##### Table of Contents



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 March 31, 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
    
    36-6169860(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)CNA CenterChicago, Illinois
    
    60685(Address of principal executive offices)
    
    (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 the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. Class
    
    Outstanding at May 2, 2005Common Stock, Par value $2.50
    
    
    255,953,958




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Item
    
    
    
    PageNumber
    
    
    
    NumberPART I. Financial Information1.
    
    Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets at March 31, 2005and at December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for theThree Months Ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for theThree Months Ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    62.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
    
    
    443.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    914.
    
    Controls and Procedures
    
    
    95PART II. Other Information1.
    
    Legal Proceedings
    
    
    966.
    
    Exhibits
    
    
    96Signatures
    
    
    97Certifications
    
    
    98Exhibit 10.21Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



CNA FINANCIAL CORPORATION 
 PART 1. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 March 31,
    
    
    December 31,2005
    
    
    2004Restated(In millions, except share data)
    
    
    
    
    
    See Note QAssetsInvestments:Fixed maturity securities at fair value (amortized cost of $29,501 and $30,266)
    
    $
    30,114
    
    
    $
    31,327Equity securities at fair value (cost of $245 and $320)
    
    
    368
    
    
    
    456Limited partnership investments
    
    
    1,633
    
    
    
    1,549Other invested assets
    
    
    43
    
    
    
    36Short-term investments at cost, which approximates fair value
    
    
    7,525
    
    
    
    5,863Total investments
    
    
    39,683
    
    
    
    39,231Cash
    
    
    93
    
    
    
    95Reinsurance receivables (less allowance for uncollectible receivables of $517 and $531)
    
    
    15,070
    
    
    
    15,357Insurance receivables (less allowance for doubtful accounts of $504 and $517)
    
    
    2,028
    
    
    
    2,050Accrued investment income
    
    
    309
    
    
    
    297Receivables for securities sold
    
    
    780
    
    
    
    496Deferred acquisition costs
    
    
    1,254
    
    
    
    1,268Prepaid reinsurance premiums
    
    
    1,019
    
    
    
    1,128Federal income taxes recoverable (includes $35 and $7 due from Loews Corporation)
    
    
    23
    
    
    
    Deferred income taxes
    
    
    858
    
    
    
    709Property and equipment at cost (less accumulated depreciation of $527 and $524)
    
    
    230
    
    
    
    235Goodwill and other intangible assets
    
    
    145
    
    
    
    162Other assets
    
    
    948
    
    
    
    815Separate account business
    
    
    558
    
    
    
    568Total assets
    
    $
    62,998
    
    
    $
    62,411Liabilities and Stockholders EquityLiabilities:Insurance reserves:Claim and claim adjustment expense
    
    $
    31,113
    
    
    $
    31,523Unearned premiums
    
    
    4,447
    
    
    
    4,522Future policy benefits
    
    
    5,978
    
    
    
    5,883Policyholders funds
    
    
    1,648
    
    
    
    1,725Collateral on loaned securities and derivatives
    
    
    1,111
    
    
    
    918Payables for securities purchased
    
    
    1,095
    
    
    
    288Participating policyholders funds
    
    
    60
    
    
    
    63Short term debt
    
    
    575
    
    
    
    531Long term debt
    
    
    1,669
    
    
    
    1,726Reinsurance balances payable
    
    
    2,968
    
    
    
    2,980Other liabilities
    
    
    2,445
    
    
    
    2,231Separate account business
    
    
    558
    
    
    
    568Total liabilities
    
    
    53,667
    
    
    
    52,958Commitments and contingencies (Notes F, G, I and K)Minority interest
    
    
    277
    
    
    
    275Stockholders 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
    
    
    
    750Common stock ($2.50 par value; 500,000,000 shares authorized; 258,177,285 shares issued; and
255,953,958 shares outstanding)
    
    
    645
    
    
    
    645Additional paid-in capital
    
    
    1,701
    
    
    
    1,701Retained earnings
    
    
    5,750
    
    
    
    5,572Accumulated other comprehensive income
    
    
    346
    
    
    
    650Treasury stock (2,223,327 shares), at cost
    
    
    (69
    )
    
    
    (69
    )9,123
    
    
    
    9,249Notes receivable for the issuance of common stock
    
    
    (69
    )
    
    
    (71
    )Total stockholders equity
    
    
    9,054
    
    
    
    9,178Total liabilities and stockholders equity
    
    $
    62,998
    
    
    $
    62,411
 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited). 3




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CNA FINANCIAL CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three months ended March 31
    
    2005
    
    
    2004(In millions, except per share data)
    
    
    
    
    
    RestatedSee Note QRevenuesNet earned premiums
    
    $
    1,899
    
    
    $
    2,168Net investment income
    
    
    406
    
    
    
    475Realized investment losses, net of participating
policyholders and minority interests
    
    
    (19
    )
    
    
    (458
    )Other revenues
    
    
    78
    
    
    
    82Total revenues
    
    
    2,364
    
    
    
    2,267Claims, Benefits and ExpensesInsurance claims and policyholders benefits
    
    
    1,434
    
    
    
    1,638Amortization of deferred acquisition costs
    
    
    378
    
    
    
    433Other operating expenses
    
    
    274
    
    
    
    332Interest
    
    
    37
    
    
    
    35Total claims, benefits and expenses
    
    
    2,123
    
    
    
    2,438Income (loss) before income tax and minority interest
    
    
    241
    
    
    
    (171
    )Income tax (expense) benefit
    
    
    (56
    )
    
    
    53Minority interest
    
    
    (7
    )
    
    
    (6
    )Net income (loss)
    
    $
    178
    
    
    $
    (124
    )Basic and Diluted Earnings (Loss) Per ShareBasic and diluted earnings (loss) per share
available to common stockholders
    
    $
    0.63
    
    
    $
    (0.55
    )Weighted average outstanding common stock and common
stock equivalents
    
    
    256.0
    
    
    
    255.9
 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited). 4




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CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) Three months ended March 31
    
    2005
    
    
    2004(In millions)
    
    
    
    
    
    RestatedSee Note QCash Flows from Operating ActivitiesNet income (loss)
    
    $
    178
    
    
    $
    (124
    )Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:Change in bad debt provision for insurance and reinsurance receivables
    
    
    (7
    )
    
    
    42Minority interest
    
    
    7
    
    
    
    5Loss on disposal of property and equipment
    
    
    7
    
    
    
    6Deferred income tax provision
    
    
    12
    
    
    
    (77
    )Realized investment losses, net of participating policyholders and minority interests
    
    
    19
    
    
    
    458Equity method income
    
    
    (80
    )
    
    
    (75
    )Amortization of bond (discount) premium
    
    
    (22
    )
    
    
    1Depreciation
    
    
    14
    
    
    
    19Changes in:Receivables, net
    
    
    316
    
    
    
    188Deferred acquisition costs
    
    
    14
    
    
    
    10Accrued investment income
    
    
    (12
    )
    
    
    (30
    )Federal income taxes payable/recoverable
    
    
    (23
    )
    
    
    108Prepaid reinsurance premiums
    
    
    109
    
    
    
    26Reinsurance balances payable
    
    
    (13
    )
    
    
    (73
    )Insurance reserves
    
    
    (467
    )
    
    
    (288
    )Other, net
    
    
    36
    
    
    
    (156
    )Net purchases of trading securities
    
    
    36
    
    
    
    (3
    )Total adjustments
    
    
    (54
    )
    
    
    161Net cash flows provided by operating activities
    
    
    124
    
    
    
    37Cash Flows from Investing ActivitiesPurchases of fixed maturity securities
    
    
    (12,314
    )
    
    
    (14,475
    )Proceeds from fixed maturity securities:Sales
    
    
    12,554
    
    
    
    10,867Maturities, calls and redemptions
    
    
    991
    
    
    
    1,443Purchases of equity securities
    
    
    (22
    )
    
    
    (30
    )Proceeds from sales of equity securities
    
    
    101
    
    
    
    36Change in short-term investments
    
    
    (1,628
    )
    
    
    1,820Change in collateral on loaned securities and derivatives
    
    
    193
    
    
    
    (71
    )Change in other investments
    
    
    (5
    )
    
    
    7Purchases of property and equipment
    
    
    (16
    )
    
    
    (11
    )Dispositions
    
    
    12
    
    
    
    Other, net
    
    
    19
    
    
    
    (27
    )Net cash flows used by investing activities
    
    
    (115
    )
    
    
    (441
    )Cash Flows from Financing ActivitiesPrincipal payments on debt
    
    
    (14
    )
    
    
    (6
    )Proceeds from issuance of surplus notes
    
    
    
    
    
    
    346Returns and deposits of policyholder account balances on investment contracts
    
    
    
    
    
    
    6Other
    
    
    3
    
    
    
    Net cash flows provided (used) by financing activities
    
    
    (11
    )
    
    
    346Net change in cash
    
    
    (2
    )
    
    
    (58
    )Cash, beginning of period
    
    
    95
    
    
    
    139Cash, end of period
    
    $
    93
    
    
    $
    81Supplemental Disclosures of Cash Flow Information:Cash paid (received):Interest
    
    $
    14
    
    
    $
    16Federal income taxes
    
    
    64
    
    
    
    (79
    )Non-cash transactions:Notes receivable for the issuance of common stock
    
    
    
    
    
    
    
 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited). 5




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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 March 31, 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 are included
in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2004.
See Note N 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 March 31, 2005 and for the three months ended March 31, 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. In the second quarter of 2004, the expenses incurred related to uncollectible reinsurance
receivables were reclassified from Other operating expenses to Insurance claims and
policyholders benefits on the Condensed Consolidated Statements of Operations. Prior period
amounts have been reclassified to conform to the current year presentation. This reclassification
had no impact on net income (loss) in any period. 6




