##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  
 FORM 10-Q
 þ     o
 Commission File Number 1-5823
 
 CNA FINANCIAL CORPORATION
  Delaware
    
    36-6169860(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)333 S. WabashChicago, Illinois
    
    60604(Address of principal executive offices)
    
    (Zip Code)
 (312) 822-5000
(Registrants telephone number, including area code)
  þ o
  þ o o
  o þ
  Class
    
    Outstanding at April 25, 2007Common Stock, Par value $2.50
    
    271,511,301




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##### 



CNA FINANCIAL CORPORATION
INDEX
  
 Item
    
    
    
    PageNumber
    
    
    
    NumberPART I. Financial Information1.
    
    Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2007 and 2006
    
    3Condensed Consolidated Balance Sheets at March 31, 2007
and at December 31, 2006
    
    4Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2007 and 2006
    
    5Condensed Consolidated Statements of Stockholders
Equity for the Three Months Ended March 31, 2007 and 2006
    
    7Notes to Condensed Consolidated Financial Statements
    
    82.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    353.
    
    Quantitative and Qualitative Disclosures About Market
Risk
    
    594.
    
    Controls and Procedures
    
    60PART II. Other Information1.
    
    Legal Proceedings
    
    616.
    
    Exhibits
    
    612007 Incentive Compensation Awards to Executive OfficersCertification of Chief Executive OfficerCertification of Chief Financial OfficerWritten Statement of the Chief Executive OfficerWritten Statement of the Chief Financial Officer




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##### Table of Contents



CNA FINANCIAL CORPORATION
 
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three months ended March 31
    
    2007
    
    
    2006(In millions, except per share data)RevenuesNet earned premiums
    
    $
    1,863
    
    
    $
    1,869Net investment income
    
    
    608
    
    
    
    570Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    (21
    )
    
    
    9Other revenues
    
    
    67
    
    
    
    53Total revenues
    
    
    2,517
    
    
    
    2,501Claims, Benefits and ExpensesInsurance claims and policyholders benefits
    
    
    1,448
    
    
    
    1,492Amortization of deferred acquisition costs
    
    
    381
    
    
    
    370Other operating expenses
    
    
    218
    
    
    
    257Interest
    
    
    34
    
    
    
    30Total claims, benefits and expenses
    
    
    2,081
    
    
    
    2,149Income before income tax and minority interest
    
    
    436
    
    
    
    352Income tax expense
    
    
    (132
    )
    
    
    (108
    )Minority interest
    
    
    (10
    )
    
    
    (9
    )Income from continuing operations
    
    
    294
    
    
    
    235Income (loss) from discontinued operations, net of income tax
expense of $1 and $0
    
    
    2
    
    
    
    (6
    )Net income
    
    $
    296
    
    
    $
    229Basic and Diluted Earnings Per ShareIncome from continuing operations
    
    $
    1.08
    
    
    $
    0.84Income (loss) from discontinued operations
    
    
    0.01
    
    
    
    (0.02
    )Basic and diluted earnings per share available to common stockholders
    
    $
    1.09
    
    
    $
    0.82Weighted average outstanding common stock and common stock
equivalentsBasic
    
    
    271.3
    
    
    
    256.0Diluted
    
    
    271.6
    
    
    
    256.0
  3




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CNA FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 March 31,
    
    
    December 31,2007
    
    
    2006(In millions, except share data)AssetsInvestments:Fixed maturity securities at fair value (amortized cost of $33,985 and $35,135)
    
    $
    34,719
    
    
    $
    35,851Equity securities at fair value (cost of $417 and $408)
    
    
    673
    
    
    
    657Limited partnership investments
    
    
    1,940
    
    
    
    1,852Other invested assets
    
    
    25
    
    
    
    26Short term investments
    
    
    7,846
    
    
    
    5,710Total investments
    
    
    45,203
    
    
    
    44,096Cash
    
    
    91
    
    
    
    84Reinsurance receivables (less allowance for uncollectible receivables of $469 and $469)
    
    
    9,373
    
    
    
    9,478Insurance receivables (less allowance for doubtful accounts of $365 and $368)
    
    
    2,170
    
    
    
    2,108Accrued investment income
    
    
    321
    
    
    
    313Receivables for securities sold
    
    
    470
    
    
    
    303Deferred acquisition costs
    
    
    1,189
    
    
    
    1,190Prepaid reinsurance premiums
    
    
    373
    
    
    
    342Deferred income taxes
    
    
    805
    
    
    
    855Property and equipment at cost (less accumulated depreciation of $578 and $571)
    
    
    296
    
    
    
    277Goodwill and other intangible assets
    
    
    142
    
    
    
    142Other assets
    
    
    657
    
    
    
    592Separate account business
    
    
    515
    
    
    
    503Total assets
    
    $
    61,605
    
    
    $
    60,283Liabilities and Stockholders EquityLiabilities:Insurance reserves:Claim and claim adjustment expenses
    
    $
    29,510
    
    
    $
    29,636Unearned premiums
    
    
    3,825
    
    
    
    3,784Future policy benefits
    
    
    6,755
    
    
    
    6,645Policyholders funds
    
    
    977
    
    
    
    1,015Collateral on loaned securities
    
    
    2,914
    
    
    
    2,851Payables for securities purchased
    
    
    1,190
    
    
    
    221Participating policyholders funds
    
    
    50
    
    
    
    50Long term debt
    
    
    2,156
    
    
    
    2,156Federal income taxes payable (includes $95 and $38 due to Loews Corporation)
    
    
    100
    
    
    
    40Reinsurance balances payable
    
    
    577
    
    
    
    539Other liabilities
    
    
    2,550
    
    
    
    2,740Separate account business
    
    
    515
    
    
    
    503Total liabilities
    
    
    51,119
    
    
    
    50,180Commitments and contingencies (Notes D, G, H and J)Minority interest
    
    
    347
    
    
    
    335Stockholders equity:Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,543 shares
issued; and 271,506,815 and 271,108,780 shares outstanding)
    
    
    683
    
    
    
    683Additional paid-in capital
    
    
    2,168
    
    
    
    2,166Retained earnings
    
    
    6,825
    
    
    
    6,486Accumulated other comprehensive income
    
    
    563
    
    
    
    549Treasury stock (1,533,728 and 1,931,763 shares), at cost
    
    
    (44
    )
    
    
    (58
    )10,195
    
    
    
    9,826Notes receivable for the issuance of common stock
    
    
    (56
    )
    
    
    (58
    )Total stockholders equity
    
    
    10,139
    
    
    
    9,768Total liabilities and stockholders equity
    
    $
    61,605
    
    
    $
    60,283
  4




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CNA FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Cash Flows from Operating Activities:Net income
    
    $
    296
    
    
    $
    229Adjustments to reconcile net income to net cash flows provided
by operating activities:(Income) loss from discontinued operations
    
    
    (2
    )
    
    
    6Loss on disposal of property and equipment
    
    
    2
    
    
    
    4Minority interest
    
    
    10
    
    
    
    9Deferred income tax provision
    
    
    20
    
    
    
    41Trading securities activity
    
    
    (6
    )
    
    
    267Realized investment (gains) losses, net of participating
policyholders and minority interests
    
    
    21
    
    
    
    (9
    )Undistributed earnings of equity method investees
    
    
    (24
    )
    
    
    (15
    )Net amortization of bond (discount) premium
    
    
    (56
    )
    
    
    (62
    )Depreciation
    
    
    13
    
    
    
    12Changes in:Receivables, net
    
    
    43
    
    
    
    252Deferred acquisition costs
    
    
    1
    
    
    
    (1
    )Accrued investment income
    
    
    (8
    )
    
    
    33Federal income taxes recoverable/payable
    
    
    60
    
    
    
    116Prepaid reinsurance premiums
    
    
    (31
    )
    
    
    (100
    )Reinsurance balances payable
    
    
    38
    
    
    
    (17
    )Insurance reserves
    
    
    32
    
    
    
    (181
    )Other assets
    
    
    (2
    )
    
    
    39Other liabilities
    
    
    (178
    )
    
    
    3Other, net
    
    
    6
    
    
    
    5Total adjustments
    
    
    (61
    )
    
    
    402Net cash flows provided by operating activities-continuing
operations
    
    $
    235
    
    
    $
    631Net cash flows used by operating activities-discontinued
operations
    
    $
    (18
    )
    
