate limits for asbestos bodily injury claims. CIC has asserted, among other things, even if Honeywell’s allegation is correct, which CNA denies, its liability is limited to a single occurrence limit per policy or per year, and in the alternative, a proper allocation of losses would substantially limit its exposure under the 1969-1975 policies to asbestos claims. These and other issues are being litigated in Continental Insurance Co., et al. v. Honeywell International Inc., No. MRS-L-1523-00 (Morris County, New Jersey) which was filed on May 15, 2000. In the litigation, the parties are seeking declaratory relief of the scope and extent of coverage, if any, afforded to Bendix under the policies issued by the Company. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether certain of the primary policies issued by the Company contain aggregate limits of liability; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether some of the claims against Bendix arise out of events which took place after expiration of the Company’s policies; (e) the extent to which claimants can establish exposures to asbestos materials as to which Bendix has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Bendix and whether such theories can, in fact, be established; (g) the diseases and damages claimed by such claimants; (h) the extent that any liability of Bendix would be shared with other responsible parties; and (i) whether Bendix is responsible for reimbursement of funds advanced by the Company for defense and indemnity in the past. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

Suits have also been initiated directly against two CNA companies and other insurers in four jurisdictions: Ohio, Texas, West Virginia and Montana. In the approximately 75 Ohio actions, plaintiffs allege the defendants negligently performed duties undertaken to protect workers and the public from the effects of asbestos, spoliated evidence and conspired and acted in concert to harm the plaintiffs. (E.g. Varner v. Ford Motor Co., (Ohio Ct. Common Pl., filed June 12, 2003); Peplowski v. ACE American Ins. Co., (N.D. Ohio, filed April 1, 2004)) and Cross v. Garlock, Inc. (Ohio Ct. Common Pl., filed September 1, 2004)). The Cuyahoga County court granted insurers, including CNA, dismissals against an initial group of plaintiffs, ruling that insurers had no duty to warn plaintiffs about the dangers of asbestos and that there was no basis for spoliation, conspiracy and concert of action claims. That ruling was recently affirmed on appeal. Budd v. Am. Std., Inc., No. 84829 (Ohio Ct. App. May 26, 2005). The Cuyahoga County court has continued to dismiss substantially similar types of complaints and plaintiffs have either failed to appeal the dismissals or have voluntarily dismissed their appeals. Nonetheless, plaintiffs continue to file additional similar suits. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date may be barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; and (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

Similar lawsuits were filed in Texas beginning in 2002, against two CNA companies and numerous other insurers and non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos (E.g. Boson v. Union Carbide Corp., (Nueces County, Texas)). During 2003, many of the Texas suits were dismissed as time-barred by the applicable Statute of Limitations. In other suits, the carriers argued that they did not owe any duty to the plaintiffs or the general public to advise the world generally or the plaintiffs particularly of the effects of asbestos and that Texas statutes precluded liability for such claims, and the Texas courts dismissed these suits. Certain of the Texas courts’ rulings were appealed, but plaintiffs later dismissed their appeals. Recently, a different Texas court denied similar motions seeking dismissal at the pleading stage, allowing limited discovery to proceed. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date are barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; and (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CCC was named in Adams v. Aetna, Inc., et al. (Circuit Court of Kanawha County, West Virginia, filed June 28, 2002), a purported class action against CCC and other insurers, alleging that the defendants violated West Virginia’s Unfair Trade Practices Act (“UTPA”) in handling and resolving asbestos claims against five specifically named asbestos defendants. The Adams litigation had been stayed pending a planned motion by plaintiffs to file an amended complaint that reflected two June 2004 decisions of the West Virginia Supreme Court of Appeals. In June 2005, the court presiding over Adams and three similar putative class actions against other insurers, on its own motion, directed plaintiffs to file any amended complaints by June 13, 2005 and directed the parties to agree upon a case management order that would result in trial being commenced by July 2006. Plaintiffs’ Amended Complaint greatly expands the scope of the action against the insurers, including CCC. Under the Amended Complaint, the defendant insurers, including CCC have now been sued for alleged violations of the UTPA in connection with handling and resolving asbestos personal injury and wrongful death claims in West Virginia courts against all their insureds if those claims were resolved before June 30, 2001. CCC, along with other insurer defendants removed the Adams case to Federal court, Adams v. Ins. Co. of North America (INA) et al. (S.D. W. Va. No. 2:05-CV-0527). A motion by plaintiffs to remand the case to state courts is pending. Numerous factual and legal issues remain to be resolved that are critical to the final result in Adams, the outcome of which cannot be predicted with any reliability. These issues include: (a) the legal sufficiency of the novel statutory claims pled by the claimants; (b) the applicability of claimants’ legal theories to insurers who issued excess policies and/or neither defended nor controlled the defense of certain policyholders; (c) the possibility that certain of the claims are barred by various Statutes of Limitation; (d) the fact that the imposition of duties would interfere with the attorney-client privilege and the contractual rights and responsibilities of the parties to the Company’s insurance policies; (e) whether plaintiffs’ claims are barred in whole or in part by injunctions that have been issued by bankruptcy courts that are overseeing, or that have overseen, the bankruptcies of various insureds; (f) whether some or all of the named plaintiffs or members of the plaintiff class have released CCC from the claims alleged in the Amended Complaint when they resolved their underlying asbestos claims; (g) the appropriateness of the case for class action treatment; and (h) the potential and relative magnitude of liabilities of co-defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