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Note B. Accounting Pronouncements In October of 2004, the Financial Accounting Standards Board (FASB)issued FASB Staff
Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 (AJCA). AJCA introduces a special one-time
dividends received deduction of 85% for the repatriation of certain foreign earnings. A number of
companies are requesting that Congress or the Treasury Department provide additional clarifying
language on key elements of the repatriation provision. The Company and its eligible subsidiaries
(CNA Tax Group) are included in the consolidated Federal income tax return of Loews and its
eligible subsidiaries. Should Loews, upon consideration of any such potential clarifying language,
ultimately elect to apply the repatriation provision of the AJCA, the CNA Tax Group does not expect
that the impact of such an election would be material to its results of operations or equity. 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 per share is computed by dividing 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 months ended March
31, 2005 and 255.9 million for the three months ended March 31, 2004. Included in the outstanding
shares in 2004 is the effect of the 32.3 million shares of CNAF common stock issued on April 20,
2004 in conjunction with the conversion of the $750 million Series I Convertible Preferred Stock
issued during the fourth quarter of 2003. 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 March 31, 2005,
the Company had $144 million of undeclared but accumulated dividends. The Series H Issue dividend
amounts for the three months ended March 31, 2005 and 2004 have been subtracted from Net Income
(Loss) to determine 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. For the three
months ended March 31, 2005 and 2004, approximately one million shares attributable to the exercise
of outstanding options were excluded from the calculation of diluted earnings (loss) per share
because the exercise price of these options was greater than the average market price of CNA common
stock. The computation of earnings (loss) per share was as follows. Earnings (Loss) Per ShareFor the three months ended March 31
    
    2005
    
    
    2004(In millions, except per share amounts)Net income (loss)
    
    $
    178
    
    
    $
    (124
    )Less: undeclared preferred stock dividend
    
    
    (17
    )
    
    
    (16
    )Net income (loss) available to common stockholders
    
    $
    161
    
    
    $
    (140
    )Weighted average outstanding common stock and common
stock equivalents
    
    
    256.0
    
    
    
    255.9Effect of dilutive securities, employee stock options
    
    
    
    
    
    
    Adjusted weighted average outstanding common stock
and common stock equivalents assuming conversions
    
    
    256.0
    
    
    
    255.9Basic and diluted earnings (loss) per share
available to common stockholders
    
    $
    0.63
    
    
    $
    (0.55
    )
 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 7




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) recognized, as the exercise price of the granted options equaled the market price of the underlying
stock at the grant date. 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 Net Income (Loss) and Earnings (Loss) Per ShareFor the three months ended March 31
    
    2005
    
    
    2004(In millions, except per share amounts)Net income (loss) available to common stockholders
    
    $
    161
    
    
    $
    (140
    )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
    
    $
    160
    
    
    $
    (141
    )Basic and diluted earnings (loss) per share, as reported
    
    $
    0.63
    
    
    $
    (0.55
    )Basic and diluted earnings (loss) per share, pro forma
    
    $
    0.63
    
    
    $
    (0.55
    )
 8




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##### Table of Contents



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 IncomeThree months ended March 31
    
    2005
    
    
    2004(In millions)Fixed maturity securities
    
    $
    364
    
    
    $
    407Short term investments
    
    
    32
    
    
    
    16Limited partnerships
    
    
    79
    
    
    
    75Equity securities
    
    
    4
    
    
    
    4Income (loss) from trading portfolio (a)
    
    
    (30
    )
    
    
    20Interest on funds withheld and other deposits
    
    
    (39
    )
    
    
    (48
    )Other
    
    
    7
    
    
    
    10Gross investment income
    
    
    417
    
    
    
    484Investment expense
    
    
    (11
    )
    
    
    (9
    )Net investment income
    
    $
    406
    
    
    $
    475
 (a) The change in net unrealized gains (losses) on trading securities, included in net
investment income, was $(8) million and $4 million for the three months ended March 31, 2005 and
2004. The components of realized investment results for available-for-sale securities are presented
in the following table. Realized Investment Gains (Losses)Three months ended March 31
    
    2005
    
    
    2004(In millions)Realized investment gains (losses):Fixed maturity securities:U.S. Government bonds
    
    $
    (26
    )
    
    $
    10Corporate and other taxable bonds
    
    
    (21
    )
    
    
    6Tax-exempt bonds
    
    
    7
    
    
    
    73Asset-backed bonds
    
    
    7
    
    
    
    39Redeemable preferred stock
    
    
    10
    
    
    
    1Total fixed maturity securities
    
    
    (23
    )
    
    
    129Equity securities
    
    
    14
    
    
    
    11Derivative securities
    
    
    4
    
    
    
    (32
    )Impairment loss on Individual Life business, net of
participating policyholders interest
    
    
    
    
    
    
    (569
    )Other, including disposition of businesses
    
    
    (17
    )
    
    
    4Net realized investment gains (losses) before allocation to
participating policyholders and minority interests
    
    
    (22
    )
    
    
    (457
    )Allocated to participating policyholders and minority interests
    
    
    3
    
    
    
    (1
    )Realized investment gains (losses)
    
    $
    (19
    )
    
    $
    (458
    )
 Realized investment losses
were $19 million and $458 million for the three months ended March 31, 2005
and 2004. The $439 million improvement in realized results is largely related to an impairment
loss recorded in the first quarter of 2004 of $569 million related to the sale of CNAs individual
life business. This improvement was partly offset by decreased results in the fixed maturity
securities portfolio and $32 million of total impairment losses recorded across various market
sectors, including an impairment loss of $13 million related to loans made under a credit facility
to a national contractor. See Note O for further details. For 2004, there were no impairments
other than the individual life sale loss discussed above. 9




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Investments in the general account had a total net unrealized gain of $736 million at March 31,
2005 compared with $1,197 million at December 31, 2004. The net unrealized position at March 31,
2005 was composed of a net unrealized gain of $613 million for fixed maturities and a net
unrealized gain of $123 million for equity securities. The net unrealized position at December 31,
2004 was composed of a net unrealized gain of $1,061 million for fixed maturities and a net
unrealized gain of $136 million for equity securities. The following tables summarize the unrealized gain (loss) position related to fixed maturity and
equity securities. Unrealized Gains (Losses) on Fixed Maturity and Equity Securities Cost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    NetAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    UnrealizedMarch 31, 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
    
    $
    2,580
    
    
    $
    115
    
    
    $
    2
    
    
    $
    1
    
    
    $
    112Asset-backed securities
    
    
    8,582
    
    
    
    60
    
    
    
    65
    
    
    
    5
    
    
    
    (10
    )States, municipalities and political
subdivisions  tax-exempt
    
    
    9,446
    
    
    
    122
    
    
    
    95
    
    
    
    21
    
    
    
    6Corporate securities
    
    
    5,470
    
    
    
    363
    
    
    
    68
    
    
    
    15
    
    
    
    280Other debt securities
    
    
    2,564
    
    
    
    248
    
    
    
    21
    
    
    
    2
    
    
    
    225Redeemable preferred stock
    
    
    140
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    Options embedded in convertible debt
securities
    
    
    214
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities
available-for-sale
    
    
    28,996
    
    
    
    910
    
    
    
    253
    
    
    
    44
    
    
    
    613Total fixed maturity securities trading
    
    
    505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securities available-for-sale:Common stock
    
    
    154
    
    
    
    107
    
    
    
    1
    
    
    
    
    
    
    
    106Non-redeemable preferred stock
    
    
    88
    
    
    
    18
    
    
    
    1
    
    
    
    
    
    
    
    17Total equity securities available-for-sale
    
    
    242
    
    
    
    125
    
    
    
    2
    
    
    
    
    
    
    
    123Total equity securities trading
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity and equity securities
    
    $
    29,746
    
    
    $
    1,035
    
    
    $
    255
    
    
    $
    44
    
    
    $
    736
 10




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Unrealized Gains (Losses) on Fixed Maturity and Equity Securities Cost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    NetAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    UnrealizedDecember 31, 2004
    
    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
    
    $
    4,233
    
    
    $
    126
    
    
    $
    13
    
    
    $
    
    
    
    $
    113Asset-backed securities
    
    
    7,706
    
    
    
    105
    
    
    
    19
    
    
    
    4
    
    
    
    82States, municipalities and political
subdivisions  tax-exempt
    
    
    8,699
    
    
    
    189
    
    
    
    28
    
    
    
    3
    
    
    
    158Corporate securities
    
    
    6,093
    
    
    
    477
    
    
    
    52
    
    
    
    5
    
    
    
    420Other debt securities
    
    
    2,769
    
    
    
    295
    
    
    
    11
    
    
    
    
    
    
    
    284Redeemable preferred stock
    
    
    142
    
    
    
    6
    
    
    
    
    
    
    
    2
    
    
    
    4Options embedded in convertible debt
securities
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities
available-for-sale
    
    
    29,876
    
    
    
    1,198
    
    
    
    123
    
    
    
    14
    
    
    
    1,061Total fixed maturity securities trading
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securities available-for-sale:Common stock
    
    
    148
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    112Non-redeemable preferred stock
    
    
    126
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    24Total equity securities available-for-sale
    
    
    274
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    136Total 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) For the three months ended March 31
    
    2005
    
    
    2004(In millions)General accountSwaps
    
    $
    3
    
    
    $
    1Futures purchased
    
    
    (33
    )
    
    
    13Futures sold, not yet purchased
    
    
    
    
    
    
    (30
    )Forwards
    
    
    1
    
    
    
    2Forwards sold, not yet purchased
    
    
    
    
    
    
    2Commitments to purchase government and municipal securities
    
    
    
    
    
    
    (12
    )Equity warrants
    
    
    
    
    
    
    1Collateralized debt obligation liabilities
    
    
    
    
    
    
    2Options written
    
    
    1
    
    
    
    2Options embedded in convertible debt securities
    
    
    (12
    )
    
    
    (28
    )Total
    
    $
    (40
    )
    
    $
    (47
    )
 11




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) 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. Derivative Financial Instruments Contractual/
    
    
    Estimated
    
    
    EstimatedMarch 31, 2005
    
    Notional
    
    
    Fair Value
    
    
    Fair Value(In millions)
    