    $
    (5
    )Net cash flows provided by operating activities-total
    
    $
    217
    
    
    $
    626Cash Flows from Investing Activities:Purchases of fixed maturity securities
    
    $
    (15,552
    )
    
    $
    (9,951
    )Proceeds from fixed maturity securities:Sales
    
    
    16,435
    
    
    
    11,697Maturities, calls and redemptions
    
    
    1,016
    
    
    
    1,089Purchases of equity securities
    
    
    (67
    )
    
    
    (596
    )Proceeds from sales of equity securities
    
    
    69
    
    
    
    582Change in short term investments
    
    
    (2,060
    )
    
    
    (4,014
    )Change in collateral on loaned securities
    
    
    63
    
    
    
    1,022Change in other investments
    
    
    (37
    )
    
    
    (86
    )Purchases of property and equipment
    
    
    (34
    )
    
    
    (16
    )Dispositions
    
    
    
    
    
    
    (2
    )Other, net
    
    
    (35
    )
    
    
    (29
    )Net cash flows used by investing activities-continuing operations
    
    $
    (202
    )
    
    $
    (304
    )Net cash flows provided (used) by investing
activities-discontinued operations
    
    $
    1
    
    
    $
    (3
    )Net cash flows used by investing activities-total
    
    $
    (201
    )
    
    $
    (307
    )
 
 5




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CNA FINANCIAL CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Cash Flows from Financing Activities:Return of investment contract account balances
    
    
    (46
    )
    
    
    (344
    )Receipts of investment contract account balances
    
    
    1
    
    
    
    1Stock options exercised
    
    
    15
    
    
    
    1Other, net
    
    
    4
    
    
    
    (1
    )Net cash flows used by financing activities-continuing operations
    
    $
    (26
    )
    
    $
    (343
    )Net cash flows used by financing activities-discontinued
operations
    
    $
    
    
    
    $
    Net cash flows used by financing activities-total
    
    $
    (26
    )
    
    $
    (343
    )Net change in cash
    
    
    (10
    )
    
    
    (24
    )Net cash transactions from continuing operations to discontinued
operations
    
    
    
    
    
    
    16Net cash transactions from discontinued operations to continuing
operations
    
    
    
    
    
    
    (16
    )Cash, beginning of year
    
    
    124
    
    
    
    125Cash, end of period
    
    $
    114
    
    
    $
    101Cash-continuing operations
    
    $
    91
    
    
    $
    96Cash-discontinued operations
    
    
    23
    
    
    
    5Cash-total
    
    $
    114
    
    
    $
    101
 
 6




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##### Table of Contents



CNA FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(UNAUDITED)
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Preferred StockBalance, beginning and end of period
    
    $
    
    
    
    $
    750Common StockBalance, beginning and end of period
    
    
    683
    
    
    
    645Additional Paid-in CapitalBalance, beginning of period
    
    
    2,166
    
    
    
    1,701Stock options exercised and other
    
    
    2
    
    
    
    1Balance, end of period
    
    
    2,168
    
    
    
    1,702Retained EarningsBalance, beginning of period
    
    
    6,486
    
    
    
    5,621Adjustment to initially apply FSP 85-4-1, net of tax
    
    
    38
    
    
    
    Adjustment to initially apply FIN 48
    
    
    5
    
    
    
    Adjusted balance, beginning of period
    
    
    6,529
    
    
    
    5,621Net income
    
    
    296
    
    
    
    229Balance, end of period
    
    
    6,825
    
    
    
    5,850Accumulated Other Comprehensive IncomeBalance, beginning of period
    
    
    549
    
    
    
    359Other comprehensive income (loss)
    
    
    14
    
    
    
    (239
    )Balance, end of period
    
    
    563
    
    
    
    120Treasury StockBalance, beginning of period
    
    
    (58
    )
    
    
    (67
    )Stock options exercised and other
    
    
    14
    
    
    
    Balance, end of period
    
    
    (44
    )
    
    
    (67
    )Notes Receivable for the Issuance of Common StockBalance, beginning of period
    
    
    (58
    )
    
    
    (59
    )(Increase) decrease in notes receivable for the
issuance of common stock
    
    
    2
    
    
    
    (1
    )Balance, end of period
    
    
    (56
    )
    
    
    (60
    )Total Stockholders Equity
    
    $
    10,139
    
    
    $
    8,940
  7




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##### Table of Contents



CNA FINANCIAL CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note A. Basis of Presentation
    Note B. Accounting Pronouncements
 Financial Accounting Standards Board (FASB) Staff Position Technical Bulletin No. 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors (FSP 85-4-1)
 Accounting for Purchases of Life Insurance
   8




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CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
    Values as of March 31, 2007
    
    
    
    
    
    Fair Value of Life
    
    
    Face Amount ofNumber of Life
    
    
    Settlement
    
    
    Life InsuranceSettlement
    
    
    Contracts
    
    
    PoliciesContracts
    
    
    (In millions)
    
    
    (In millions)Estimated maturity during:2007
    
    
    60
    
    
    $
    6
    
    
    $
    382008
    
    
    80
    
    
    
    8
    
    
    
    502009
    
    
    80
    
    
    
    8
    
    
    
    492010
    
    
    80
    
    
    
    8
    
    
    
    492011
    
    
    80
    
    
    
    9
    
    
    
    51Thereafter
    
    
    1,075
    
    
    
    69
    
    
    
    538Total
    
    
    1,455
    
    
    $
    108
    
    
    $
    775
  FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48)
  Statement of Accounting Financial Standard (SFAS) No. 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB Statements No. 133 and 140 (SFAS 155)
 Accounting for
Derivative Instruments and Hedging Activities Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets
 9




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CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  SFAS 133 Implementation Issue No. B40, Embedded Derivatives: Application ofParagraph 13(b)to
Securitized Interests in Prepayable Financial Assets (Issue B40)
  Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs
in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1)
 Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments
 10




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CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note C. Earnings Per Share
   Earnings Per ShareThree months ended March 31
    
    2007
    
    
    2006(In millions, except per share amounts)Income from continuing operations
    
    $
    294
    
    
    $
    235Less: undeclared preferred stock dividend through repurchase date
    
    
    
    
    
    
    (19
    )Income from continuing operations available to common stockholders
    
    $
    294
    
    
    $
    216Weighted average outstanding common stock and common stock
equivalents
    
    
    271.3
    
    
    
    256.0Effect of dilutive securities, employee stock options and
appreciation rights
    
    
    0.3
    
    
    
    Adjusted weighted average outstanding common stock and common
stock equivalents assuming conversions
    
    
    271.6
    
    
    
    256.0Basic and diluted earnings per share from continuing operations
available to common stockholders
    
    $
    1.08
    
    
    $
    0.84
  11




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CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note D. Investments
  Net Investment IncomeThree months ended March 31
    
    2007
    
    
    2006(In millions)Fixed maturity securities
    
    $
    496
    
    
    $
    415Short term investments
    
    
    50
    
    
    
    65Limited partnerships
    
    
    52
    
    
    
    74Equity securities
    
    
    5
    
    
    
    6Income from trading portfolio (a)
    
    
    3
    
    
    
    42Interest on funds withheld and other deposits
    
    
    (1
    )
    
    
    (25
    )Other
    
    
    11
    
    
    
    3Gross investment income
    
    
    616
    
    
    
    580Investment expense
    
    
    (8
    )
    
    
    (10
    )Net investment income
    
    $
    608
    
    
    $
    570
   Realized Investment Gains (Losses)Three months ended March 31
    
    2007
    
    
    2006(In millions)Fixed maturity securities:U.S. Government bonds
    
    $
    2
    
    
    $
    4Corporate and other taxable bonds
    
    
    25
    
    
    
    (20
    )Tax-exempt bonds
    
    
    (11
    )
    
    
    25Asset-backed bonds
    
    
    (33
    )
    
    
    (9
    )Total fixed maturity securities
    
    
    (17
    )
    
    
    Equity securities
    
    
    3
    
    
    
    3Derivative securities
    
    
    (8
    )
    
    
    7Short term investments
    
    
    
    
    
    
    (2
    )Other, net of participating policyholders interest
    
    
    1
    
    
    