On March 22, 2002, a direct action was filed in Montana (Pennock, et al. v. Maryland Casualty, et al. First Judicial District Court of Lewis & Clark County, Montana) by eight individual plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses against CNA, Maryland Casualty and the State of Montana. This action alleges that the carriers failed to warn of or otherwise protect W.R. Grace employees from the dangers of asbestos at a W.R. Grace vermiculite mining facility in Libby, Montana. The Montana direct action is currently stayed because of W.R. Grace’s pending bankruptcy. With respect to such claims, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the unclear nature and scope of any alleged duties owed to people exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the potential application of Statutes of Limitation to many of the claims which may be made depending on the nature and scope of the alleged duties; (c) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; (d) the diseases and damages claimed by such claimants; (e) and the extent that such liability would be shared with other potentially responsible parties; and (f) the impact of bankruptcy proceedings on claims resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CNA is vigorously defending these and other cases and believes that it has meritorious defenses to the claims asserted. However, there are numerous factual and legal issues to be resolved in connection with these claims, and it is extremely difficult to predict the outcome or ultimate financial exposure represented by these matters. Adverse developments with respect to any of these matters could have a material adverse effect on CNA’s business, insurer financial strength and debt ratings, results of operations and/or equity.

As a result of the uncertainties and complexities involved, reserves for asbestos claims cannot be estimated with traditional actuarial techniques that rely on historical accident year loss development factors. In establishing asbestos reserves, CNA evaluates the exposure presented by each insured. As part of this evaluation, CNA considers the available insurance coverage; limits and deductibles; the potential role of other insurance, particularly underlying coverage below any CNA excess liability policies; and applicable coverage defenses, including asbestos exclusions. Estimation of asbestos-related claim and claim adjustment expense reserves involves a high degree of judgment on the part of management and consideration of many complex factors, including: inconsistency of court decisions, jury attitudes and future court decisions; specific policy provisions; allocation of liability among insurers and insureds; missing policies and proof of coverage; the proliferation of bankruptcy proceedings and attendant uncertainties; novel theories asserted by policyholders and their counsel; the targeting of a broader range of businesses and entities as defendants; the uncertainty as to which other insureds may be targeted in the future and the uncertainties inherent in predicting the number of future claims; volatility in claim numbers and settlement demands; increases in the number of non-impaired claimants and the extent to which they can be precluded from making claims; the efforts by insureds to obtain coverage not subject to aggregate limits; long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims; medical inflation trends; the mix of asbestos-related diseases presented and the ability to recover reinsurance.

The Company is also monitoring possible legislative reforms on the state and national level, including possible federal legislation to create a national privately financed trust financed by contributions from insurers such as CNA, industrial companies and others, which if established, could replace litigation of asbestos claims with payments to claimants from the trust. It is uncertain at the present time whether such legislation will be enacted or, if it is, its impact on the Company.

Environmental Pollution and Mass Tort

Environmental pollution cleanup is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and restoration by “Potentially Responsible Parties” (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

fail to do so and assign liability to PRPs. The extent of liability to be allocated to a PRP is dependent upon a variety of factors. Further, the number of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been identified by the Environmental Protection Agency (EPA) and included on its National Priorities List (NPL). State authorities have designated many cleanup sites as well.

Many policyholders have made claims against various CNA insurance subsidiaries for defense costs and indemnification in connection with environmental pollution matters. The vast majority of these claims relate to accident years 1989 and prior, which coincides with CNA’s adoption of the Simplified Commercial General Liability coverage form, which includes what is referred to in the industry as absolute pollution exclusion. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether cleanup costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and the definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues.

As of September 30, 2005 and December 31, 2004, CNA carried approximately $402 million and $497 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and mass tort claims. There was $3 million of unfavorable environmental pollution and mass tort net claim and claim adjustment expense reserve development recorded for the nine months ended September 30, 2005. No development was recorded for the nine months ended September 30, 2004. The Company recorded $15 million and $10 million of current accident year losses related to mass tort for the nine months ended September 30, 2005 and 2004. The Company paid environmental pollution-related claims and mass tort-related claims, net of reinsurance recoveries, of $113 million and $79 million for the nine months ended September 30, 2005 and 2004.

CNA has made resolution of large environmental pollution exposures a management priority. The Company has resolved a number of its large environmental accounts by negotiating settlement agreements. In its settlements, CNA sought to resolve those exposures and obtain the broadest release language to avoid future claims from the same policyholders seeking coverage for sites or claims that had not emerged at the time CNA settled with its policyholder. While the terms of each settlement agreement vary, CNA sought to obtain broad environmental releases that include known and unknown sites, claims and policies. The broad scope of the release provisions contained in those settlement agreements should, in many cases, prevent future exposure from settled policyholders. It remains uncertain, however, whether a court interpreting the language of the settlement agreements will adhere to the intent of the parties and uphold the broad scope of language of the agreements.

In 2003, CNA observed a marked increase in silica claims frequency in Mississippi, where plaintiff attorneys appear to have filed claims to avoid the effect of tort reform. In 2004, silica claims frequency in Mississippi has moderated notably due to implementation of tort reform measures and favorable court decisions. To date, the most significant silica exposures identified included a relatively small number of accounts with significant numbers of new claims reported in 2003 and that continued at a far lesser rate in 2004 and 2005. Establishing claim and claim adjustment expense reserves for silica claims is subject to uncertainties because of disputes concerning medical causation with respect to certain diseases, including lung cancer, geographical concentration of the lawsuits asserting the claims, and the large rise in the total number of claims without underlying epidemiological developments suggesting an increase in disease rates or plaintiffs. Moreover, judicial interpretations regarding application of various tort defenses, including application of various theories of joint and several liabilities, impede the Company’s ability to estimate its ultimate liability for such claims.