    Amount
    
    
    Asset
    
    
    (Liability)General accountSwaps
    
    $
    409
    
    
    $
    
    
    
    $
    Futures purchased
    
    
    1,435
    
    
    
    
    
    
    
    (1
    )Futures sold, not yet purchased
    
    
    99
    
    
    
    
    
    
    
    Forwards purchased
    
    
    142
    
    
    
    1
    
    
    
    Forwards sold, not yet purchased
    
    
    16
    
    
    
    
    
    
    
    Equity warrants
    
    
    6
    
    
    
    
    
    
    
    Options purchased
    
    
    83
    
    
    
    1
    
    
    
    Options written
    
    
    82
    
    
    
    
    
    
    
    Options embedded in convertible debt securities
    
    
    597
    
    
    
    214
    
    
    
    Total
    
    $
    2,869
    
    
    $
    216
    
    
    $
    (1
    )Separate accountsOptions written
    
    $
    6
    
    
    $
    
    
    
    $
    Total
    
    $
    6
    
    
    $
    
    
    
    $
    
 Derivative Financial Instruments Contractual/
    
    
    Estimated
    
    
    EstimatedDecember 31, 2004
    
    Notional
    
    
    Fair Value
    
    
    Fair Value(In millions)
    
    Amount
    
    
    Asset
    
    
    (Liability)General accountSwaps
    
    $
    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 accountsOptions 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. The change in fair value for derivatives with no hedge designation that are associated with the
indexed group annuity contracts are reflected in Net Investment Income. 12




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Note F. Legal Proceedings and Contingent Liabilities 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 13




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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 to be resolved 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. Numerous unresolved 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. 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. 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 G 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. Note G. 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 14




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) 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 were $1
million and $8 million pretax for the three months ended March 31, 2005 and 2004. Claim and claim adjustment expense reserves are presented net of amounts due from insureds related
to losses under high deductible policies. The Company has established a valuation allowance
related to these amounts, which is presented as a component of the allowance for doubtful accounts
for insurance receivables. The following tables summarize the gross and net carried reserves as of March 31, 2005 and December
31, 2004. March 31, 2005 Gross and Net CarriedClaim and Claim Adjustment Expense Reserves
    
    
    
    
    
    
    
    
    
    Life and
    
    
    CorporateStandard
    
    
    Specialty
    
    
    Group
    
    
    and Other(In millions)
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    TotalGross Case Reserves
    
    $
    6,796
    
    
    $
    1,762
    
    
    $
    2,769
    
    
    $
    3,642
    
    
    $
    14,969Gross IBNR Reserves
    
    
    7,396
    
    
    
    3,159
    
    
    
    896
    
    
    
    4,693
    
    
    
    16,144Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,192
    
    
    $
    4,921
    
    
    $
    3,665
    
    
    $
    8,335
    
    
    $
    31,113Net Case Reserves
    
    $
    4,580
    
    
    $
    1,198
    
    
    $
    1,409
    
    
    $
    1,597
    
    
    $
    8,784Net IBNR Reserves
    
    
    4,816
    
    
    
    2,157
    
    
    
    417
    
    
    
    1,443
    
    
    
    8,833Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    9,396
    
    
    $
    3,355
    
    
    $
    1,826
    
    
    $
    3,040
    
    
    $
    17,617
 15




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) December 31, 2004 Gross and Net CarriedClaim and Claim Adjustment Expense Reserves
    
    
    
    
    
    
    
    
    
    Life and
    
    
    CorporateStandard
    
    
    Specialty
    
    
    Group
    
    
    and Other(In millions)
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    TotalGross Case Reserves
    
    $
    6,904
    
    
    $
    1,659
    
    
    $
    2,800
    
    
    $
    3,806
    
    
    $
    15,169Gross IBNR Reserves
    
    
    7,398
    
    
    
    3,201
    
    
    
    880
    
    
    
    4,875
    
    
    
    16,354Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,302
    
    
    $
    4,860
    
    
    $
    3,680
    
    
    $
    8,681
    
    
    $
    31,523Net Case Reserves
    
    $
    4,761
    
    
    $
    1,191
    
    
    $
    1,394
    
    
    $
    1,588
    
    
    $
    8,934Net IBNR Reserves
    
    
    4,547
    
    
    
    2,042
    
    
    
    430
    
    
    
    1,691
    
    
    
    8,710Total 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. 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. 16




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) 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 after 1989. 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, and 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. The following table provides data related to CNAs APMT claim and claim adjustment expense
reserves. Asbestos and Environmental Pollution and Mass Tort Reserves March 31, 2005
    
    
    December 31, 2004Environmental
    
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    
    Pollution andAsbestos
    
    
    Mass Tort
    
    
    Asbestos
    
    
    Mass Tort(In millions)Gross reserves
    
    $
    3,116
    
    
    $
    688
    
    
    $
    3,218
    
    
    $
    755Ceded reserves
    
    
    (1,481
    )
    
    
    (238
    )
    
    
    (1,532
    )
    
    
    (258
    )Net reserves
    
    $
    1,635
    
    
    $
    450
    
    
    $
    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 March 31, 2005 and December 31, 2004, CNA carried approximately $1,635 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 $2 million and $9 million of
unfavorable asbestos-related net claim and 17




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) claim adjustment expense reserve development for the three months ended March 31, 2005 and 2004.
The Company paid asbestos-related claims, net of reinsurance recoveries, of $53 million and $64
million for the three months ended March 31, 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 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, filed in 2003, with underlying plaintiffs who have
asbestos bodily injury claims against the former Robert A. Keasbey Company (Keasbey) in New York
state court (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. 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 is now
being appealed. 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 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 in some of the policies apply to exclude certain claims;
(e) the extent to which claimants can establish 18




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) 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 claimed by such claimants; (h)
and 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. 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 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 claimed by
such claimants; (h) the extent that any liability of Burns & Roe would be shared with other
potentially responsible parties; (i) and 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 78,254 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 19




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) 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 CNA and other insurers in four jurisdictions: Ohio,
Texas, West Virginia and Montana. In the Ohio actions, plaintiffs allege the defendants
negligently performed duties undertaken to protect workers and the public from the effects of
asbestos (Varner v. Ford Motor Co., et al. (Cuyahoga County, Ohio, filed on June 12, 2003);
Peplowski v. ACE American Ins. Co., et al. (U.S. D. C. N.D. Ohio, filed on April 1, 2004))
and Cross v. Garlock, Inc. et. al (Trumball County, Ohio, filed on September 1, 2004)). The
Cuyahoga County court granted insurers, including CNA, summary judgment against an initial group of
plaintiffs, ruling that insurers had no duty to warn plaintiffs about the dangers of asbestos. That
ruling is on appeal. 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 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; (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 against CNA beginning in 2002, and other insurers and
non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos
(Boson v. Union Carbide Corp., et al. (Nueces County, Texas)). During 2003, many of the
Texas claims were dismissed as time-barred by the applicable Statute of Limitations. In other
claims, the Texas courts ruled that the carriers did not owe any duty to the plaintiffs or the
general public to advise on the effects of asbestos thereby dismissing these claims. Certain of
the Texas courts rulings have been appealed. 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; (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. CNA was named in Adams v. Aetna, Inc., et al. (Circuit Court of Kanawha County, West
Virginia, filed June 23, 2002), a purported class action against CNA and other insurers, alleging
that the defendants violated West Virginias Unfair Trade Practices Act in handling and resolving
asbestos claims against their policyholders. The Adams litigation had been stayed pending a planned
motion by plaintiffs to file an amended complaint that reflects two June 2004 decisions of the West
Virginia Supreme Court of Appeals. The Adams case is related to proceedings and mediation in the
Bankruptcy Court in New York with jurisdiction over the Manville Bankruptcy. At issue, in those
proceedings is the extent to which actions such as Adams violate injunctions against claims that
insurers of Manville obtained in the Manville Bankruptcy. That issue is now on appeal to the
United States District Court for the Southern District of New York. With respect to the Adams
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 issues
include: (a) the legal sufficiency of the novel statutory and common law claims pled by the
claimants; (b) the applicability of claimants legal theories to insurers who 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) 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. 20




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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 and 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 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 21




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) 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 an 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. A number of proposals to modify Superfund have been made by various parties. However, no
modifications were enacted by Congress during 2004. In the first three months of 2005, Congress has
not enacted modification to Superfund, and it is unclear what positions Congress or the
Administration will take and what legislation, if any, will result in the future. If there is
legislation, and in some circumstances even if there is no legislation, the federal role in
environmental cleanup may be significantly reduced in favor of state action. Substantial changes
in the federal statute or the activity of the EPA may cause states to reconsider their
environmental cleanup statutes and regulations. There can be no meaningful prediction of the
pattern of regulation that would result or the possible effect upon CNAs results of operations or
equity. As of March 31, 2005 and December 31, 2004, CNA carried approximately $450 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 no environmental pollution and
mass tort net claim and claim adjustment expense reserve development recorded for the three months
ended March 31, 2005 and 2004. The Company recorded $5 million of current accident year losses
related to mass tort for the three months ended March 31, 2005. The Company recorded no current
accident year losses related to mass tort for the three months ended March 31, 2004. The Company
paid environmental pollution-related claims and mass tort-related claims, net of reinsurance
recoveries, of $52 million and $36 million for the three months ended March 31, 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 for the first three
months of 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 $68 million was recorded for the three months ended
March 31, 2005. This amount consisted of $133 million of unfavorable claim and allocated claim
adjustment expense reserve development and $65 million of favorable premium development. Favorable
net prior year development of 22