    Realized investment gains (losses) before allocation to
participating policyholders and minority interests
    
    
    (21
    )
    
    
    8Allocated to participating policyholders and minority interests
    
    
    
    
    
    
    1Realized investment gains (losses)
    
    $
    (21
    )
    
    $
    9
   12




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CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Summary of Fixed Maturity and Equity SecuritiesCost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    FairMarch 31, 2007
    
    Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Value(In millions)Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations of
government agencies
    
    $
    4,531
    
    
    $
    106
    
    
    $
    1
    
    
    $
    1
    
    
    $
    4,635Asset-backed securities
    
    
    12,604
    
    
    
    33
    
    
    
    24
    
    
    
    129
    
    
    
    12,484States, municipalities and political
subdivisions  tax-exempt
    
    
    5,451
    
    
    
    221
    
    
    
    3
    
    
    
    4
    
    
    
    5,665Corporate securities
    
    
    6,708
    
    
    
    307
    
    
    
    3
    
    
    
    9
    
    
    
    7,003Other debt securities
    
    
    3,497
    
    
    
    209
    
    
    
    4
    
    
    
    3
    
    
    
    3,699Redeemable preferred stock
    
    
    994
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    1,033Total fixed maturity securities available-for-sale
    
    
    33,785
    
    
    
    915
    
    
    
    35
    
    
    
    146
    
    
    
    34,519Total fixed maturity securities trading
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Equity securities available-for-sale:Common stock
    
    
    217
    
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    461Preferred stock
    
    
    134
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    146Total equity securities available-for-sale
    
    
    351
    
    
    
    256
    
    
    
    
    
    
    
    
    
    
    
    607Total equity securities trading
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Total
    
    $
    34,402
    
    
    $
    1,171
    
    
    $
    35
    
    
    $
    146
    
    
    $
    35,392
 Summary of Fixed Maturity and Equity SecuritiesCost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    FairDecember 31, 2006
    
    Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Value(In millions)Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations of
government agencies
    
    $
    5,056
    
    
    $
    86
    
    
    $
    3
    
    
    $
    1
    
    
    $
    5,138Asset-backed securities
    
    
    13,821
    
    
    
    28
    
    
    
    20
    
    
    
    152
    
    
    
    13,677States, municipalities and political
subdivisions  tax-exempt
    
    
    4,915
    
    
    
    237
    
    
    
    1
    
    
    
    5
    
    
    
    5,146Corporate securities
    
    
    6,811
    
    
    
    338
    
    
    
    8
    
    
    
    9
    
    
    
    7,132Other debt securities
    
    
    3,443
    
    
    
    207
    
    
    
    7
    
    
    
    1
    
    
    
    3,642Redeemable preferred stock
    
    
    885
    
    
    
    28
    
    
    
    1
    
    
    
    
    
    
    
    912Total fixed maturity securities available-for-sale
    
    
    34,931
    
    
    
    924
    
    
    
    40
    
    
    
    168
    
    
    
    35,647Total fixed maturity securities trading
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204Equity securities available-for-sale:Common stock
    
    
    214
    
    
    
    239
    
    
    
    1
    
    
    
    
    
    
    
    452Preferred stock
    
    
    134
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    145Total equity securities available-for-sale
    
    
    348
    
    
    
    250
    
    
    
    1
    
    
    
    
    
    
    
    597Total equity securities trading
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60Total
    
    $
    35,543
    
    
    $
    1,174
    
    
    $
    41
    
    
    $
    168
    
    
    $
    36,508
 13




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Unrealized Loss AgingMarch 31, 2007
    
    
    December 31, 2006Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In millions)Fixed maturity securities:Investment grade:0-6 months
    
    $
    3,380
    
    
    $
    27
    
    
    $
    9,829
    
    
    $
    247-12 months
    
    
    459
    
    
    
    6
    
    
    
    1,267
    
    
    
    1213-24 months
    
    
    4,796
    
    
    
    92
    
    
    
    5,248
    
    
    
    127Greater than 24 months
    
    
    1,679
    
    
    
    54
    
    
    
    1,022
    
    
    
    41Total investment grade
    
    
    10,314
    
    
    
    179
    
    
    
    17,366
    
    
    
    204Non-investment grade:0-6 months
    
    
    143
    
    
    
    1
    
    
    
    509
    
    
    
    27-12 months
    
    
    30
    
    
    
    1
    
    
    
    87
    
    
    
    213-24 months
    
    
    7
    
    
    
    
    
    
    
    24
    
    
    
    Greater than 24 months
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Total non-investment grade
    
    
    182
    
    
    
    2
    
    
    
    622
    
    
    
    4Total fixed maturity securities
    
    
    10,496
    
    
    
    181
    
    
    
    17,988
    
    
    
    208Equity securities:0-6 months
    
    
    20
    
    
    
    
    
    
    
    10
    
    
    
    17-12 months
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    13-24 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Greater than 24 months
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Total equity securities
    
    
    23
    
    
    
    
    
    
    
    14
    
    
    
    1Total fixed maturity and equity securities
    
    $
    10,519
    
    
    $
    181
    
    
    $
    18,002
    
    
    $
    209
   14




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Asset-Backed Securities
  Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets
  Investment Commitments
   15




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note E. Derivative Financial Instruments
  Derivative Financial Instruments Recognized Gains (Losses)Three months ended March 31
    
    2007
    
    
    2006(In millions)General accountWithout hedge designationSwaps
    
    $
    (7
    )
    
    $
    6Futures sold, not yet purchased
    
    
    
    
    
    
    2Currency forwards
    
    
    (1
    )
    
    
    Commitments to purchase government and municipal securities
(TBAs)
    
    
    
    
    
    
    (1
    )Trading activitiesFutures purchased
    
    
    (5
    )
    
    
    29Currency forwards
    
    
    
    
    
    
    1Total
    
    $
    (13
    )
    
    $
    37
  Derivative Financial InstrumentsEstimatedContractual/
    
    
    Fair ValueMarch 31, 2007
    
    Notional
    
    
    Asset(In millions)
    
    Amount
    
    
    (Liability)General accountWithout hedge designationSwaps
    
    $
    5,161
    
    
    $
    (34
    )Currency forwards
    
    
    28
    
    
    
    (1
    )Equity warrants
    
    
    6
    
    
    
    2Options embedded in convertible debt securities
    
    
    9
    
    
    
    Trading activitiesFutures purchased
    
    
    678
    
    
    
    Futures sold, not yet purchased
    
    
    138
    
    
    
    Currency forwards
    
    
    27
    
    
    
    Total general account
    
    $
    6,047
    
    
    $
    (33
    )Separate accountsOptions written
    
    $
    8
    
    
    $
    Total separate accounts
    
    $
    8
    
    
    $
    
 16




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Derivative Financial InstrumentsEstimatedContractual/
    
    
    Fair ValueDecember 31, 2006
    
    Notional
    
    
    Asset(In millions)
    
    Amount
    
    
    (Liability)General accountWithout hedge designationSwaps
    
    $
    4,795
    
    
    $
    (30
    )Currency forwards
    
    
    8
    
    
    
    Equity warrants
    
    
    6
    
    
    
    2Options embedded in convertible debt securities
    
    
    9
    
    
    
    Trading activitiesFutures purchased
    
    
    722
    
    
    
    (3
    )Futures sold, not yet purchased
    
    
    79
    
    
    
    Currency forwards
    
    
    25
    
    
    
    Total general account
    
    $
    5,644
    
    
    $
    (31
    )Separate accountsOptions written
    
    $
    1
    
    
    $
    Total separate accounts
    
    $
    1
    
    
    $
    
  Note F. Income Taxes
        17




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Note G. Claim and Claim Adjustment Expense Reserves
     APMT Reserves
    18




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
   APMT ReservesMarch 31, 2007
    
    
    December 31, 2006Environmental
    
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    
    Pollution andAsbestos
    
    
    Mass Tort
    
    
    Asbestos
    
    
    Mass Tort(In millions)Gross reserves
    
    $
    2,503
    
    
    $
    629
    
    
    $
    2,635
    
    
    $
    647Ceded reserves
    
    
    (1,115
    )
    
    
    (220
    )
    
    
    (1,183
    )
    