Net Prior Year Development

Unfavorable net prior year development of $216 million was recorded for the nine months ended September 30, 2005. This amount consisted of $344 million of unfavorable claim and allocated claim adjustment expense reserve development and $128 million of favorable premium development. Unfavorable net prior year development of $111 million was recorded for the nine months ended September 30, 2004. This amount consisted of $222 million of unfavorable claim and allocated claim adjustment expense reserve development and $111 million of favorable premium development.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The Company records favorable or unfavorable premium and claim and claim adjustment expense reserve development related to the corporate aggregate reinsurance treaties as movements in the claim and allocated claim adjustment expense reserves for the accident years covered by the corporate aggregate reinsurance treaties indicate such development is required. While the available limit of these treaties has been fully utilized, the ceded premiums and losses for an individual segment may change because of the re-estimation of the subject losses. See Note I for further discussion of the corporate aggregate reinsurance treaties.

For the nine months ended September 30, 2005, the Company recorded unfavorable net prior year development of $17 million related to the corporate aggregate reinsurance treaties, consisting of $13 million of unfavorable development in Standard Lines, $6 million of favorable development in Specialty Lines and $10 million of unfavorable development in Corporate and Other Non-Core. There was no significant development related to the corporate aggregate reinsurance treaties for the nine months ended September 30, 2004.

The following includes the net prior year development recorded for the Standard Lines, Specialty Lines and Corporate and Other Non-Core segments. Favorable net prior year development in the Life and Group Non-Core segment for the nine months ended September 30, 2005 and September 30, 2004 was $11 million and $12 million.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)


Net Prior Year Development
							Corporate
For the nine months ended September 30, 2005	Standard			Specialty			and Other
(In millions)	Lines			Lines			Non-Core		Total

Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of the corporate aggregate reinsurance treaties:

Core (Non-APMT)	$	183		$	56		$	57	$	296
APMT		—			—			11		11


Total		183			56			68		307
Ceded losses related to corporate aggregate reinsurance treaties		19			(25	)		6		—


Pretax unfavorable net prior year development before impact of premium development		202			31			74		307


Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		(99	)		(9	)		11		(97	)
Ceded premiums related to corporate aggregate reinsurance treaties		(6	)		19			4		17


Total premium development		(105	)		10			15		(80	)


Total unfavorable net prior year development (pretax)	$	97		$	41		$	89	$	227


Net Prior Year Development
							Corporate
For the nine months ended September 30, 2004	Standard			Specialty			and Other
(In millions)	Lines			Lines			Non-Core			Total

Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of the corporate aggregate reinsurance treaties:

Core (Non-APMT)	$	107			74		$	9		$	190
APMT		—			—			44			44


Total		107			74			53			234
Ceded losses related to corporate aggregate reinsurance treaties		4			(9	)		5			—


Pretax unfavorable net prior year development before impact of premium development		111			65			58			234


Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		(97	)		(29	)		15			(111	)
Ceded premiums related to corporate aggregate reinsurance treaties		(1	)		3			(2	)		—


Total premium development		(98	)		(26	)		13			(111	)


Total unfavorable net prior year development (pretax)		13			39			71		$	123

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Standard Lines

Unfavorable net prior year development of $97 million was recorded for the nine months ended September 30, 2005. This amount consisted of $202 million of unfavorable claim and allocated claim adjustment expense development and $105 million of favorable premium development. Unfavorable net prior year development of $13 million was recorded for the nine months ended September 30, 2004. This amount consisted of $111 million of unfavorable claim and allocated claim adjustment expense reserve development and $98 million of favorable premium development.

2005 Net Prior Year Development

Approximately $141 million of unfavorable net prior year claim and allocated claim adjustment expense development resulted from increased severity trends for workers compensation, primarily in accident years 2002 and prior.

Approximately $135 million of favorable net prior year claim and allocated claim adjustment expense development was recorded due to improvement in the severity and number of claims for property coverages and marine business, primarily in accident year 2004.

Approximately $90 million of unfavorable net prior year claim and allocated claim adjustment expense development and $83 million of favorable net prior year premium development resulted from an unfavorable arbitration ruling on two reinsurance treaties.

Approximately $76 million of unfavorable net prior year claim and allocated claim adjustment expense development was attributed to increased severity in liability coverages for large account policies.

Approximately $51 million of unfavorable net prior year claim and allocated claim adjustment expense development was related to reviews of liquor liability, trucking and habitational business that indicated that the number of large claims was higher than previously expected in recent accident years. The remainder of the favorable net prior year claim and allocated claim adjustment expense development was primarily a result of improved experience on several coverages on middle market business mainly in accident year 2004.

Favorable net prior year premium development was recorded primarily as a result of additional premium resulting from audits and endorsements on recent policies, primarily workers compensation.

Additionally, there was $19 million of unfavorable net prior year claim and allocated claim adjustment expense development and $6 million of favorable premium development related to the corporate aggregate reinsurance treaties.

2004 Net Prior Year Development

In the second quarter of 2004, the Company finalized commutation agreements with several members of the Trenwick Group. These commutations resulted in unfavorable claim and claim adjustment expense reserve development which was more than offset by a release of a previously established allowance for uncollectible reinsurance.

In addition approximately $75 million of unfavorable net prior year claim and allocated claim adjustment expense development recorded in the second quarter of 2004 resulted from increased severity trends for workers compensation on large account policies primarily in accident years 2002 and prior. Favorable premium development on retrospectively rated large account policies of $25 million was recorded in relation to this unfavorable net prior year claim and allocated claim adjustment expense development. Also, favorable net prior year premium development of approximately $60 million resulted primarily from higher audit and endorsement premiums on workers compensation and general liability policies. Approximately $30 million of the unfavorable

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

net prior year claim and allocated claim adjustment expense reserve development was recorded related to the higher audit and endorsement premium.