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) $1 million was recorded for the three months ended March 31, 2004. This amount consisted of $17
million of unfavorable claim and allocated claim adjustment expense reserve development and $18
million of favorable premium development. 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 H for further discussion of the corporate
aggregate reinsurance treaties. For the three months ended March 31, 2005, the Company recorded unfavorable net prior year
development of $12 million related to the corporate aggregate reinsurance treaties, consisting of
$9 million of unfavorable development in Standard Lines, $5 million of favorable development in
Specialty Lines and $8 million of unfavorable development in Corporate and Other Non-Core. The following includes the net prior year development recorded for Standard Lines, Specialty Lines
and Corporate and Other Non-Core. Favorable claim and allocated claim adjustment expense reserve
development of $16 million was recorded in the Life and Group Non-Core segment for the three months
ended March 31, 2005. Standard Lines Unfavorable net prior year development of $33 million was recorded for the three months ended
March 31, 2005. This amount consisted of $132 million of unfavorable claim and allocated claim
adjustment expense development and $99 million of favorable premium development. 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 $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. Other net prior year
claim and allocated claim adjustment expense reserve development was due to improvement in the
severity and number of claims for property coverages, primarily in accident year 2004, partially
offset by unfavorable net prior year development due to increased severity on older individual
claims, primarily workers compensation. Favorable net prior year premium development was recorded
as a result of additional premium resulting from audits and endorsements on recent policies,
primarily workers compensation. Additionally, there was approximately $18 million of unfavorable
net prior year claim and allocated claim adjustment expense development and $9 million of favorable
premium development related to the corporate aggregate reinsurance treaties in the first quarter of
2005. Specialty Lines Unfavorable net prior year development of $30 million was recorded for the three months ended
March 31, 2005. This amount consisted of $13 million of unfavorable claim and allocated claim
adjustment expense development and $17 million of unfavorable premium development. Approximately $27 million of unfavorable net prior year claim and allocated claim adjustment
expense development was related to large directors and officers 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 $29
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. Additionally, there was approximately $25 million of
favorable net prior year claim and allocated claim adjustment expense development and $20 million
of unfavorable premium development related to the corporate aggregate reinsurance treaties in the
first quarter of 2005. 23




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Corporate and Other Non-Core Unfavorable net prior year development of $21 million was recorded for the three months ended
March 31, 2005. This amount consisted of $4 million of unfavorable claim and allocated claim
adjustment expense development and $17 million of unfavorable premium development. Unfavorable net prior year development of $19 million, including $4 million of unfavorable claim
and allocated claim adjustment expense development and $15 million of unfavorable premium
development, was recorded in CNA Re. The unfavorable claim and allocated claim adjustment expense
development was primarily related to the corporate aggregate reinsurance treaties. The unfavorable
premium development was driven by $13 million of additional ceded reinsurance premium on agreements
where the ceded premium depends on the ceded loss and $1 million of additional premium ceded to the
corporate aggregate reinsurance treaties. The remaining unfavorable net prior year development recorded in the Corporate and Other Non-Core
segment resulted from commutations and increases to net reserves due to reducing ceded losses. Note H. 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, a credit exposure exists with respect to property and casualty and life
reinsurance ceded to the extent that any reinsurer is unable to meet the obligations 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. 24




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) The following table summarizes the amounts receivable from reinsurers at March 31, 2005 and
December 31, 2004. Components of reinsurance receivables
    
    March 31, 2005
    
    
    December 31, 2004(In millions)Reinsurance receivables related to insurance reserves:Ceded claim and claim adjustment expense
    
    $
    13,496
    
    
    $
    13,879Ceded future policy benefits
    
    
    1,239
    
    
    
    1,260Ceded policyholders funds
    
    
    63
    
    
    
    65Billed reinsurance receivables
    
    
    789
    
    
    
    684Reinsurance receivables
    
    
    15,587
    
    
    
    15,888Allowance for uncollectible reinsurance
    
    
    (517
    )
    
    
    (531
    )Reinsurance receivables, net of allowance for
uncollectible reinsurance
    
    $
    15,070
    
    
    $
    15,357
 The Company has established an allowance for uncollectible reinsurance receivables. The
allowance for uncollectible reinsurance receivables was $517 million and $531 million at March 31,
2005 and December 31, 2004. The net decrease in the allowance for uncollectible reinsurance
receivables was primarily due to release of the previously established allowance due to an adverse
arbitration ruling and commutations in the first quarter of 2005, partially offset by a net
increase in the allowance for other reinsurance receivables. The expenses incurred related to
uncollectible reinsurance receivables are presented as a component of Insurance claims and
policyholders benefits on 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. The effects of reinsurance on earned premiums are shown in the following table. Components of Earned Premiums Three months ended March 31
    
    Direct
    
    
    Assumed
    
    
    Ceded
    
    
    Net(In millions)2005Property and casualty
    
    $
    2,522
    
    
    $
    58
    
    
    $
    846
    
    
    $
    1,734Accident and health
    
    
    308
    
    
    
    14
    
    
    
    158
    
    
    
    164Life
    
    
    45
    
    
    
    
    
    
    
    44
    
    
    
    1Total earned premiums
    
    $
    2,875
    
    
    $
    72
    
    
    $
    1,048
    
    
    $
    1,8992004Property and casualty
    
    $
    2,643
    
    
    $
    78
    
    
    $
    863
    
    
    $
    1,858Accident and health
    
    
    343
    
    
    
    16
    
    
    
    155
    
    
    
    204Life
    
    
    240
    
    
    
    
    
    
    
    134
    
    
    
    106Total earned premiums
    
    $
    3,226
    
    
    $
    94
    
    
    $
    1,152
    
    
    $
    2,168
 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 25




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) judgment to determine whether or not risk transfer requirements are met. For such contracts, often
referred to as finite products, the Company generally assesses risk transfer for each contract 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. In 2003, the Company discontinued
purchases and sales of such contracts. 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 records these deposits as either reinsurance
receivables or other assets for ceded recoverables and reinsurance balances payable or other
liabilities for assumed liabilities. 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 is 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. The following table summarizes the pretax impact of the Companys funds withheld reinsurance
arrangements, including the corporate aggregate reinsurance treaties discussed in further detail
below. Three months ended March 31
    Aggregate Cover
    
    CCC Cover
    
    
    All Other
    
    
    Total(In millions)2005Ceded earned premium
    
    $
    (12
    )
    
    $
    
    
    
    $
    62
    
    
    $
    50Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (69
    )
    
    
    (69
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )Interest charges
    
    
    (24
    )
    
    
    (16
    )
    
    
    2
    
    
    
    (38
    )Pretax expense
    
    $
    (36
    )
    
    $
    (16
    )
    
    $
    (38
    )
    
    $
    (90
    )2004Ceded earned premium
    
    $
    
    
    
    $
    
    
    
    $
    2
    
    
    $
    2Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Interest charges
    
    
    (20
    )
    
    
    (11
    )
    
    
    (16
    )
    
    
    (47
    )Pretax expense
    
    $
    (20
    )
    
    $
    (11
    )
    
    $
    (16
    )
    
    $
    (47
    )
 Included in "All Other" above
for the first quarter of 2005 is approximately $24 million of pretax
expense related to Standard Lines which resulted from an unfavorable
arbitration ruling on two reinsurance treaties impacting ceded earned
premiums, ceded claim and claim adjustment expenses, ceding
commissions and interest charges. This unfavorable outcome was
partially offset by a release of previously established reinsurance
bad debt reserves resulting in a net impact of $10 million pretax
expense for the three months ended March 31, 2005. The pretax impact by operating segment of the Companys funds withheld reinsurance
arrangements, including the corporate aggregate reinsurance treaties was as follows: 26




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Three months ended March 31
    
    2005
    
    
    2004(In millions)Standard Lines
    
    $
    (66
    )
    
    $
    (37
    )Specialty Lines
    
    
    (7
    )
    
    
    (2
    )Corporate and Other
    
    
    (17
    )
    
    
    (8
    )Pretax expense
    
    $
    (90
    )
    
    $
    (47
    )
 Interest cost on reinsurance contracts accounted for on a funds withheld basis is incurred
during all periods in which a funds withheld liability exists, and is included in
net investment income. The amount subject to interest crediting rates on such contracts was $2,463 million and
$2,564 million at March 31, 2005 and December 31, 2004. Certain funds withheld reinsurance
contracts, including the corporate aggregate reinsurance treaties, require interest on additional
premiums arising from ceded losses as if those premiums were payable at the inception of the
contract. The amount subject to interest crediting on these funds withheld contracts will vary over time
based on a number of factors, including the timing of loss payments and ultimate gross losses
incurred. The Company expects that it will continue to incur significant interest costs on these
contracts for several years. Corporate Aggregate Reinsurance Treaties The Company has an aggregate reinsurance treaty related to the 1999 through 2001 accident years
that covers substantially all of the Companys property and casualty lines of business (the
Aggregate Cover). The Aggregate Cover provides for two sections of coverage. These coverages
attach at defined loss ratios for each accident year. Coverage under the first section of the
Aggregate Cover, which is available for all accident years covered by the treaty, has a $500
million limit per accident year of ceded losses and an aggregate limit of $1 billion of ceded
losses for the three accident years. The ceded premiums associated with the first section are a
percentage of ceded losses and for each $500 million of limit the ceded premium is $230 million.
The second section of the Aggregate Cover, which only relates to accident year 2001, provides
additional coverage of up to $510 million of ceded losses for a maximum ceded premium of $310
million. Under the Aggregate Cover, interest charges on the funds withheld liability accrue at 8%
per annum. The aggregate loss ratio for the three-year period has exceeded certain thresholds
which requires additional premiums and an increase in the rate at which interest charges
are accrued. This rate will increase to 8.25% per annum commencing in 2006. Also, if an
additional aggregate loss ratio threshold is exceeded, additional premiums of 10% of amounts in
excess of the aggregate loss ratio threshold are to be paid retroactively with interest. The
aggregate limits under both sections of the Aggregate Cover have been fully utilized. In 2001, the Company entered into a one-year aggregate reinsurance treaty related to the 2001
accident year covering substantially all property and casualty lines of business in the Continental
Casualty Company pool (the CCC Cover). The loss protection provided by the CCC Cover has an
aggregate limit of approximately $761 million of ceded losses. The ceded premiums are a percentage
of ceded losses. The ceded premium related to full utilization of the $761 million of limit is
$456 million. The CCC Cover provides continuous coverage in excess of the second section of the
Aggregate Cover discussed above. Under the CCC Cover, interest charges on the funds withheld are
accrued at 8% per annum. The interest rate increases to 10% per annum if the aggregate loss ratio
exceeds certain thresholds. The aggregate loss ratio exceeded that
threshold in the fourth quarter
of 2004 which required retroactive interest charges on funds withheld. The CCC Cover was fully
utilized in 2003. At the Companys discretion, the contract can be commuted annually on the anniversary date of the
contract. The CCC Cover requires mandatory commutation on December 31, 2010, if the agreement has
not been commuted on or before such date. Upon mandatory commutation of the CCC Cover, the
reinsurer is required to release to the Company the existing balance of the funds withheld account
if the unpaid ultimate ceded losses at the time of commutation are less than or equal to the funds
withheld account balance. If the unpaid ultimate ceded losses at the time of commutation are
greater than the funds withheld account balance, the reinsurer will release the existing balance of
the funds withheld account and pay CNA the present value of the projected amount the reinsurer
would 27