    
    (231
    )Net reserves
    
    $
    1,388
    
    
    $
    409
    
    
    $
    1,452
    
    
    $
    416
 Asbestos
      19




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Continental Casualty Co. v. Employers Ins. of Wausau et
al.
 In re:
Burns & Roe Enterprises, Inc
 20




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Boson v. Union Carbide Corp.,
 Pennock, et al. v. Maryland Casualty,
et al.
  Environmental Pollution and Mass Tort
  21




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Net Prior Year Development
  Net Prior Year DevelopmentThree months ended March 31, 2007CorporateStandard
    
    
    Specialty
    
    
    and OtherLines
    
    
    Lines
    
    
    Non-Core
    
    
    Total(In millions)Pretax unfavorable (favorable) net prior year
claim and allocated claim adjustment expense
reserve development:Core (Non-APMT)
    
    $
    13
    
    
    $
    7
    
    
    $
    
    
    
    $
    20APMT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pretax unfavorable (favorable) net prior year
development before impact of premium development
    
    
    13
    
    
    
    7
    
    
    
    
    
    
    
    20Total unfavorable (favorable) premium development
    
    
    (27
    )
    
    
    (9
    )
    
    
    2
    
    
    
    (34
    )Total unfavorable (favorable) net prior year
development (pretax)
    
    $
    (14
    )
    
    $
    (2
    )
    
    $
    2
    
    
    $
    (14
    )
     22




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Net Prior Year DevelopmentThree months ended March 31, 2006CorporateStandard
    
    
    Specialty
    
    
    and OtherLines
    
    
    Lines
    
    
    Non-Core
    
    
    Total(In millions)Pretax unfavorable net prior year claim and allocated
claim adjustment expense reserve development:Core (Non-APMT)
    
    $
    59
    
    
    $
    5
    
    
    $
    6
    
    
    $
    70APMT
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Pretax unfavorable net prior year development before
impact of premium development
    
    
    59
    
    
    
    5
    
    
    
    7
    
    
    
    71Total unfavorable (favorable) premium development
    
    
    (49
    )
    
    
    (8
    )
    
    
    7
    
    
    
    (50
    )Total unfavorable (favorable) net prior year
development (pretax)
    
    $
    10
    
    
    $
    (3
    )
    
    $
    14
    
    
    $
    21
       23




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note H. Legal Proceedings and Contingent Liabilities
 Insurance Brokerage Antitrust Litigation
 In re Insurance Brokerage Antitrust Litigation, Civil No.
04-5184 (FSH)
  Global Crossing Limited Litigation
   IGI Contingency
   24




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
     New Jersey Wage and Hour Litigation
 W. Curtis Himmelman, individually and on behalf of all others similarly situated v. Continental
Casualty Company
  California Long Term Care Litigation
 Shaffer v. Continental Casualty Company, et al.
 25




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
   Asbestos, Environmental Pollution and Mass Tort (APMT) Reserves
  Other Litigation
  Note I. Benefit Plans
 Pension and Postretirement Healthcare and Life Insurance Benefit Plans
     Net Periodic Benefit CostsThree months ended March 31
    
    2007
    
    
    2006(In millions)Pension benefitsService cost
    
    $
    7
    
    
    $
    8Interest cost on projected benefit obligation
    
    
    38
    
    
    
    37Expected return on plan assets
    
    
    (43
    )
    
    
    (40
    )Prior service cost amortization
    
    
    
    
    
    
    1Actuarial loss
    
    
    4
    
    
    
    10Net periodic pension cost
    
    $
    6
    
    
    $
    16Postretirement benefitsService cost
    
    $
    1
    
    
    $
    1Interest cost on projected benefit obligation
    
    
    2
    
    
    
    3Prior service cost amortization
    
    
    (5
    )
    
    
    (7
    )Actuarial loss
    
    
    1
    
    
    
    1Net periodic postretirement benefit
    
    $
    (1
    )
    
    $
    (2
    )
 26




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Note J. Operating Leases, Other Commitments and Contingencies, and Guarantees
 Operating Leases
     Other Commitments and Contingencies
   Guarantees
   27




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
   Note K. Comprehensive Income (Loss)
  Comprehensive Income (Loss)Three months ended March 31
    
    2007
    
    
    2006(In millions)Net income
    
    $
    296
    
    
    $
    229Other comprehensive income (loss):Change in unrealized gains (losses) on general account investments:Holding gains (losses) arising during the period, net of tax
(expense) benefit of ($28) and $132
    
    
    52
    
    
    
    (244
    )Reclassification adjustment for (gains) losses included in net
income, net of tax expense (benefit) of $20 and $3
    
    
    (35
    )
    
    
    (7
    )Net change in unrealized gains (losses) on general account
investments, net of tax (expense) benefit of ($8) and $135
    
    
    17
    
    
    
    (251
    )Net change in unrealized gains on discontinued operations and
other, net of tax (expense) benefit of ($1) and $2
    
    
    1
    
    
    
    1Net change in foreign currency translation adjustment
    
    
    (7
    )
    
    
    3Net change related to pensions, net of tax (expense) benefit of
($1) and $0
    
    
    4
    
    
    
    (1
    )Allocation to participating policyholders and minority interests
    
    
    (1
    )
    
    
    9Other comprehensive income (loss), net of tax (expense) benefit of
($10) and $137
    
    
    14
    
    
    
    (239
    )Total comprehensive income (loss)
    
    $
    310
    
    
    $
    (10
    )
 28




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note L. Business Segments
       29




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 CorporateStandard
    
    
    Specialty
    
    
    Life and Group
    
    
    and OtherThree months ended
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalMarch 31, 2007(In millions)Net earned premiums
    
    $
    1,060
    
    
    $
    648
    
    
    $
    156
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    1,863Net investment income
    
    
    259
    
    
    
    110
    
    
    
    161
    
    
    
    78
    
    
    
    
    
    
    
    608Other revenues
    
    
    23
    
    
    
    41
    
    
    
    12
    
    
    
    2
    
    
    
    (11
    )
    
    
    67Total operating revenues
    
    
    1,342
    
    
    
    799
    
    
    
    329
    
    
    
    80
    
    
    
    (12
    )
    
    
    2,538Claims, benefits and expenses:Net incurred claims and benefits
    
    
    738
    
    
    
    398
    
    
    
    273
    
    
    
    34
    
    
    
    
    
    
    
    1,443Policyholders dividends
    
    
    5
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    5Amortization of deferred acquisition costs
    
    
    242
    
    
    
    134
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    381Other insurance related expenses
    
    
    66
    
    
    
    40
    
    
    
    51
    
    
    
    4
    
    
    
    (1
    )
    
    
    160Other expenses
    
    
    25
    
    
    
    38
    
    
    
    9
    
    
    
    31
    
    
    
    (11
    )
    
    
    92Total claims, benefits and expenses
    
    
    1,076
    
    
    
    611
    
    
    
    337
    
    
    
    69
    
    
    
    (12
    )
    
    
    2,081Operating income (loss) from continuing operations
before income tax and minority interest
    
    
    266
    
    
    
    188
    
    
    
    (8
    )
    
    
    11
    
    
    
    
    
    
    
    457Income tax (expense) benefit on operating income (loss)
    
    
    (86
    )
    
    
    (62
    )
    
    
    10
    
    
    
    (2
    )
    
    
    
    
    
    
    (140
    )Minority interest
    
    
    (2
    )
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Net operating income from continuing operations
    
    
    178
    
    
    
    118
    
    
    
    2
    
    
    
    9
    
    
    
    
    
    
    
    307Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    (28
    )
    
    
    (10
    )
    
    
    1
    
    
    
    16
    
    
    
    
    
    
    
    (21
    )Income tax (expense) benefit on realized investment gains
    
    
    10
    
    
    
    4
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    8Income from continuing operations
    
    $
    160
    
    
    $
    112
    
    
    $
    3
    
    
    $
    19
    
    
    $
    
    
    
    $
    294March 31, 2007(In millions)Reinsurance receivables
    
    $
    3,249
    
    
    $
    1,349
    
    
    $
    2,320
    
    
    $
    2,924
    
    
    $
    
    
    
    $
    9,842Insurance receivables
    
    $
    2,106
    
    
    $
    419
    
    
    $
    61
    
    
    $
    (51
    )
    
    $
    
    
    