In the third quarter of 2004, approximately $15 million of unfavorable net prior claim and allocated claim adjustment expense development was recorded in relation to the Company’s share of the National Workers Compensation Reinsurance Pool (NWCRP). During the third quarter of 2004, the NWCRP reached an agreement with a former pool member to settle their pool liabilities at an amount less than their established share. The result of this settlement was a higher allocation to the remaining pool members, including the Company.

Specialty Lines

Unfavorable net prior year development of $41 million was recorded for the nine months ended September 30, 2005. This amount consisted of $31 million of unfavorable claim and allocated claim adjustment expense development and $10 million of unfavorable premium development. Unfavorable net prior year development of $39 million was recorded for the nine months ended September 30, 2004. This amount consisted of $65 million of unfavorable claim and allocated claim adjustment expense reserve development and $26 million of favorable premium development.

2005 Net Prior Year Development

Approximately $60 million of unfavorable claim and allocated claim adjustment expense development was recorded due to increased claim adjustment expenses and increased severities in the architects and engineers book of business, in accident years 2000 through 2003. Favorable net prior year premium development of approximately $10 million was recorded in relation to this unfavorable claim and allocated claim adjustment expense development.

Approximately $27 million of unfavorable net prior year claim and allocated claim adjustment expense development was related to large directors and officers (D&O) claims assumed from a London syndicate, primarily in accident years 2001 and prior. Approximately $40 million of unfavorable net prior year claim and allocated claim adjustment expense development was recorded due to large claims resulting from excess coverages provided to health care facilities.

Approximately $17 million of favorable net prior year claim and allocated claim adjustment expense development was recorded due to lower severity in the dental program.

Approximately $24 million of favorable net prior year claim and allocated claim adjustment expense development was recorded as a result of improvements in the claim severity and claim frequency, mainly in recent accident years, from nursing home businesses. The remainder of the favorable net prior year claim and allocated claim adjustment expense development was primarily attributed to favorable experience in the warranty line of business, partially offset by unfavorable net prior year claim and allocated claim adjustment expense development attributed to other large D&O claims.

Additionally, there was approximately $25 million of favorable net prior year claim and allocated claim adjustment expense development and $19 million of unfavorable premium development related to the corporate aggregate reinsurance treaties in the first nine months of 2005.

2004 Net Prior Year Development

The Company finalized commutation agreements with several members of the Trenwick Group in the second quarter of 2004. These commutations resulted in unfavorable claim and claim adjustment expense reserve development which was more than offset by a release of a previously established allowance for uncollectible reinsurance. Additionally, unfavorable net prior year claim and allocated claim adjustment expense reserve development resulted from the increased emergence of several large directors and officers (D&O) claims, primarily in recent accident years.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Corporate and Other Non-Core

Unfavorable net prior year development of $89 million was recorded for the nine months ended September 30, 2005. This amount consisted of $74 million of unfavorable claim and allocated claim adjustment expense development and $15 million of unfavorable premium development. Unfavorable net prior year development of $71 million was recorded for the nine months ended September 30, 2004. This amount consisted of $58 million of unfavorable claim and allocated claim adjustment expense reserve development and $13 million of unfavorable premium development.

2005 Net Prior Year Development

Approximately $56 million of unfavorable claim and allocated claim adjustment expense development was a result of a commutation recorded in the second quarter of 2005. Approximately $6 million of unfavorable claim and allocated claim adjustment expense development was related to the corporate aggregate reinsurance treaties. The unfavorable premium development was primarily driven by $10 million of additional ceded reinsurance premium on agreements where the ceded premium depends on the ceded loss and $4 million of additional premium ceded to the corporate aggregate reinsurance treaties.

2004 Net Prior Year Development

The net prior year development recorded for 2004 related to commutation agreements with several members of the Trenwick Group. These commutations resulted in unfavorable net prior year development partially offset by a release of a previously established allowance for uncollectible reinsurance.

Note I. Reinsurance

CNA assumes and cedes reinsurance with other insurers, reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk, minimize exposures on larger risks and to exit certain lines of business. The ceding of insurance does not discharge the primary liability of the Company. Therefore, an exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities assumed under reinsurance agreements.

Property and casualty reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA’s retained amount varies by type of coverage. Treaty reinsurance is purchased to protect specific lines of business such as property, workers compensation and professional liability. Corporate catastrophe reinsurance is also purchased for property and workers compensation exposure. Most treaty reinsurance is purchased on an excess of loss basis. CNA also utilizes facultative reinsurance in certain lines.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The following table summarizes the amounts receivable from reinsurers at September 30, 2005 and December 31, 2004.


Components of reinsurance receivables	September 30, 2005			December 31, 2004
(In millions)

Reinsurance receivables related to insurance reserves:
Ceded claim and claim adjustment expense	$	12,842		$	13,879
Ceded future policy benefits		1,213			1,260
Ceded policyholders’ funds		59			65
Billed reinsurance receivables		536			684

Reinsurance receivables		14,650			15,888
Allowance for uncollectible reinsurance		(552	)		(546	)


Reinsurance receivables, net of allowance for uncollectible reinsurance	$	14,098		$	15,342

The Company has established an allowance for uncollectible reinsurance receivables. The allowance for uncollectible reinsurance receivables was $552 million and $546 million at September 30, 2005 and December 31, 2004. The expenses incurred related to uncollectible reinsurance receivables are presented as a component of “Insurance claims and policyholders’ benefits” in the Condensed Consolidated Statements of Operations.

The Company attempts to mitigate its credit risk related to reinsurance by entering into reinsurance arrangements only with reinsurers that have credit ratings above certain levels and by obtaining substantial amounts of collateral. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances.

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The effects of reinsurance on earned premiums are shown in the following table.