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) have had to pay from its own funds absent a commutation. The present value is calculated using
1-year LIBOR as of the date of the commutation. Note I. Debt Debt is composed of the following obligations. Debt March 31,
    
    
    December 31,2005
    
    
    2004(In millions)Variable rate debt:Credit facility  CNA Surety, due September 30, 2005
    
    $
    25
    
    
    $
    25Term loan  CNA Surety, due through September 30, 2005
    
    
    5
    
    
    
    10Debenture, CNA Surety, face amount of $31, due April 29, 2034
    
    
    30
    
    
    
    30Senior notes:6.500%, face amount of $493, due April 15, 2005
    
    
    493
    
    
    
    4936.750%, face amount of $250, due November 15, 2006
    
    
    249
    
    
    
    2496.450%, face amount of $150, due January 15, 2008
    
    
    149
    
    
    
    1496.600%, face amount of $200, due December 15, 2008
    
    
    199
    
    
    
    1998.375%, face amount of $70, due August 15, 2012
    
    
    69
    
    
    
    695.850%, face amount of $549, due December 15, 2014
    
    
    546
    
    
    
    5466.950%, face amount of $150, due January 15, 2018
    
    
    149
    
    
    
    149Debenture, CNAF, 7.250%, face amount of $243, due November 15, 2023
    
    
    241
    
    
    
    241Other debt, 1.000%-6.850%, due through 2019
    
    
    39
    
    
    
    47Surplus Note:Encompass Insurance Company of America (EICA) Surplus Note,
face amount of $50, due March 31, 2006
    
    
    50
    
    
    
    50Total debt
    
    $
    2,244
    
    
    $
    2,257Short term debt
    
    $
    575
    
    
    $
    531Long term debt
    
    
    1,669
    
    
    
    1,726Total debt
    
    $
    2,244
    
    
    $
    2,257
 The Company retired the $493 million 6.5% senior note on April 15, 2005. In May of 2004, CNA Surety, a 64% owned and consolidated subsidiary of CNA, issued privately,
through a wholly-owned trust, $30 million of preferred securities through two pooled transactions.
These securities bear interest at a rate of LIBOR plus 337.5 basis points with a thirty-year term
and are redeemable after five years. The securities were issued by CNA Surety Capital Trust I
(Issuer Trust). The sole asset of the Issuer Trust consists of a $31 million junior subordinated
debenture issued by CNA Surety to the Issuer Trust. The subordinated debenture bears interest at a
rate of LIBOR plus 337.5 basis points and matures in April of 2034. As of March 31, 2005, the
interest rate on the junior subordinated debenture was 6.17%. In September of 2003, CNA Surety entered into a $50 million credit agreement, which consisted of a
$30 million two-year revolving credit facility and a $20 million two-year term loan, with
semi-annual principal payments of $5 million. The credit agreement is an amendment to a $65
million credit agreement, extending the revolving loan termination date from September 30, 2003 to
September 30, 2005. The new revolving credit facility was fully utilized at inception. During the
first quarter of 2005, CNA Surety reduced the outstanding borrowings under the term loan by $5
million. CNA Surety pays a facility fee of 35.0 basis points on the revolving credit portion of the
facility, interest at LIBOR plus 90.0 basis points, and for utilization greater than 50% of the
amount available to borrow an additional fee of 5.0 basis points. On the term loan, CNA Surety
pays interest at LIBOR plus 62.5 basis points. At March 31, 2005, the weighted-average interest
rate on the $30 million of outstanding borrowings under the credit agreement, 28




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) including facility fees and utilization fees, was 4.15%. Effective January 30, 2003, CNA Surety
entered into a swap agreement on the term loan portion of the agreement which uses the 3-month
LIBOR to determine the swap increment. As a result, the effective interest rate on the $5 million
in outstanding borrowings on the term loan was 2.78% at March 31, 2005. On the $25 million
revolving credit agreement, the effective interest rate at March 31, 2005 was 4.43%. The combined aggregate maturities for debt at March 31, 2005 are presented in the following table. Maturity of Debt (In millions)2005
    
    $
    5252006
    
    
    3032007
    
    
    112008
    
    
    3532009
    
    
    3Thereafter
    
    
    1,059Less original issue discount
    
    
    (10
    )Total
    
    $
    2,244
 Note J. Benefit Plans Pension and Postretirement Healthcare and Life Insurance Benefit Plans CNAF and certain subsidiaries sponsor noncontributory pension plans typically covering
full-time employees age 21 or over who have completed at least one year of service. Effective
January 1, 2000, the CNA Retirement Plan was closed to new participants; instead, retirement
benefits are provided to these employees under the Companys savings plans. While the terms of the
plans vary, benefits are generally based on years of credited service and the employees highest 60
consecutive months of compensation. CNA uses December 31 as the measurement date for the majority
of its plans. CNAs funding policy is to make contributions in accordance with applicable governmental regulatory
requirements. The assets of the plans are invested primarily in U.S. government and
mortgage-backed securities with the balance in short-term investments, equity securities and
limited partnerships. CNA provides certain healthcare and life insurance benefits to eligible retired employees, their
covered dependents and their beneficiaries. The funding for these plans is generally to pay
covered expenses as they are incurred. 29




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) The components of net periodic benefit costs are presented in the following table. Three months ended March 31
    
    2005
    
    
    2004(In millions)Pension benefitsService cost
    
    $
    9
    
    
    $
    10Interest cost on projected benefit obligation
    
    
    36
    
    
    
    44Expected return on plan assets
    
    
    (38
    )
    
    
    (45
    )Prior service cost amortization
    
    
    1
    
    
    
    Actuarial loss
    
    
    7
    
    
    
    7Net periodic pension cost
    
    $
    15
    
    
    $
    16Postretirement benefitsService cost
    
    $
    
    
    
    $
    2Interest cost on projected benefit obligation
    
    
    3
    
    
    
    6Prior service cost amortization
    
    
    (7
    )
    
    
    (5
    )Actuarial loss
    
    
    1
    
    
    
    2Net periodic postretirement cost
    
    $
    (3
    )
    
    $
    5
 At December 31, 2004, CNA expected to contribute $7 million to its pension plans and $14
million to its postretirement healthcare and life insurance benefit plans in 2005. As of March 31,
2005, $3 million of contributions have been made to its pension plans and $3 million to its
postretirement healthcare and life insurance benefit plans. CNA plans to contribute an additional
$4 million to its pension plans and $11 million to its postretirement healthcare and life insurance
benefit plans during the remainder of 2005. Note K. Commitments, Contingencies and Guarantees Commitments and Contingencies In the normal course of business, CNA has obtained letters of credit in favor of various
unaffiliated insurance companies, regulatory authorities and other entities. As of March 31, 2005
and December 31, 2004, there were approximately $39 million and $47 million of outstanding letters
of credit. The Company is obligated to make future payments totaling $285 million for non-cancelable operating
leases expiring from 2005 through 2015 primarily for office space and data processing, office and
transportation equipment. Estimated future minimum payments under these contracts are as follows:
$51 million in 2005; $56 million in 2006; $47 million in 2007; $39 million in 2008; $29 million in
2009; and $63 million in 2010 and beyond. Additionally, the Company has entered into a limited
number of guaranteed payment contracts, primarily relating to telecommunication and software
services, amounting to approximately $33 million. Estimated future minimum payments under these
contracts are as follows: $15 million in 2005; $13 million in 2006; and $5 million in 2007. The Company currently has an agreement in place for services to be rendered in relation to employee
benefits, administration and consulting. If the Company terminates this agreement without cause,
or the agreement is terminated due to the Companys default, prior to the end of any renewal term,
the Company shall pay the greater of fifteen percent of the average monthly fees related to such
services for the remainder of the term, or the specified minimum termination fee for the year. The
minimum termination fee for the year ending December 31, 2005 is $9 million. As of March 31, 2005 and December 31, 2004, the Company had committed approximately $102 million
and $104 million for future capital calls from various third-party limited partnership investments
in exchange for an ownership interest in the related partnership. 30