    $
    2,535Insurance reserves:Claim and claim adjustment expense
    
    $
    14,936
    
    
    $
    5,714
    
    
    $
    3,085
    
    
    $
    5,775
    
    
    $
    
    
    
    $
    29,510Unearned premiums
    
    
    2,012
    
    
    
    1,630
    
    
    
    180
    
    
    
    2
    
    
    
    1
    
    
    
    3,825Future policy benefits
    
    
    
    
    
    
    
    
    
    
    6,755
    
    
    
    
    
    
    
    
    
    
    
    6,755Policyholders funds
    
    
    33
    
    
    
    
    
    
    
    944
    
    
    
    
    
    
    
    
    
    
    
    977Deferred acquisition costs
    
    $
    407
    
    
    $
    287
    
    
    $
    495
    
    
    $
    
    
    
    $
    
    
    
    $
    1,189
 30




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 CorporateStandard
    
    
    Specialty
    
    
    Life and Group
    
    
    And OtherThree months ended
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalMarch 31, 2006(In millions)Net earned premiums
    
    $
    1,086
    
    
    $
    628
    
    
    $
    163
    
    
    $
    (7
    )
    
    $
    (1
    )
    
    $
    1,869Net investment income
    
    
    228
    
    
    
    87
    
    
    
    187
    
    
    
    68
    
    
    
    
    
    
    
    570Other revenues
    
    
    20
    
    
    
    33
    
    
    
    12
    
    
    
    1
    
    
    
    (13
    )
    
    
    53Total operating revenues
    
    
    1,334
    
    
    
    748
    
    
    
    362
    
    
    
    62
    
    
    
    (14
    )
    
    
    2,492Claims, benefits and expenses:Net incurred claims and benefits
    
    
    780
    
    
    
    372
    
    
    
    306
    
    
    
    28
    
    
    
    1
    
    
    
    1,487Policyholders dividends
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Amortization of deferred acquisition costs
    
    
    238
    
    
    
    127
    
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    370Other insurance related expenses
    
    
    101
    
    
    
    37
    
    
    
    53
    
    
    
    17
    
    
    
    (2
    )
    
    
    206Other expenses
    
    
    19
    
    
    
    32
    
    
    
    13
    
    
    
    30
    
    
    
    (13
    )
    
    
    81Total claims, benefits and expenses
    
    
    1,142
    
    
    
    569
    
    
    
    376
    
    
    
    76
    
    
    
    (14
    )
    
    
    2,149Operating income (loss) from continuing operations
before income tax and minority interest
    
    
    192
    
    
    
    179
    
    
    
    (14
    )
    
    
    (14
    )
    
    
    
    
    
    
    343Income tax (expense) benefit on operating income (loss)
    
    
    (56
    )
    
    
    (59
    )
    
    
    11
    
    
    
    4
    
    
    
    
    
    
    
    (100
    )Minority interest
    
    
    (3
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Net operating income (loss) from continuing operations
    
    
    133
    
    
    
    114
    
    
    
    (3
    )
    
    
    (10
    )
    
    
    
    
    
    
    234Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    13
    
    
    
    3
    
    
    
    (12
    )
    
    
    5
    
    
    
    
    
    
    
    9Income tax (expense) benefit on realized investment
gains (losses)
    
    
    (4
    )
    
    
    (1
    )
    
    
    5
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Income (loss) from continuing operations
    
    $
    142
    
    
    $
    116
    
    
    $
    (10
    )
    
    $
    (13
    )
    
    $
    
    
    
    $
    235December 31, 2006(In millions)Reinsurance receivables
    
    $
    3,260
    
    
    $
    1,296
    
    
    $
    2,378
    
    
    $
    3,013
    
    
    $
    
    
    
    $
    9,947Insurance receivables
    
    $
    2,053
    
    
    $
    424
    
    
    $
    52
    
    
    $
    (53
    )
    
    $
    
    
    
    $
    2,476Insurance reserves:Claim and claim adjustment expense
    
    $
    14,934
    
    
    $
    5,529
    
    
    $
    3,134
    
    
    $
    6,039
    
    
    $
    
    
    
    $
    29,636Unearned premiums
    
    
    2,007
    
    
    
    1,599
    
    
    
    173
    
    
    
    5
    
    
    
    
    
    
    
    3,784Future policy benefits
    
    
    
    
    
    
    
    
    
    
    6,645
    
    
    
    
    
    
    
    
    
    
    
    6,645Policyholders funds
    
    
    35
    
    
    
    
    
    
    
    980
    
    
    
    
    
    
    
    
    
    
    
    1,015Deferred acquisition costs
    
    $
    407
    
    
    $
    283
    
    
    $
    500
    
    
    $
    
    
    
    $
    
    
    
    $
    1,190
 31




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Revenue by Line of BusinessThree months ended March 31
    
    2007
    
    
    2006(In millions)Standard LinesProperty
    
    $
    317
    
    
    $
    287Casualty
    
    
    818
    
    
    
    887CNA Global
    
    
    179
    
    
    
    173Standard Lines revenue
    
    
    1,314
    
    
    
    1,347Specialty LinesUS Specialty Lines
    
    
    608
    
    
    
    581Surety
    
    
    110
    
    
    
    102Warranty
    
    
    71
    
    
    
    68Specialty Lines revenue
    
    
    789
    
    
    
    751Life and Group Non-CoreLife & Annuity
    
    
    81
    
    
    
    108Health
    
    
    233
    
    
    
    224Other
    
    
    16
    
    
    
    18Life and Group Non-Core revenue
    
    
    330
    
    
    
    350Corporate and Other Non-CoreCNA Re
    
    
    47
    
    
    
    17Other
    
    
    49
    
    
    
    50Corporate and Other Non-Core revenue
    
    
    96
    
    
    
    67Eliminations
    
    
    (12
    )
    
    
    (14
    )Total revenue
    
    $
    2,517
    
    
    $
    2,501
 32




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note M. Discontinued Operations
   Discontinued OperationsThree months ended March 31
    
    2007
    
    
    2006(In millions)Revenues:Net investment income
    
    $
    5
    
    
    $
    4Realized investment losses and other
    
    
    (1
    )
    
    
    Total revenues
    
    
    4
    
    
    
    4Insurance related expenses
    
    
    1
    
    
    
    10Income (loss) before income taxes
    
    
    3
    
    
    
    (6
    )Income tax expense
    
    
    (1
    )
    
    
    Income (loss) from discontinued operations, net of tax
    
    $
    2
    
    
    $
    (6
    )
   Discontinued Operations(In millions)
    
    March 31, 2007
    
    
    December 31, 2006Assets:Investments
    
    $
    320
    
    
    $
    317Reinsurance receivables
    
    
    35
    
    
    
    33Cash
    
    
    23
    
    
    
    40Other assets
    
    
    7
    
    
    
    3Total assets
    
    
    385
    
    
    
    393Liabilities:Insurance reserves
    
    
    302
    
    
    
    308Other liabilities
    
    
    10
    
    
    
    17Total liabilities
    
    
    312
    
    
    
    325Net assets of discontinued operations
    
    $
    73
    
    
    $
    68
 33




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Reporting the Results of Operations  Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions
 34




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##### Table of Contents



CNA FINANCIAL CORPORATION
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
    35




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, Continued
 CONSOLIDATED OPERATIONS
 Results of Operations
  Three months ended March 31(In millions, except per share data)
    
    2007
    
    
    2006RevenuesNet earned premiums
    
    $
    1,863
    
    
    $
    1,869Net investment income
    
    
    608
    
    
    
    570Other revenues
    
    
    67
    
    
    
    53Total operating revenues
    
    
    2,538
    
    
    
    2,492Claims, Benefits and ExpensesNet incurred claims and benefits
    
    
    1,443
    
    
    
    1,487Policyholders dividends
    
    
    5
    
    
    
    5Amortization of deferred acquisition costs
    
    
    381
    
    
    
    370Other insurance related expenses
    
    
    160
    
    
    
    206Other expenses
    
    
    92
    
    
    
    81Total claims, benefits and expenses
    
    
    2,081
    
    
    
    2,149Operating income from continuing operations before income tax and minority interest
    
    
    457
    
    
    
    343Income tax expense on operating income
    
    
    (140
    )
    
    
    (100
    )Minority interest
    
    
    (10
    )
    