Components of Earned Premiums


Three months ended September 30	Direct		Assumed		Ceded		Net
(In millions)

2005
Property and casualty	$	2,548	$	13	$	856	$	1,705
Accident and health		245		18		96		167
Life		27		—		26		1


Total earned premiums	$	2,820	$	31	$	978	$	1,873


2004
Property and casualty	$	2,666	$	36	$	905	$	1,797
Accident and health		260		19		130		149
Life		46		—		45		1


Total earned premiums	$	2,972	$	55	$	1,080	$	1,947


Nine months ended September 30	Direct		Assumed		Ceded		Net
(In millions)

2005
Property and casualty	$	7,600	$	72	$	2,526	$	5,146
Accident and health		805		42		311		536
Life		109		—		107		2


Total earned premiums	$	8,514	$	114	$	2,944	$	5,684


2004
Property and casualty	$	8,059	$	163	$	2,663	$	5,559
Accident and health		919		45		421		543
Life		369		—		250		119


Total earned premiums	$	9,347	$	208	$	3,334	$	6,221

Life premiums are primarily from long duration contracts; property and casualty premiums and accident and health premiums are primarily from short duration contracts.

Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses, as compared to deposit accounting, which requires cash flows to be reflected as assets and liabilities. To qualify for reinsurance accounting, reinsurance agreements must include risk transfer. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. Reinsurance contracts that include both significant risk sharing provisions, such as adjustments to premiums or loss coverage based on loss experience, and relatively low policy limits as evidenced by a high proportion of maximum premium assessments to loss limits, may require considerable judgment to determine whether or not risk transfer requirements are met. For such contracts, often referred to as finite products, the Company assesses risk transfer for each contract generally by developing quantitative analyses at contract inception which measure the present value of reinsurer losses as compared to the present value of the related premium.

Reinsurance contracts that do not effectively transfer the underlying economic risk of loss on policies written by the Company are recorded using the deposit method of accounting, which requires that premium paid or received by the ceding company or assuming company be accounted for as a deposit asset or liability. The Company primarily

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

records these deposits as either reinsurance receivables or other assets for ceded recoverables and reinsurance balances payable or other liabilities for assumed liabilities.

Catastrophe Reinsurance

The anticipated reinsurance recoveries related to Hurricane Katrina assume significant utilization of the Company’s Corporate Property Catastrophe, Corporate Property Per Risk and Marine reinsurance treaties. The Corporate Property Catastrophe treaty provides 90% coverage for the accumulation of losses between $200 million and $500 million arising out of a single catastrophe occurrence. Coverage under this treaty was fully utilized for Hurricane Katrina. After payment of a reinstatement premium, the Company has coverage for one additional occurrence under this treaty. The Corporate Property Per Risk treaty limits the Company’s loss on an individual insured property to $10 million, subject to certain limitations and aggregate limits contained in the treaty. The Company’s Marine treaty provides $75 million of protection above a $10 million retention on the accumulation of losses arising out of a single catastrophe occurrence. After payment of reinstatement premiums, the Company has almost full ongoing coverage under these treaties.

In addition to these reinsurance treaties, the Company’s exposure to Hurricane Rita is further mitigated by an Aggregate Property Catastrophe treaty. This treaty was purchased to obtain reinsurance protection against the aggregation of losses from multiple catastrophic events. The Aggregate Property Catastrophe treaty covers 95% of $150 million of losses above a retention of $100 million from named earthquake or wind storm catastrophes which exceed $25 million in 2005. For any single event, the maximum that can be applied to the Company’s retention or recovered under the treaty is $80 million. The Company has approximately $45 million of available recoveries from this treaty in the event its estimate of gross losses from Hurricane Rita increases in the future.

Funds Withheld Reinsurance Arrangements

The Company’s overall reinsurance program includes certain finite property and casualty contracts, such as the corporate aggregate reinsurance treaties discussed in more detail below, that are entered into and accounted for on a “funds withheld” basis. Under the funds withheld basis, the Company records the cash remitted to the reinsurer for the reinsurer’s margin, or cost of the reinsurance contract, as ceded premiums. The remainder of the premiums ceded under the reinsurance contract not remitted in cash are recorded as funds withheld liabilities. The Company is required to increase the funds withheld balance at stated interest crediting rates applied to the funds withheld balance or as otherwise specified under the terms of the contract. The funds withheld liability is reduced by any cumulative claim payments made by the Company in excess of the Company’s retention under the reinsurance contract. If the funds withheld liability is exhausted, interest crediting will cease and additional claim payments are recoverable from the reinsurer. The funds withheld liability is recorded in Reinsurance Balances Payable in the Condensed Consolidated Balance Sheets.


(In millions)

2005	$	1
2006		303
2007		11
2008		383
2009		3
Thereafter		1,059
Less original issue discount		(9	)


Total	$	1,751

	•		increases in the number and size of claims relating to injuries from medical products, and exposure to lead;

	•		the effects of accounting and financial reporting scandals and other major corporate governance failures, which have resulted in an increase in the number and size of claims, including director and officer and errors and omissions insurance claims;

	•		class action litigation relating to claims handling and other practices;

	•		construction defect claims, including claims for a broad range of additional insured endorsements on policies; and

	•		increases in the number of claims alleging abuse by members of the clergy, including passage of legislation to reopen or extend various statutes of limitations.

	•		coverage issues, including whether certain costs are covered under the policies and whether policy limits apply;

	•		inconsistent court decisions and developing legal theories;

	•		increasingly aggressive tactics of plaintiffs’ lawyers;

	•		the risks and lack of predictability inherent in major litigation;

	•		changes in the volume of asbestos and environmental pollution and mass tort claims which cannot now be anticipated;

	•		continued increase in mass tort claims relating to silica and silica-containing products;

	•		the impact of the exhaustion of primary limits and the resulting increase in claims on any umbrella or excess policies the Company has issued;

	•		the number and outcome of direct actions against the Company; and

	•		the Company’s ability to recover reinsurance for asbestos and environmental pollution and mass tort claims.