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) The Company invests in multiple bank loan participations as part of its overall investment strategy
and has committed to additional future purchases and sales. The purchase and sale of these
investments are recorded on the date that the legal agreements are finalized and cash settlement is
made. As of March 31, 2005, the Company had commitments to purchase $41 million and sell $8
million of various bank loan participations. In the normal course of investing activities, CCC had committed approximately $51 million as of
March 31, 2005 and December 31, 2004 to future capital calls from certain of its unconsolidated
affiliates in exchange for an ownership interest in such affiliates. CNAFs $750 million Series H Cumulative Preferred Issue (Series H Issue) preferred stock, accrues
cumulative dividends at an initial rate of 8% per year, compounded annually. As of March 31, 2005,
the Company had $144 million of undeclared but accumulated dividends. Loews owns 100% of the
Series H Issue preferred stock. The Loews consolidated federal income tax returns have been settled with the Internal Revenue
Service (IRS) through the 1997 tax year. The federal income tax returns for 1998 through 2001,
including related carryback claims and prior claims for refund, have been examined and are
currently under review by the Joint Committee on Taxation. Although the Companys ultimate tax
obligation for these years is subject to review and final determination, in the opinion of
management, the outcome of the review and final determination of the Companys ultimate tax
obligation will not have a material effect on the financial condition or results of operations of
the CNA Tax Group. Pending the outcome of the review and final determination of the Companys tax
obligations for these years, interest on any tax refunds net of any tax deficiencies is subject to
computation, review and final determination. The amount of any net refund interest ultimately due
to the Company may have a material impact on the results of operations in the period in which the
review is finalized. The federal income tax returns for 2002 and 2003 are currently under
examination by the IRS. The Company believes the outcome of the 2002 and 2003 examinations will
not have a material effect on the financial condition or results of operations of the CNA Tax
Group. Guarantees The Company has provided guarantees related to irrevocable standby letters of credit for
certain of its subsidiaries. Certain of these subsidiaries have been sold; however, the
irrevocable standby letter of credit guarantees remain in effect. The Company would be required to
remit prompt payment on the letters of credit in question if the primary obligor drew down on these
letters of credit and failed to repay such amounts in accordance with the terms of the letters of
credit. The maximum potential amount of future payments that CNA could be required to pay under
these guarantees is approximately $30 million at March 31, 2005. CNAF has provided parent company guarantees, which expire in 2015, related to lease obligations of
certain subsidiaries. Certain of those subsidiaries have been sold; however, the lease obligation
guarantees remain in effect. CNAF would be required to remit prompt payment on leases in question
if the primary obligor fails to observe and perform its covenants under the lease agreements. The
maximum potential amount of future payments that the Company could be required to pay under these
guarantees are approximately $7 million at March 31, 2005. The Company holds an investment in a real estate joint venture. In the normal course of business,
CNA, on a joint and several basis with other unrelated insurance company shareholders, has
committed to continue funding the operating deficits of this joint venture. Additionally, CNA and
the other unrelated shareholders, on a joint and several basis, have guaranteed an operating lease
for an office building, which expires in 2016. The guarantee of the operating lease is a parallel guarantee to the commitment to fund operating
deficits; consequently, the separate guarantee to the lessor is not expected to be triggered as
long as the joint venture continues to be funded by its shareholders and continues to make its
annual lease payments. In the event that the other parties to the joint venture are unable to meet their commitments in
funding the operations of this joint venture, the Company would be required to assume the
obligation for the entire office building operating lease. The maximum potential future lease
payments at March 31, 2005 that the Company could be required to pay under this guarantee are
approximately $293 million. If CNA were required to assume the entire lease obligation, the
Company would have the right to pursue reimbursement from the other shareholders and would have the
right to all sublease revenues. 31




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) CNA has provided guarantees of the indebtedness of certain of its independent insurance producers.
These guarantees expire in 2008. The Company would be required to remit prompt and complete
payment when due, should the primary obligor default. In the event of default on the part of the
primary obligor, the Company has a right to any and all shares of common stock of the primary
obligor. The maximum potential amount of future payments that CNA could be required to pay under
these guarantees is approximately $7 million at March 31, 2005. In the course of selling business entities and assets to third parties, the Company has agreed to
indemnify purchasers for losses arising out of breaches of representation and warranties with
respect to the business entities or assets being sold, including, in certain cases, losses arising
from undisclosed liabilities or certain named litigation. Such indemnification provisions
generally survive for periods ranging from nine months following the applicable closing date to the
expiration of the relevant statutes of limitation. As of March 31, 2005, the aggregate amount of
quantifiable indemnification agreements in effect for sales of business entities, assets and third
party loans was $953 million. In addition, the Company has agreed to provide indemnification to third party purchasers for
certain losses associated with sold business entities or assets that are not limited by a
contractual monetary amount. As of March 31, 2005, the Company had outstanding unlimited
indemnifications in connection with the sales of certain of its business entities or assets for tax
liabilities arising prior to a purchasers ownership of an entity or asset, defects in title at the
time of sale, employee claims arising prior to closing and in some cases losses arising from
certain litigation and undisclosed liabilities. These indemnification agreements survive until the
applicable statutes of limitation expire, or until the agreed upon contract terms expire. The
Company had recorded approximately $21 million of other liabilities related to these
indemnification agreements as of March 31, 2005 and December 31, 2004. In connection with the issuance of preferred securities by CNA Surety Capital Trust I, CNA Surety
issued a guarantee of $75 million to guarantee the payment by CNA Surety Capital Trust I of annual
dividends of $1.5 million over 30 years and redemption of $30 million of preferred securities. See
Note I for further description of debentures issued by CNA Surety, which are the sole assets of CNA
Surety Capital Trust I. 32




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Note L. Comprehensive Income (Loss) Comprehensive income is composed of all changes to stockholders equity, except those changes
resulting from transactions with stockholders in their capacity as stockholders. The components of
comprehensive income (loss) are shown below. Comprehensive Loss For the three months ended March 31
    
    2005
    
    
    2004(In millions)Net income (loss)
    
    $
    178
    
    
    $
    (124
    )Other comprehensive income (loss):Net change in unrealized gains/losses on general account
investments, net of (tax) benefit of $162 and ($62)
    
    
    (300
    )
    
    
    115Net change in unrealized gains/losses on separate accounts and
other, net of (tax) benefit of $(3) and $13
    
    
    (8
    )
    
    
    (50
    )Foreign currency translation adjustment
    
    
    (6
    )
    
    
    16Allocation to participating policyholders and minority interests
    
    
    10
    
    
    
    2Other comprehensive income (loss), net of (tax) benefit of $159 and
($49)
    
    
    (304
    )
    
    
    83Total comprehensive loss
    
    $
    (126
    )
    
    $
    (41
    )
 Note M. Business Segments CNA manages its property and casualty operations in two operating segments which represent
CNAs core operations: Standard Lines and Specialty Lines. The non-core operations are managed in
Life and Group Non-Core and Corporate and Other Non-Core segments. These segments reflect the way
CNA manages its operations and makes business decisions. The Company manages most of its assets on a legal entity basis, while segment operations are
conducted across legal entities. As such, only reinsurance and insurance receivables, insurance
reserves and deferred acquisition costs are readily identifiable for each individual segment.
Distinct investment portfolios are not maintained for each segment; accordingly, allocation of
assets to each segment is not performed. Therefore, net investment income and realized investment
gains or losses are allocated primarily based on each segments net carried insurance reserves, as
adjusted. Income taxes have been allocated on the basis of the taxable income of the segments. In the following tables, certain financial measures are presented to provide information used by
management to monitor the Companys operating performance. Management utilizes these financial
measures to monitor the Companys insurance operations and investment portfolio. Net operating
income, which is derived from certain income statement amounts, is used by management to monitor
performance of the Companys insurance operations. The Companys investment portfolio is monitored
through analysis of various quantitative and qualitative factors and certain decisions related to
the sale or impairment of investments that produce realized gains and losses. Net realized
investment gains and losses are comprised of after-tax realized investment gains and losses net of
participating policyholders and minority interests. Net operating income is calculated by excluding from net income the after-tax effects of 1) net
realized investment gains or losses, 2) gains or losses from discontinued operations and 3)
cumulative effects of changes in accounting principles. In the calculation of net operating
income, management excludes after-tax net realized investment gains or losses because net realized
investment gains or losses related to the Companys investment portfolio are largely discretionary,
except for losses related to other-than-temporary impairments, are generally driven by economic
factors that are not necessarily consistent with key drivers of underwriting performance, and are
therefore not an indication of trends in insurance operations. 33




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) The Companys investment portfolio is monitored by management through analyses of various factors
including unrealized gains and losses on securities, portfolio duration and exposure to interest
rate, market and credit risk. Based on such analyses, the Company may impair an investment
security in accordance with its policy, or sell a security. Such activities will produce realized
gains and losses. 34




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) CorporateStandard
    
    
    Specialty
    
    
    Life and Group
    
    
    and OtherFor the three months ended
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalMarch 31, 2005(In millions)Net earned premiums
    
    $
    1,169
    
    
    $
    573
    
    
    $
    166
    
    
    $
    (6
    )
    
    $
    (3
    )
    
    $
    1,899Net investment income
    
    
    183
    
    
    
    56
    
    
    
    106
    
    
    
    61
    
    
    
    
    
    
    
    406Other revenues
    
    
    21
    
    
    
    31
    
    
    
    33
    
    
    
    12
    
    
    
    (19
    )
    
    
    78Total operating revenues
    
    
    1,373
    
    
    
    660
    
    
    
    305
    
    
    
    67
    
    
    
    (22
    )
    
    
    2,383Claims, benefits and expenses:Net incurred claims and benefits
    
    
    830
    
    
    
    357
    
    
    
    234
    
    
    
    10
    
    
    
    (2
    )
    
    
    1,429Policyholders dividends
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Amortization of deferred acquisition costs
    
    
    239
    
    
    
    130
    
    
    
    7
    
    
    
    2
    
    
    
    
    
    
    
    378Other insurance related expenses
    
    
    139
    
    
    
    24
    
    
    
    54
    
    
    
    10
    
    
    
    (1
    )
    
    
    226Other operating expenses
    
    
    26
    
    
    
    28
    
    
    
    14
    
    
    
    36
    
    
    
    (19
    )
    
    
    85Total claims, benefits and expenses
    
    
    1,238
    
    
    
    540
    
    
    
    309
    
    
    
    58
    
    
    
    (22
    )
    
    
    2,123Operating income (loss) before income tax
and minority interest
    
    
    135
    
    
    
    120
    
    
    
    (4
    )
    
    
    9
    
    
    
    
    
    
    
    260Income tax (expense) benefit on operating
income (loss)
    
    
    (32
    )
    
    
    (36
    )
    