    
    (9
    )Net operating income from continuing operations
    
    
    307
    
    
    
    234Realized investment gains (losses), net of participating policyholders and minority interests
    
    
    (21
    )
    
    
    9Income tax (expense) benefit on realized investment gains (losses)
    
    
    8
    
    
    
    (8
    )Income from continuing operations
    
    
    294
    
    
    
    235Income (loss) from discontinued operations, net of income tax expense of $1 and $0
    
    
    2
    
    
    
    (6
    )Net income
    
    $
    296
    
    
    $
    229Basic and Diluted Earnings Per ShareIncome from continuing operations
    
    $
    1.08
    
    
    $
    0.84Income (loss) from discontinued operations
    
    
    0.01
    
    
    
    (0.02
    )Basic and diluted earnings per share available to common stockholders
    
    $
    1.09
    
    
    $
    0.82Weighted average outstanding common stock and common stock equivalentsBasic
    
    
    271.3
    
    
    
    256.0Diluted
    
    
    271.6
    
    
    
    256.0
 36




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, Continued
      Critical Accounting Estimates
    
    
    Insurance Reserves
    
    Reinsurance
    
    Valuation of Investments and Impairment of Securities
    
    Long Term Care Products
    
    Pension and Postretirement Benefit Obligations
    
    Legal Proceedings
  37




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, Continued
  SEGMENT RESULTS
  STANDARD LINES
  Results of Operations
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Net written premiums
    
    $
    1,081
    
    
    $
    1,110Net earned premiums
    
    
    1,060
    
    
    
    1,086Net investment income
    
    
    259
    
    
    
    228Net operating income
    
    
    178
    
    
    
    133Net realized investment gains (losses), after-tax
    
    
    (18
    )
    
    
    9Net income
    
    
    160
    
    
    
    142RatiosLoss and loss adjustment expense
    
    
    69.6
    %
    
    
    71.8
    %Expense
    
    
    29.1
    
    
    
    31.2Dividend
    
    
    0.4
    
    
    
    0.4Combined
    
    
    99.1
    %
    
    
    103.4
    %
     38




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
      Gross and Net Carried  Claim and Claim Adjustment Expense Reserves
 March 31, 2007
    
    
    December 31, 2006(In millions)Gross Case Reserves
    
    $
    6,729
    
    
    $
    6,746Gross IBNR Reserves
    
    
    8,207
    
    
    
    8,188Total Gross Carried Claim and Claim Adjustment Expense Reserves
    
    $
    14,936
    
    
    $
    14,934Net Case Reserves
    
    $
    5,199
    
    
    $
    5,234Net IBNR Reserves
    
    
    6,642
    
    
    
    6,632Total Net Carried Claim and Claim Adjustment Expense Reserves
    
    $
    11,841
    
    
    $
    11,866
 39




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 SPECIALTY LINES
  Results of Operations
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Net written premiums
    
    $
    650
    
    
    $
    648Net earned premiums
    
    
    648
    
    
    
    628Net investment income
    
    
    110
    
    
    
    87Net operating income
    
    
    118
    
    
    
    114Net realized investment gains (losses), after-tax
    
    
    (6
    )
    
    
    2Net income
    
    
    112
    
    
    
    116RatiosLoss and loss adjustment expense
    
    
    61.5
    %
    
    
    59.3
    %Expense
    
    
    26.8
    
    
    
    26.1Dividend
    
    
    0.2
    
    
    
    0.2Combined
    
    
    88.5
    %
    
    
    85.6
    %
         40




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Gross and Net Carried  Claim and Claim Adjustment Expense Reserves
 March 31, 2007
    
    
    December 31, 2006(In millions)Gross Case Reserves
    
    $
    1,689
    
    
    $
    1,715Gross IBNR Reserves
    
    
    4,025
    
    
    
    3,814Total Gross Carried Claim and Claim Adjustment Expense Reserves
    
    $
    5,714
    
    
    $
    5,529Net Case Reserves
    
    $
    1,352
    
    
    $
    1,350Net IBNR Reserves
    
    
    3,034
    
    
    
    2,921Total Net Carried Claim and Claim Adjustment Expense Reserves
    
    $
    4,386
    
    
    $
    4,271
 LIFE AND GROUP NON-CORE
  Results of Operations
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Net earned premiums
    
    $
    156
    
    
    $
    163Net investment income
    
    
    161
    
    
    
    187Net operating income (loss)
    
    
    2
    
    
    
    (3
    )Net realized investment gains (losses), after-tax
    
    
    1
    
    
    
    (7
    )Net income (loss)
    
    
    3
    
    
    
    (10
    )
   41




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 CORPORATE AND OTHER NON-CORE
  Results of Operations
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Net investment income
    
    $
    78
    
    
    $
    68Revenues
    
    
    84
    
    
    
    53Net operating income (loss)
    
    
    9
    
    
    
    (10
    )Net realized investment gains (losses), after-tax
    
    
    10
    
    
    
    (3
    )Net income (loss)
    
    
    19
    
    
    
    (13
    )
     Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
 March 31, 2007
    
    
    December 31, 2006(In millions)Gross Case Reserves
    
    $
    2,484
    
    
    $
    2,511Gross IBNR Reserves
    
    
    3,291
    
    
    
    3,528Total Gross Carried Claim and Claim Adjustment Expense Reserves
    
    $
    5,775
    
    
    $
    6,039Net Case Reserves
    
    $
    1,469
    
    
    $
    1,453Net IBNR Reserves
    
    
    1,864
    
    
    
    1,999Total Net Carried Claim and Claim Adjustment Expense Reserves
    
    $
    3,333
    
    
    $
    3,452
 42




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 APMT Reserves
       Asbestos
  43




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
          44




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Pending Asbestos Accounts and Associated Reserves
 March 31, 2007
 Net Paid Losses
    
    
    Net Asbestos
    
    
    Percent ofNumber of
    
    
    in 2007
    
    
    Reserves
    
    
    AsbestosPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    Net ReservesPolicyholders with settlement agreementsStructured Settlements
    
    
    16
    
    
    $
    15
    
    
    $
    172
    
    
    
    12
    %Wellington
    
    
    3
    
    
    
    
    
    
    
    14
    
    
    
    1Coverage in place
    
    
    37
    
    
    
    36
    
    
    
    79
    
    
    
    6Total with settlement agreements
    
    
    56
    
    
    
    51
    
    
    
    265
    
    
    
    19Other policyholders with active accountsLarge asbestos accounts
    
    
    223
    
    
    
    7
    
    
    
    257
    
    
    
    18Small asbestos accounts
    
    
    1,062
    
    
    
    3
    
    
    
    93
    
    
    
    7Total other policyholders
    
    
    1,285
    
    
    
    10
    
    
    
    350
    
    
    
    25Assumed reinsurance and pools
    
    
    
    
    
    
    3
    
    
    
    139
    
    
    
    10Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    634
    
    
    
    46Total
    
    
    1,341
    
    
    $
    64
    
    
    $
    1,388
    
    
    
    100
    %
 Pending Asbestos Accounts and Associated Reserves
 December 31, 2006
 Net Paid(Recovered) Losses
    
    
    Net Asbestos
    
    
    Percent ofNumber of
    
    
    in 2006
    
    
    Reserves
    
    
    AsbestosPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    Net ReservesPolicyholders with settlement agreementsStructured Settlements
    
    
    15
    
    
    $
    22
    
    
    $
    171
    
    
    
    12
    %Wellington
    
    
    3
    
    
    
    (1
    )
    
    
    14
    
    
    
    1Coverage in place
    
    
    38
    
    
    
    (18
    )
    
    
    132
    
    
    
    9Total with settlement agreements
    
    
    56
    
    
    
    3
    
    
    
    317
    
    
    
    22Other policyholders with active accountsLarge asbestos accounts
    
    
    220
    
    
    
    76
    
    
    
    254
    
    
    
    17Small asbestos accounts
    
    
    1,080
    
    
    
    17
    
    
    
    101
    
    
    
    7Total other policyholders
    
    
    1,300
    
    
    
    93
    
    
    
    355
    
    
    
    24Assumed reinsurance and pools
    
    
    
    
    
    
    6
    
    
    
    141
    
    
    
    10Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    639
    
    
    