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Net written premiums	$	1,047		$	1,046		$	3,352		$	3,520
Net earned premiums		1,080			1,183			3,333			3,756
Net investment income		186			125			540			382
Net operating income (loss)		(144	)		(74	)		57			138
Net realized investment gains (losses)		33			(23	)		42			65
Net income (loss)		(111	)		(97	)		99			203

Ratios
Loss and loss adjustment expense		106.3	%		80.4	%		82.5	%		71.9	%
Expense		33.0			41.1			32.2			34.8
Dividend		0.3			0.7			0.5			0.1


Combined		139.6	%		122.2	%		115.2	%		106.8	%


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Net written premiums	$	649		$	599		$	1,838		$	1,772
Net earned premiums		628			576			1,831			1,672
Net investment income		74			61			197			182
Net operating income		108			80			268			236
Net realized investment gains (losses)		11			(8	)		19			23
Net income		119			72			287			259

Ratios
Loss and loss adjustment expense		58.4	%		62.8	%		63.3	%		63.4	%
Expense		27.3			27.2			26.3			26.4
Dividend		0.2			0.4			0.2			0.3


Combined		85.9	%		90.4	%		89.8	%		90.1	%


Three months ended September 30	Aggregate Cover			CCC Cover			All Other			Total
(In millions)

2005
Ceded earned premium	$	1		$	—		$	(9	)	$	(8	)
Ceded claim and claim adjustment expense		—			—			15			15
Ceding commissions		—			—			3			3
Interest charges		(15	)		(17	)		(16	)		(48	)


Pretax expense	$	(14	)	$	(17	)	$	(7	)	$	(38	)


2004
Ceded earned premium	$	3		$	—		$	(21	)	$	(18	)
Ceded claim and claim adjustment expense		—			—			29			29
Ceding commissions		—			—			(2	)		(2	)
Interest charges		(19	)		(12	)		(22	)		(53	)


Pretax expense	$	(16	)	$	(12	)	$	(16	)	$	(44	)


For the three months ended										Corporate
September 30, 2005	Standard			Specialty			Life and Group			and Other
(In millions)	Lines			Lines			Non-Core			Non-Core			Eliminations			Total

Net earned premiums	$	1,080		$	628		$	169		$	(1	)	$	(3	)	$	1,873
Net investment income		186			74			179			61			—			500
Other revenues		26			34			20			16			(16	)		80

Total operating revenues		1,292			736			368			76			(19	)		2,453

Claims, benefits and expenses:
Net incurred claims and benefits		1,148			366			342			12			—			1,868
Policyholders’ dividends		4			1			(1	)		(1	)		—			3
Amortization of deferred acquisition costs		281			128			5			2			—			416
Other insurance related expenses		76			45			69			(4	)		(3	)		183
Other operating expenses		23			28			13			39			(16	)		87

Total claims, benefits and expenses		1,532			568			428			48			(19	)		2,557

Operating income (loss) before income tax and minority interest		(240	)		168			(60	)		28			—			(104	)
Income tax (expense) benefit on operating income (loss)		100			(53	)		25			4			—			76
Minority interest		(4	)		(7	)		—			—			—			(11	)


Net operating income (loss)		(144	)		108			(35	)		32			—			(39	)

Realized investment gains (losses), net of participating policyholders’ and minority interests		51			16			(2	)		2			—			67

Income tax (expense) benefit on realized investment gains (losses)		(18	)		(5	)		1			(3	)		—			(25	)


Net income (loss)	$	(111	)	$	119		$	(36	)	$	31		$	—		$	3


For the three months ended										Corporate
September 30, 2004	Standard			Specialty			Life and Group			and Other
(In millions)	Lines			Lines			Non-Core			Non-Core			Eliminations			Total

Net earned premiums	$	1,183		$	576		$	182		$	10		$	(4	)	$	1,947
Net investment income		125			61			109			65			—			360
Other revenues		32			36			12			9			(16	)		73

Total operating revenues		1,340			673			303			84			(20	)		2,380

Claims, benefits and expenses:
Net incurred claims and benefits		951			361			245			34			—			1,591
Policyholders’ dividends		8			2			(4	)		(1	)		—			5
Amortization of deferred acquisition costs		247			112			11			4			—			374
Other insurance related expenses		239			46			61			(8	)		(4	)		334
Other operating expenses		25			29			17			32			(16	)		87

Total claims, benefits and expenses		1,470			550			330			61			(20	)		2,391

Operating income (loss) before income tax and minority interest		(130	)		123			(27	)		23			—			(11	)
Income tax (expense) benefit on operating income (loss)		58			(39	)		14			(1	)		—			32
Minority interest		(2	)		(4	)		—			—			—			(6	)


Net operating income (loss)		(74	)		80			(13	)		22			—			15

Realized investment gains (losses), net of participating policyholders’ and minority interests		(33	)		(13	)		2			(18	)		—			(62	)
Income tax benefit on realized investment gains (losses)		10			5			—			5			—			20


Net income (loss)	$	(97	)	$	72		$	(11	)	$	9		$	—		$	(27	)


For the nine months ended										Corporate
September 30, 2005	Standard			Specialty			Life and Group			and Other
(In millions)	Lines			Lines			Non-Core			Non-Core			Eliminations			Total

Net earned premiums	$	3,333		$	1,831		$	539		$	(10	)	$	(9	)	$	5,684
Net investment income		540			197			431			177			—			1,345
Other revenues		74			94			78			156			(51	)		351