    
    5
    
    
    
    2
    
    
    
    
    
    
    
    (61
    )Minority interest
    
    
    (2
    )
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )Net operating income
    
    
    101
    
    
    
    79
    
    
    
    1
    
    
    
    11
    
    
    
    
    
    
    
    192Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    (5
    )
    
    
    1
    
    
    
    (5
    )
    
    
    (10
    )
    
    
    
    
    
    
    (19
    )Income tax (expense) benefit on realized
investment gains (losses)
    
    
    (3
    )
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    5Net income (loss)
    
    $
    93
    
    
    $
    82
    
    
    $
    (2
    )
    
    $
    5
    
    
    $
    
    
    
    $
    178As of March 31, 2005(In millions)Reinsurance receivables
    
    $
    4,949
    
    
    $
    1,583
    
    
    $
    3,263
    
    
    $
    5,792
    
    
    $
    
    
    
    $
    15,587Insurance receivables
    
    
    1,956
    
    
    
    417
    
    
    
    137
    
    
    
    22
    
    
    
    
    
    
    
    2,532Insurance reserves:Claim and claim adjustment expense
    
    $
    14,192
    
    
    $
    4,921
    
    
    $
    3,665
    
    
    $
    8,335
    
    
    $
    
    
    
    $
    31,113Unearned premiums
    
    
    1,986
    
    
    
    1,614
    
    
    
    178
    
    
    
    678
    
    
    
    (9
    )
    
    
    4,447Future policy benefits
    
    
    
    
    
    
    
    
    
    
    5,978
    
    
    
    
    
    
    
    
    
    
    
    5,978Policyholders funds
    
    
    42
    
    
    
    
    
    
    
    1,606
    
    
    
    
    
    
    
    
    
    
    
    1,648Deferred acquisition costs
    
    $
    439
    
    
    $
    284
    
    
    $
    529
    
    
    $
    2
    
    
    $
    -
    
    
    $
    1,254
 35




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) CorporateStandard
    
    
    Specialty
    
    
    Life and Group
    
    
    and OtherFor the three months ended
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalMarch 31, 2004(In millions)Net earned premiums
    
    $
    1,258
    
    
    $
    529
    
    
    $
    326
    
    
    $
    76
    
    
    $
    (21
    )
    
    $
    2,168Net investment income
    
    
    138
    
    
    
    62
    
    
    
    206
    
    
    
    69
    
    
    
    
    
    
    
    475Other revenues
    
    
    40
    
    
    
    25
    
    
    
    34
    
    
    
    7
    
    
    
    (24
    )
    
    
    82Total operating revenues
    
    
    1,436
    
    
    
    616
    
    
    
    566
    
    
    
    152
    
    
    
    (45
    )
    
    
    2,725Claims, benefits, and expenses:Net incurred claims and benefits
    
    
    823
    
    
    
    334
    
    
    
    407
    
    
    
    77
    
    
    
    (21
    )
    
    
    1,620Policyholders dividends
    
    
    9
    
    
    
    2
    
    
    
    6
    
    
    
    1
    
    
    
    
    
    
    
    18Amortization of deferred acquisition costs
    
    
    280
    
    
    
    82
    
    
    
    55
    
    
    
    16
    
    
    
    
    
    
    
    433Other insurance related expenses
    
    
    143
    
    
    
    58
    
    
    
    53
    
    
    
    11
    
    
    
    
    
    
    
    265Other operating expenses
    
    
    31
    
    
    
    27
    
    
    
    21
    
    
    
    47
    
    
    
    (24
    )
    
    
    102Total claims, benefits and expenses
    
    
    1,286
    
    
    
    503
    
    
    
    542
    
    
    
    152
    
    
    
    (45
    )
    
    
    2,438Operating income (loss) before income tax
and minority interest
    
    
    150
    
    
    
    113
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    287Income tax (expense) benefit on operating
income (loss)
    
    
    (34
    )
    
    
    (34
    )
    
    
    (5
    )
    
    
    1
    
    
    
    
    
    
    
    (72
    )Minority interest
    
    
    (2
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Net operating income (loss)
    
    
    114
    
    
    
    75
    
    
    
    19
    
    
    
    1
    
    
    
    
    
    
    
    209Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    57
    
    
    
    20
    
    
    
    (562
    )
    
    
    27
    
    
    
    
    
    
    
    (458
    )Income tax (expense) benefit on realized
investment gains (losses)
    
    
    (19
    )
    
    
    (7
    )
    
    
    161
    
    
    
    (10
    )
    
    
    
    
    
    
    125Net income (loss)
    
    $
    152
    
    
    $
    88
    
    
    $
    (382
    )
    
    $
    18
    
    
    $
    
    
    
    $
    (124
    )As of December 31, 2004(In millions)Reinsurance receivables
    
    $
    5,129
    
    
    $
    1,682
    
    
    $
    3,284
    
    
    $
    5,793
    
    
    $
    
    
    
    $
    15,888Insurance receivables
    
    
    2,013
    
    
    
    340
    
    
    
    153
    
    
    
    61
    
    
    
    
    
    
    
    2,567Insurance reserves:Claim and claim adjustment expense
    
    $
    14,302
    
    
    $
    4,860
    
    
    $
    3,680
    
    
    $
    8,681
    
    
    $
    
    
    
    $
    31,523Unearned premiums
    
    
    1,978
    
    
    
    1,546
    
    
    
    164
    
    
    
    834
    
    
    
    
    
    
    
    4,522Future policy benefits
    
    
    
    
    
    
    
    
    
    
    5,883
    
    
    
    
    
    
    
    
    
    
    
    5,883Policyholders funds
    
    
    43
    
    
    
    
    
    
    
    1,682
    
    
    
    
    
    
    
    
    
    
    
    1,725Deferred acquisition costs
    
    $
    444
    
    
    $
    285
    
    
    $
    537
    
    
    $
    2
    
    
    $
    
    
    
    $
    1,268
 36




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) The following table provides revenue by line of business for each reportable segment. Revenue by Line of Business For the three months ended March 31
    
    2005
    
    
    2004(In millions)Standard LinesProperty
    
    $
    153
    
    
    $
    165Casualty
    
    
    1,012
    
    
    
    1,100CNA Global
    
    
    203
    
    
    
    228Standard Lines revenue
    
    
    1,368
    
    
    
    1,493Specialty LinesProfessional Liability Insurance (CNA Pro)
    
    
    495
    
    
    
    476Surety
    
    
    94
    
    
    
    87Warranty
    
    
    72
    
    
    
    73Specialty Lines revenue
    
    
    661
    
    
    
    636Life and Group Non-CoreLife & Annuity
    
    
    43
    
    
    
    (291
    )Health
    
    
    229
    
    
    
    264Other
    
    
    28
    
    
    
    31Life and Group Non-Core revenue
    
    
    300
    
    
    
    4Corporate and Other Non-CoreCNA Re
    
    
    16
    
    
    
    105Other
    
    
    41
    
    
    
    74Corporate and Other Non-Core revenue
    
    
    57
    
    
    
    179Eliminations
    
    
    (22
    )
    
    
    (45
    )Total revenue
    
    $
    2,364
    
    
    $
    2,267
 Note N. Significant Transactions Managed Care Holdings Corporation On March 31, 2005, the Company completed the sale of Managed Care Holdings Corporation, and
its subsidiary, Caronia Corporation, to Octagon Risk Services, Incorporated, for approximately $16
million. As a result of the sale, CNA recorded a realized gain of approximately $1 million
after-tax. The revenues of the business sold were $4 million for each of the three months ended
March 31, 2005 and 2004. Net income was $0.2 million and $0.6 million for the three months ended
March 31, 2005 and 2004. Additionally, the Companys goodwill decreased $17 million as a result of
the sale. Specialty Medical Business On January 6, 2005, the Company completed the sale of its specialty medical business to Aetna
Inc. The revenues of the business sold were $8 million and $34 million for the three months ended
March 31, 2005 and 2004. Net income related to this business was $3 million and $4 million for the
three months ended March 31, 2005 and 2004. Individual Life Sale On April 30, 2004, the Company completed the sale of its individual life insurance business to
Swiss Re. The business sold included term, universal and permanent life insurance policies and
individual annuity products. CNAs individual long term care and structured settlement businesses
were excluded from the sale. Swiss Re acquired VFL, a wholly owned subsidiary of CAC, and CNAs
Nashville, Tennessee insurance servicing and 37