    44Total
    
    
    1,356
    
    
    $
    102
    
    
    $
    1,452
    
    
    
    100
    %
  45




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS, Continued
    Environmental Pollution and Mass Tort
    46




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
        Pending Environmental Pollution Accounts and Associated Reserves
 March 31, 2007
 NetEnvironmental
    
    
    Percent ofNet Paid Losses
    
    
    Pollution
    
    
    EnvironmentalNumber of
    
    
    in 2007
    
    
    Reserves
    
    
    Pollution NetPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    ReservePolicyholders with Settlement AgreementsStructured settlements
    
    
    9
    
    
    $
    4
    
    
    $
    6
    
    
    
    2
    %Coverage in place
    
    
    18
    
    
    
    1
    
    
    
    14
    
    
    
    5Total with Settlement Agreements
    
    
    27
    
    
    
    5
    
    
    
    20
    
    
    
    7Other Policyholders with Active AccountsLarge pollution accounts
    
    
    111
    
    
    
    2
    
    
    
    52
    
    
    
    19Small pollution accounts
    
    
    325
    
    
    
    1
    
    
    
    46
    
    
    
    17Total Other Policyholders
    
    
    436
    
    
    
    3
    
    
    
    98
    
    
    
    36Assumed Reinsurance & Pools
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    11Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    46Total
    
    
    463
    
    
    $
    8
    
    
    $
    277
    
    
    
    100
    %
 47




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Pending Environmental Pollution Accounts and Associated Reserves
 December 31, 2006
 NetEnvironmental
    
    
    Percent ofNet Paid Losses
    
    
    Pollution
    
    
    EnvironmentalNumber of
    
    
    in 2006
    
    
    Reserves
    
    
    Pollution NetPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    ReservePolicyholders with Settlement AgreementsStructured settlements
    
    
    11
    
    
    $
    16
    
    
    $
    9
    
    
    
    3
    %Coverage in place
    
    
    18
    
    
    
    5
    
    
    
    14
    
    
    
    5Total with Settlement Agreements
    
    
    29
    
    
    
    21
    
    
    
    23
    
    
    
    8Other Policyholders with Active AccountsLarge pollution accounts
    
    
    115
    
    
    
    20
    
    
    
    58
    
    
    
    20Small pollution accounts
    
    
    346
    
    
    
    9
    
    
    
    46
    
    
    
    17Total Other Policyholders
    
    
    461
    
    
    
    29
    
    
    
    104
    
    
    
    37Assumed Reinsurance & Pools
    
    
    
    
    
    
    1
    
    
    
    32
    
    
    
    11Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    44Total
    
    
    490
    
    
    $
    51
    
    
    $
    285
    
    
    
    100
    %
 INVESTMENTS
 Net Investment Income
  Net Investment Income
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Fixed maturity securities
    
    $
    496
    
    
    $
    415Short term investments
    
    
    50
    
    
    
    65Limited partnerships
    
    
    52
    
    
    
    74Equity securities
    
    
    5
    
    
    
    6Income from trading portfolio (a)
    
    
    3
    
    
    
    42Interest on funds withheld and other deposits
    
    
    (1
    )
    
    
    (25
    )Other
    
    
    11
    
    
    
    3Gross investment income
    
    
    616
    
    
    
    580Investment expense
    
    
    (8
    )
    
    
    (10
    )Net investment income
    
    $
    608
    
    
    $
    570
   48




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   Net Realized Investment Gains (Losses)
  Net Realized Investment Gains (Losses)
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Fixed maturity securities:U.S. Government bonds
    
    $
    2
    
    
    $
    4Corporate and other taxable bonds
    
    
    25
    
    
    
    (20
    )Tax-exempt bonds
    
    
    (11
    )
    
    
    25Asset-backed bonds
    
    
    (33
    )
    
    
    (9
    )Total fixed maturity securities
    
    
    (17
    )
    
    
    Equity securities
    
    
    3
    
    
    
    3Derivative securities
    
    
    (8
    )
    
    
    7Short term investments
    
    
    
    
    
    
    (2
    )Other, net of participating policyholders interest
    
    
    1
    
    
    
    Realized investment gains (losses) before allocation to participating policyholders and minority
interests
    
    
    (21
    )
    
    
    8Allocated to participating policyholders and minority interest
    
    
    
    
    
    
    1Income tax (expense) benefit
    
    
    8
    
    
    
    (8
    )Net realized investment gains (losses), net of participating policyholders and minority interests
    
    $
    (13
    )
    
    $
    1
     49




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 â
    Realized Gains and Losses
 Three months ended March 31
    
    2007
    
    
    2006(In millions)Net realized gains (losses) on fixed maturity securities and equity securities:Fixed maturity securities:Gross realized gains
    
    $
    98
    
    
    $
    77Gross realized losses
    
    
    (115
    )
    
    
    (77
    )Net realized losses on fixed maturity securities
    
    
    (17
    )
    
    
    Equity securities:Gross realized gains
    
    
    7
    
    
    
    4Gross realized losses
    
    
    (4
    )
    
    
    (1
    )Net realized gains on equity securities
    
    
    3
    
    
    
    3Net realized gains (losses) on fixed maturity and equity securities
    
    $
    (14
    )
    
    $
    3
 50




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Largest Realized Losses from Securities Sold at a Loss
 Three months ended March 31, 2007
    
    Fair
    
    
    
    
    
    
    Months inValue at
    
    
    
    
    
    
    UnrealizedDate of
    
    
    Loss
    
    
    Loss PriorIssuer Description and Discussion
    
    Sale
    
    
    On Sale
    
    
    To Sale (a)(In millions)Various notes and bonds issued
by the United States Treasury.
Securities sold due to
inflationary outlook and asset
class reallocation.
    
    $
    3,590
    
    
    $
    18
    
    
    
    0-6Total
    
    $
    3,590
    
    
    $
    18
 
  51




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Valuation and Impairment of Investments
  Carrying Value of Investments
 March 31,
    
    
    
    
    
    
    December 31,2007
    
    
    %
    
    
    2006
    
    
    %(In millions)General account investments:Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations of government
agencies
    
    $
    4,635
    
    
    
    10
    %
    
    $
    5,138
    
    
    
    12
    %Asset-backed securities
    
    
    12,484
    
    
    
    28
    
    
    
    13,677
    
    
    
    31States, municipalities and political subdivisions  tax-exempt
    
    
    5,665
    
    
    
    13
    
    
    
    5,146
    
    
    
    12Corporate securities
    
    
    7,003
    
    
    
    16
    
    
    
    7,132
    
    
    
    16Other debt securities
    
    
    3,699
    
    
    
    8
    
    
    
    3,642
    
    
    
    8Redeemable preferred stock
    
    
    1,033
    
    
    
    2
    
    
    
    912
    
    
    
    2Total fixed maturity securities available-for-sale
    
    
    34,519
    
    
    
    77
    
    
    
    35,647
    
    
    
    81Fixed maturity securities trading:U.S. Treasury securities and obligations of government
agencies
    
    
    3
    
    
    
    
    
    
    
    2
    
    
    
    Asset-backed securities
    
    
    57
    
    
    
    
    
    
    
    55
    
    
    
    Corporate securities
    
    
    120
    
    
    
    
    
    
    
    133
    
    
    
    1Other debt securities
    
    
    19
    
    
    
    
    
    
    
    14
    
    
    
    Redeemable preferred stock
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities trading
    
    
    200
    
    
    
    
    
    
    
    204
    
    
    
    1Equity securities available-for-sale:Common stock
    
    
    461
    
    
    
    1
    
    
    
    452
    
    
    
    1Preferred stock
    
    
    146
    
    
    
    1
    
    
    
    145
    
    
    
    Total equity securities available-for-sale
    
    
    607
    
    
    
    2
    
    
    
    597
    
    
    
    1Total equity securities trading
    
    
    66
    
    
    
    
    
    
    
    60
    
    
    
    Short term investments available-for-sale
    
    
    7,671
    
    
    
    17
    
    
    
    5,538
    
    
    
    13Short term investments trading
    
    
    175
    
    
    
    
    
    
    
    172
    
    
    
    Limited partnerships
    
    
    1,940
    
    
    
    4
    
    
    
    1,852
    
    
    
    4Other investments
    
    
    25
    
    
    
    
    
    
    