Total operating revenues		3,947			2,122			1,048			323			(60	)		7,380

Claims, benefits, and expenses:
Net incurred claims and benefits		2,750			1,158			860			102			(2	)		4,868
Policyholders’ dividends		16			3			(1	)		—			—			18
Amortization of deferred acquisition costs		757			390			18			3			—			1,168
Other insurance related expenses		318			93			194			6			(7	)		604
Other operating expenses		82			81			43			103			(51	)		258

Total claims, benefits and expenses		3,923			1,725			1,114			214			(60	)		6,916

Operating income (loss) before income tax and minority interest		24			397			(66	)		109			—			464
Income tax (expense) benefit on operating income (loss)		41			(121	)		37			20			—			(23	)
Minority interest		(8	)		(8	)		—			—			—			(16	)


Net operating income (loss)		57			268			(29	)		129			—			425

Realized investment gains (losses), net of participating policyholders’ and minority interests		71			25			(8	)		(14	)		—			74
Income tax (expense) benefit on realized investment gains (losses)		(29	)		(6	)		3			2			—			(30	)


Net income (loss)	$	99		$	287		$	(34	)	$	117		$	—		$	469


As of September 30, 2005
(In millions)

Reinsurance receivables	$	4,854		$	1,618		$	2,967		$	5,211		$	—		$	14,650

Insurance receivables	$	1,781		$	406		$	115		$	47		$	—		$	2,349

Insurance reserves:
Claim and claim adjustment expense	$	14,787		$	5,107		$	3,496		$	8,045		$	—		$	31,435
Unearned premiums		2,003			1,616			169			558			(3	)		4,343
Future policy benefits		—			—			6,181			—			—			6,181
Policyholders’ funds		33			—			1,555			—			—			1,588

Deferred acquisition costs	$	434		$	281		$	518		$	1		$	—		$	1,234


Revenue by Line of Business
	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Standard Lines
Property	$	149		$	159		$	458		$	492
Casualty		963			939			2,891			3,174
CNA Global		231			209			669			675


Standard Lines revenue		1,343			1,307			4,018			4,341


Specialty Lines
Professional Liability Insurance (CNA Pro)		576			487			1,635			1,484
Surety		101			92			290			267
Warranty		75			81			222			233


Specialty Lines revenue		752			660			2,147			1,984


Life and Group Non-Core
Life & Annuity		111			41			247			(217	)
Health		230			265			679			786
Other		25			(1	)		114			54


Life and Group Non-Core revenue		366			305			1,040			623


Corporate and Other Non-Core
CNA Re		23			28			49			191
Other		55			38			260			204


Corporate and Other Non-Core revenue		78			66			309			395


Eliminations		(19	)		(20	)		(60	)		(94	)


Total revenue	$	2,520		$	2,318		$	7,454		$	7,249


	Statutory Capital and Surplus				Statutory Net Income (Loss)						Statutory Net Income (Loss)
					Three months ended September 30						Nine months ended September 30
(In millions)	September 30, 2005		December 31, 2004		2005			2004			2005		2004
Property and casualty companies	$	7,332	$	6,998	$	(19	)	$	(123	)	$	849	$	280
Life and group insurance companies (a)		722		1,177		(4	)		20			49		414


	Three Months						Nine Months
Period ended September 30, 2004	As Previously			As			As Previously		As
(In millions, except per share data)	Reported			Restated			Reported		Restated

Consolidated statements of operations:
Net investment income	$	359		$	360		$	1,212	$	1,216
Insurance claims and policyholders’ benefits		1,596			1,596			4,859		4,854
Income tax benefit		52			52			77		74
Net income (loss)		(28	)		(27	)		136		142

Basic and diluted earnings (loss) per share available to common stockholders:	$	(0.17	)	$	(0.16	)	$	0.35	$	0.37


			Net Paid Losses		Net Asbestos		Percent of
	Number of		in 2005		Reserves		Asbestos
	Policyholders		(In millions)		(In millions)		Net Reserves

Policyholders with settlement agreements
Structured Settlements		13	$	29	$	158		10	%
Wellington		4		2		16		1
Coverage in place		34		7		70		5
Fibreboard		1		—		54		3


Total with settlement agreements		52		38		298		19


Other policyholders with active accounts
Large asbestos accounts		201		52		339		22
Small asbestos accounts		1,082		21		113		7


Total other policyholders		1,283		73		452		29


Assumed reinsurance and pools		—		4		145		9
Unassigned IBNR		—		—		684		43


Total		1,335	$	115	$	1,579		100	%

	•		inconsistency of court decisions, jury attitudes and future court decisions

	•		specific policy provisions

	•		allocation of liability among insurers and insureds

	•		missing policies and proof of coverage

	•		the proliferation of bankruptcy proceedings and attendant uncertainties

	•		novel theories asserted by policyholders and their counsel

	•		the targeting of a broader range of businesses and entities as defendants

	•		the uncertainty as to which other insureds may be targeted in the future and the uncertainties inherent in predicting the number of future claims

	•		volatility in claim numbers and settlement demands

	•		increases in the number of non-impaired claimants and the extent to which they can be precluded from making claims

	•		the efforts by insureds to obtain coverage not subject to aggregate limits

	•		long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims

	•		medical inflation trends

	•		the mix of asbestos-related diseases presented and

	•		the ability to recover reinsurance.


	Nine Months Ended September 30, 2005
	Fair				Months in
	Value at				Unrealized
	Date of		Loss		Loss Prior
Issuer Description and Discussion	Sale		On Sale		To Sale (a)
(In millions)

Various notes and bonds issued by the United States Treasury. Volatility of interest rates prompted movement to other asset classes.	$	12,661	$	59		0-12+

Manufactures and sells vehicles worldwide under various brand names. The company also has financing and insurance operations. The company is experiencing inventory capacity issues. Losses relate to trades that took place to reduce issuer exposure.		357		45		0-12+

Large media company that was downgraded to below investment grade. Losses relate to trades that took place to reduce issuer exposure.		76		5		0-12+

Large domestic passenger and freight airline that filed for bankruptcy during third quarter 2005. Losses relate to trades that took place to reduce issuer exposure.		12		5		0-6

Issuer of high grade state general obligation bonds. Loss was incurred as a result of unfavorable interest rate change.		227		5		0-12

Total	$	13,333	$	119


	Percent of			Percent of
	Market			Unrealized
	Value			Loss

Due in one year or less		3	%		—	%
Due after one year through five years		11			5
Due after five years through ten years		7			13
Due after ten years		71			76
Asset-backed securities		8			6

Total		100	%		100	%


			Fair Value as a Percentage of Book Value								Gross
	Estimated										Unrealized
September 30, 2005	Fair Value		90-99%		80-89%		70-79%		<70%		Loss
(In millions)

Fixed maturity securities:
Non-investment grade:
0-6 months	$	656	$	19	$	4	$	2	$	—	$	25
7-12 months		157		5		11		4		—		20
13-24 months		106		4		4		—		—		8
Greater than 24 months		2		—		—		—		—		—


Total non-investment grade	$	921	$	28	$	19	$	6	$	—	$	53


											2010 and
September 30, 2005	2005		2006		2007		2008		2009		Beyond		Total
(In millions)

Debt (a)	$	43	$	409	$	106	$	472	$	73	$	1,629		2,732
Lease obligations		17		52		44		36		29		77		255
Claim and claim expense reserves (b)		2,441		7,173		5,111		3,658		2,612		12,349		33,344
Future policy benefits reserves (c)		68		178		173		174		170		8,866		9,629
Policyholder funds reserves (c)		258		952		155		35		9		156		1,565
Guaranteed payment contracts (d)		8		15		7		—		—		—		30


Total	$	2,835	$	8,779	$	5,596	$	4,375	$	2,893	$	23,077	$	47,555

	(a)		Includes estimated future interest payments, but does not include original issue discount.

	(b)		Claim and claim adjustment expense reserves are not discounted and represent the Company’s estimate of the amount and timing of the ultimate settlement and administration of claims based on its assessment of facts and circumstances known as of September 30, 2005. See the Reserves – Estimates and Uncertainties section of this MD&A for further information. Claim and claim adjustment expense reserves of $12 million related to business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included.

	(c)		Future policy benefits and policyholder funds reserves are not discounted and represent the Company’s estimate of the ultimate amount and timing of the settlement of benefits based on its assessment of facts and circumstances known as of September 30, 2005. Future policy benefit reserves of $979 million and policyholder fund reserves of $54 million related to business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included.

	(d)		Primarily relating to telecommunications and software services.

•		the effects of corporate bankruptcies, such as Enron and WorldCom, on capital markets, and on the markets for directors and officers and errors and omissions coverages;

•		changes in foreign or domestic political, social and economic conditions;

•		the performance of reinsurance companies under reinsurance contracts with the Company;

•		results of financing efforts, including the availability of bank credit facilities;

•		changes in the Company’s composition of operating segments;

•		the possibility that the Terrorism Risk Insurance Act of 2002 will not be extended beyond the end of 2005, as a result of which the Company could incur substantial additional exposure to losses resulting from terrorist attacks, which could be increased by current state regulatory restrictions on terrorism policy exclusions and by regulatory unwillingness to approve such exclusions prospectively;

•		the occurrence of epidemics;

•		the possibility of further changes in the Company’s ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices; and

•		the actual closing of contemplated transactions and agreements.


			Increase (Decrease)
	Market		Interest			Currency			Equity
September 30, 2005	Value		Rate Risk			Risk			Risk
(In millions)

General account:
Fixed maturity securities available-for-sale	$	32,019	$	(1,884	)	$	(81	)	$	(21	)
Fixed maturity securities trading		410		(4	)		—			(2	)
Equity securities available-for-sale		507		—			(6	)		(51	)
Equity securities trading		42		—			—			(4	)
Short term investments available-for-sale		6,772		(11	)		(40	)		—
Short term investments trading		381		—			—			—
Limited partnerships		1,618		7			—			(20	)
Other invested assets		31		—			—			—
Interest rate swaps		—		104			—			—
Equity indexed futures for trading securities		—		2			—			(110	)
Other derivative securities		3		6			—			—


Total general account		41,783		(1,780	)		(127	)		(208	)


Separate accounts:
Fixed maturity securities		476		(22	)		—			—
Equity securities		45		—			—			(4	)
Short term investments		26		—			—			—


Total separate accounts		547		(22	)		—			(4	)


Total securities	$	42,330	$	(1,802	)	$	(127	)	$	(212	)


Debt (carrying value)	$	1,751	$	(94	)	$	—		$	—

	(a)		CCC and James R. Lewis entered into an Employment Agreement as of October 26, 2005 pursuant to which Mr. Lewis will continue to serve as Executive Vice President and Chief Executive Officer of the Company’s Property and Casualty Operations from January 1, 2006 to December 31, 2008. A copy of said Employment Agreement is filed with this Report as Exhibit 10.21.

	(b)		CNAF and Stephen W. Lilienthal entered into an Employment Agreement as of October 26, 2005 pursuant to which Mr. Lilienthal will continue to serve as Chief Executive Officer of CNAF and as Chairman and Chief Executive Officer of CNAF’s wholly-owned insurance subsidiaries from January 1, 2006 to December 31, 2008. A copy of said Employment Agreement is filed with this Report as Exhibit 10.22.


Description of Exhibit	Exhibit Number

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		31.1

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		31.2

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		32.1*

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		32.2*


	CNA Financial Corporation
Dated: October 28, 2005	By	/s/ D. Craig Mense
		D. Craig Mense
		Chief Financial Officer