    26
    
    
    
    Total general account investments
    
    $
    45,203
    
    
    
    100
    %
    
    $
    44,096
    
    
    
    100
    %
    52




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   Percent of
    
    
    Percent ofMarket
    
    
    UnrealizedValue
    
    
    LossDue in one year or less
    
    
    12
    %
    
    
    4
    %Due after one year through five years
    
    
    43
    
    
    
    41Due after five years through ten years
    
    
    24
    
    
    
    28Due after ten years
    
    
    21
    
    
    
    27Total
    
    
    100
    %
    
    
    100
    %
  Unrealized Loss Aging for Non-investment Grade Securities
 Fair Value as a Percentage of Amortized Cost
    
    
    GrossEstimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedMarch 31, 2007
    
    Fair Value
    
    
    90-99%
    
    
    80-89%
    
    
    70-79%
    
    
    <70%
    
    
    Loss(In millions)Fixed maturity securities:Non-investment grade:0-6 months
    
    $
    143
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17-12 months
    
    
    30
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113-24 months
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Greater than 24 months
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    $
    182
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2
 Unrealized Loss Aging for Non-investment Grade Securities
 Fair Value as a Percentage of Amortized Cost
    
    
    GrossEstimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedDecember 31, 2006
    
    Fair Value
    
    
    90-99%
    
    
    80-89%
    
    
    70-79%
    
    
    <70%
    
    
    Loss(In millions)Fixed maturity securities:Non-investment grade:0-6 months
    
    $
    509
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    27-12 months
    
    
    87
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    213-24 months
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Greater than 24 months
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    $
    622
    
    
    $
    3
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    4
 53




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
    General Account Bond Ratings
 March 31,
    
    
    
    
    
    
    December 31,2007
    
    
    %
    
    
    2006
    
    
    %(In millions)U.S. Government and affiliated agency securities
    
    $
    4,765
    
    
    
    14
    %
    
    $
    5,285
    
    
    
    15
    %Other AAA rated
    
    
    15,386
    
    
    
    46
    
    
    
    16,311
    
    
    
    47AA and A rated
    
    
    5,364
    
    
    
    16
    
    
    
    5,222
    
    
    
    15BBB rated
    
    
    4,866
    
    
    
    14
    
    
    
    4,933
    
    
    
    14Non investment-grade
    
    
    3,304
    
    
    
    10
    
    
    
    3,188
    
    
    
    9Total
    
    $
    33,685
    
    
    
    100
    %
    
    $
    34,939
    
    
    
    100
    %
     54




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Short term Investments
 March 31,
    
    
    December 31,2007
    
    
    2006(In millions)Short term investments available-for-sale:Commercial paper
    
    $
    2,532
    
    
    $
    923U.S. Treasury securities
    
    
    1,056
    
    
    
    1,093Money market funds
    
    
    413
    
    
    
    196Other, including collateral held related to securities lending
    
    
    3,670
    
    
    
    3,326Total short term investments available-for-sale
    
    
    7,671
    
    
    
    5,538Short term investments trading:Commercial paper
    
    
    41
    
    
    
    43U.S. Treasury securities
    
    
    1
    
    
    
    2Money market funds
    
    
    133
    
    
    
    127Total short term investments trading
    
    
    175
    
    
    
    172Total short term investments
    
    $
    7,846
    
    
    $
    5,710
  LIQUIDITY AND CAPITAL RESOURCES
 Cash Flow
        55




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Dividends
  Regulatory Matters
    Accounting Pronouncements
 Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurement (SFAS
157)
  56




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
159)
  Disclosures about Fair Value of Financial Instruments
 FORWARD-LOOKING STATEMENTS
  
    
    general economic and business conditions, including inflationary pressures on
medical care costs, construction costs and other economic sectors that increase the severity
of claims;
    
    changes in financial markets such as fluctuations in interest rates, long term
periods of low interest rates, credit conditions and currency, commodity and stock prices;
    
    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;
    
    regulatory initiatives and compliance with governmental regulations, judicial
decisions, including interpretation of policy provisions, decisions regarding coverage and
theories of liability, trends in litigation and the outcome of any litigation involving us,
and rulings and changes in tax laws and regulations;
    
    effects upon insurance markets and upon industry business practices and
relationships of current litigation, investigations and regulatory activity by the New York
State Attorney Generals office and other authorities concerning contingent commission
arrangements with brokers and bid solicitation activities;
    
    legal and regulatory activities with respect to certain non-traditional and
finite-risk insurance products, and possible resulting changes in accounting and financial
reporting in relation to such products, including our restatement of financial results in May
of 2005 and our relationship with an affiliate, Accord Re Ltd., as disclosed in connection
with that restatement;
 57




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 
    
    regulatory limitations, impositions and restrictions upon us, including the
effects of assessments and other surcharges for guaranty funds and second-injury funds and
other mandatory pooling arrangements;
    
    the impact of competitive products, policies and pricing and the competitive
environment in which we operate, including changes in our book of business;
    
    product and policy availability and demand and market responses, including the
level of ability to obtain rate increases and decline or non-renew under priced accounts, to
achieve premium targets and profitability and to realize growth and retention estimates;
    
    development of claims and the impact on loss reserves, including changes in claim
settlement policies;
    
    the effectiveness of current initiatives by claims management to reduce loss and
expense ratios through more efficacious claims handling techniques;
    
    the performance of reinsurance companies under reinsurance contracts with us;
    
    results of financing efforts, including the availability of bank credit facilities;
    
    changes in our composition of operating segments;
    
    weather and other natural physical events, including the severity and frequency of
storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and
earthquakes, as well as climate change, including effects on weather patterns, greenhouse
gases, sea, land and air temperatures, sea levels, rain and snow;
    
    man-made disasters, including the possible occurrence of terrorist attacks and the
effect of the absence or insufficiency of applicable terrorism legislation on coverages;
    
    the unpredictability of the nature, targets, severity or frequency of potential
terrorist events, as well as the uncertainty as to our ability to contain our terrorism
exposure effectively, notwithstanding the extension through December 31, 2007 of the Terrorism
Risk Insurance Act of 2002;
    
    the occurrence of epidemics;
    
    exposure to liabilities due to claims made by insureds and others relating to
asbestos remediation and health-based asbestos impairments, as well as exposure to liabilities
for environmental pollution, mass tort, construction defect claims and exposure to liabilities
due to claims made by insureds and others relating to lead-based paint;
    
    whether a national privately financed trust to replace litigation of asbestos
claims with payments to claimants from the trust will be established or approved through
federal legislation, or, if established and approved, whether it will contain funding
requirements in excess of our established loss reserves or carried loss reserves;
    
    the sufficiency of our loss reserves and the possibility of future increases in
reserves;
    
    regulatory limitations and restrictions, including limitations upon our ability to
receive dividends from our insurance subsidiaries imposed by state regulatory agencies and
minimum risk-based capital standards established by the National Association of Insurance
Commissioners;
    
    the risks and uncertainties associated with our loss reserves as outlined in the
Critical Accounting Estimates and the Reserves  Estimates and Uncertainties sections of our
Annual Report on Form 10-K for the period ended December 31, 2006;
    
    the level of success in integrating acquired businesses and operations, and in
consolidating, or selling existing ones;
    
    the possibility of changes in our 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.
  58




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CNA FINANCIAL CORPORATION
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  59




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CNA FINANCIAL CORPORATION
 
 ITEM 4. CONTROLS AND PROCEDURES
    60




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CNA FINANCIAL CORPORATION
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 
 Item 6. Exhibits
  Description of Exhibit
    
    Exhibit Number2007 Incentive Compensation Awards to Executive Officers
    
    
    10.23Certification of Chief Executive Officer
    
    
    31.1Certification of Chief Financial Officer
    
    
    31.2Written Statement of the Chief Executive Officer of CNA Financial Corporation Pursuant
to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
    
    
    32.1Written Statement of the Chief Financial Officer of CNA Financial Corporation Pursuant
to 18 U.S.C. Section 1350 (As adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
    
    
    32.2
 61




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##### Table of Contents



CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION
 
 SIGNATURES
  CNA Financial CorporationDated: April 27, 2007
    
    By
    
    /s/ D. Craig Mense

D. Craig MenseExecutive Vice President andChief Financial Officer