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) administration building as part of the sale. In connection with the sale, CNA entered into a
reinsurance agreement in which CAC ceded its individual life insurance business to Swiss Re on a
100% indemnity reinsurance basis. As a result of this reinsurance agreement, approximately $1
billion of future policy benefit reserves were ceded to Swiss Re. CNA received consideration of
approximately $700 million. Swiss Re assumed assets and liabilities of $6.6 billion and $5.2
billion at April 30, 2004. In anticipation of the then pending sale, CNA recorded an impairment
loss of $406 million ($569 million pretax) during the first quarter of 2004. The revenues of the
individual life business were $160 million for the three months ended March 31, 2004. Net income,
excluding the impact of the impairment loss, was $8 million for the three months ended March 31,
2004. CNA Re U.K. On October 31, 2002, the Company completed the sale of CNA Re U.K. to Tawa UK Limited (Tawa),
a subsidiary of Artemis Group, a diversified French-based holding company. Under the terms of the
purchase agreement there was a purchase price adjustment that entitled CCC to receive $5 million
from Tawa after Tawa was able to legally withdraw funds from the former CNA Re U.K. entities; at
December 31, 2004, CCC had received all amounts owed to it, totaling approximately $5 million. CNA
had also committed to contribute up to $5 million to the former CNA Re U.K. entities over a
four-year period beginning in 2010 should the Financial Services Authority (FSA) deem those
entities to be undercapitalized. In February 2005, CCC repaid to Tawa the $5 million received as
the purchase price adjustment in settlement of certain claims made by Tawa against CCC. As a
result of this settlement, CNAs contingent liability to contribute to the former CNA Re U.K. has
been reduced to zero. Note O. Related Party Transactions CNA reimburses Loews, or pays directly, approximately $21 million annually for management
fees, travel and related expenses and expenses of investment facilities and services provided to
CNA. CNA and its eligible subsidiaries are included in the consolidated federal income tax return of
Loews and its eligible subsidiaries. For the three months ended March 31, 2005 CNA paid Loews $60
million, compared to receiving $86 million from Loews for the three months ended March 31, 2004,
related to federal income taxes. CNA previously sponsored a stock ownership plan whereby the Company financed the purchase of
Company common stock by certain officers, including executive officers. Interest charged on the
principal amount of these outstanding stock purchase loans is generally equivalent to the long term
applicable federal rate, compounded semi-annually, in effect on the disbursement date of the loan.
Loans made pursuant to the plan are generally full recourse with a ten-year term maturing between
October of 2008 and May of 2010; and are secured by the stock purchased. The balance of the loans
as of March 31, 2005 exceeds the fair value of the related common stock collateral by $35 million. CNA Surety has provided significant surety bond protection for a large national contractor that
undertakes projects for the construction of government and private facilities, a substantial
portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity
needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has
provided loans to the contractor through a credit facility. In December of 2004, the credit
facility was amended to increase the maximum available loans to $106 million from $86 million. The
amendment also provides that CNAF may in its sole discretion further increase the amounts available
for loans under the credit facility, up to an aggregate maximum of $126 million. As of March 31,
2005 and December 31, 2004, there was $112 million and $99 million of total debt outstanding under
the credit facility. Loews, through a participation agreement with CNAF, provided funds for and
owned a participation of $33 million and $29 million of the loans outstanding as of March 31, 2005
and December 31, 2004 and has agreed to participation of one-third of any additional loans which
may be made above the original $86 million credit facility limit up to the $126 million maximum
available line. In connection with the amendment to increase the maximum available line under the credit facility
in December of 2004, the term of the loan under the credit facility was extended to mature in March
of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum,
effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the
facility are at or below the original $86 million limit. 38




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Loans under the credit facility are secured by a pledge of substantially all of the assets of the
contractor and certain of its affiliates. In connection with the credit facility, CNAF has also
guaranteed or provided collateral for letters of credit which are charged against the maximum
available line and, if drawn upon, would be treated as loans under the credit facility. As of
March 31, 2005 and December 31, 2004, these guarantees and collateral obligations aggregated $13
million. As of March 31, 2005, the aggregate amount of outstanding principal and accrued interest under the
credit facility was $79 million, net of participation by Loews in the amount of $33 million. The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and
appointed a chief restructuring officer to manage execution of the plan. In the course of
addressing various expense, operational and strategic issues, however, the contractor has decided
to substantially reduce the scope of its original business and to concentrate on those segments
determined to be potentially profitable. As a consequence, operating cash flow, and in turn the
capacity to service debt, has been reduced below previous levels. Restructuring plans have also
been extended to accommodate these circumstances. In light of these developments, CNA took an
impairment charge of $56 million pretax for the fourth quarter of 2004, net of the participation by
Loews, with respect to amounts loaned under the facility, and further impairment charges with
respect to amounts loaned under the credit facility in 2005 of $13 million pretax as of March 31,
2005. Any further draws under the credit facility, if approved by CNAF pursuant to additional
credit facility amendment, or further changes in the national contractors business plan or
projections may necessitate further impairment charges. CNA Surety has advised that it intends to continue to provide surety bonds on behalf of the
contractor during this extended restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards and ongoing management of CNA Suretys
exposure to the contractor. All bonds written for the national contractor are issued by CCC and
its affiliates, other than CNA Surety, and are subject to underlying reinsurance treaties pursuant
to which all bonds on behalf of CNA Surety are 100% reinsured to one of CNA Suretys insurance
subsidiaries. This arrangement underlies the more limited reinsurance coverages discussed below. Through facultative reinsurance contracts with CCC, CNA Suretys exposure on bonds written from
October 1, 2002 through October 31, 2003 has been limited to $20 million per bond, with CCC to
incur 100% of losses above that level. For bonds written on or subsequent to November 1, 2003, CNA
Suretys exposure is limited to $14.5 million per bond, subject to a per principal retention of $60
million and an aggregate limit of $150 million, under all facultative reinsurance coverage and two
excess of loss treaties between CNA Surety and CCC. The first excess of loss contract, $40 million
excess of $60 million, provides CNA Surety coverage exclusively for the national contractor, while
the second excess of loss contract, $50 million excess of $100 million, provides CNA Surety with
coverage for the national contractor as well as other CNA Surety risks. For bonds written prior to
September 30, 2002 there is no facultative reinsurance and CCC retains 100% of the losses above the
per principal retention of $60 million. Renewals of both excess of loss contracts were effective January 1, 2005. CCC and CNA Surety are
presently discussing a possible restructuring of the reinsurance arrangements discussed in the
paragraph above, under which all bonds written for the national contractor would be reinsured by
CCC under an excess of $60 million treaty and other CNA Surety accounts would be covered by a
separate $50 million excess of $100 million treaty. CCC and CNA Surety continue to engage in periodic discussions with insurance regulatory authorities
regarding the level of bonds provided for this principal and will continue to apprise those
authorities regarding their ongoing exposure to this account. Indemnification and subrogation rights, including rights to contract proceeds on construction
projects in the event of default, exist that reduce CNA Suretys and ultimately the Companys
exposure to loss. While CNAF believes that the contractors continuing restructuring efforts may
be successful and provide sufficient cash flow for its operations, the contractors failure to
ultimately achieve its extended restructuring plan or perform its contractual obligations under the
credit facility or under the Companys surety bonds could have a material adverse effect on the
Companys results of operations and/ or equity. If such failures occur, the Company estimates the
surety loss, net of indemnification and subrogation recoveries, but before the effects of minority
interest, to be approximately $200 million pretax. In addition, such failures could cause the
remaining unimpaired amount due under the credit facility to be uncollectible. 39




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) CNA Surety Corporation CCC provided an excess of loss reinsurance contract to the insurance subsidiaries of CNA
Surety over a period that expired on December 31, 2000 (the stop loss contract). The stop loss
contract limits the net loss ratios for CNA Surety with respect to certain accounts and lines of
insurance business. In the event that CNA Suretys accident year net loss ratio exceeds 24% for
1997 through 2000 (the contractual loss ratio), the stop loss contract requires CCC to pay amounts
equal to the amount, if any, by which CNA Suretys actual accident year net loss ratio exceeds the
contractual loss ratio multiplied by the applicable net earned premiums. The minority shareholders
of CNA Surety do not share in any losses that apply to this contract. There were no reinsurance
balances payable under this stop loss contract as of March 31, 2005 and 2004. Effective October 1, 2002, CCC provided an excess of loss protection for new and renewal bonds for
CNA Surety for each principal exposure that exceeds $60 million since October 1, 2002 in two parts
- a) $40 million excess of $60 million and b) $50 million excess of $100 million for CNA Surety.
Effective January 1, 2004, the $40 million excess of $60 million contract was commuted and CCC paid
CNA Surety $11 million in return premium in the first quarter of 2004 based on experience under the
contract. 40




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Note P. Statutory Accounting Practices CNAs domestic and foreign insurance subsidiaries maintain their accounts in conformity with
accounting practices prescribed or permitted by insurance regulatory authorities, which vary in
certain respects from GAAP. In converting from statutory to GAAP, typical adjustments include
deferral of policy acquisition costs and the inclusion of net realized holding gains or losses in
shareholders equity relating to fixed maturity securities. The National Association of Insurance
Commissioners (NAIC) developed a codified version of statutory accounting principles, designed to
foster more consistency among the states for accounting guidelines and reporting. CNAs insurance subsidiaries are domiciled in various jurisdictions. These subsidiaries prepare
statutory financial statements in accordance with accounting practices prescribed or permitted by
the respective jurisdictions insurance regulators. Prescribed statutory accounting practices are
set forth in a variety of publications of the NAIC as well as state laws, regulations and general
administrative rules. CCC follows a permitted practice related to the statutory provision for reinsurance, or the
uncollectible reinsurance reserve. This permitted practice allows CCC to record an additional
uncollectible reinsurance reserve amount through a different financial statement line item than the
prescribed statutory convention. This permitted practice was requested and has been granted for
the reporting periods December 31, 2004 through September 30, 2005. This permitted practice had no
effect on CCCs statutory surplus as of March 31, 2005 or December 31, 2004. CIC follows a permitted practice related to its statutory accounting for reinsurance recoverables
from voluntary pools. Under the prescribed statutory accounting practice, CIC would be required to
record a reduction to its statutory surplus related to amounts due from reinsurers, including
voluntary pools that are not authorized in its state of domicile, South Carolina. Under the
permitted practice requested in South Carolina, CIC is not required to record such a reduction if
the voluntary pools were classified as authorized in CICs previous state of domicile, New
Hampshire. This permitted practice is intended to be transitional as a result of CICs
redomestication from New Hampshire to South Carolina effective January 1, 2004. As of March 31,
2005, the ceded reserve credit for the entire reinsurance recoverable from voluntary pools
classified as authorized is $308 million, which is the maximum potential surplus impact. CNAFs ability to pay dividends and other credit obligations is significantly dependent on receipt
of dividends from its subsidiaries. The payment of dividends to CNAF by its insurance subsidiaries
without prior approval of the insurance department of each subsidiarys domiciliary jurisdiction is
limited by formula. Dividends in excess of these amounts are subject to prior approval by the
respective state insurance departments. Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the
domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require
prior approval of the Illinois Department of Financial and Professional Regulation  Division of
Insurance (the Department), may be paid only from earned surplus, which is calculated by removing
unrealized gains from unassigned surplus. As of March 31, 2005, CCC is in a positive earned
surplus position, thereby enabling CCC to pay approximately $280 million in dividends for the
remainder of 2005 that would not be subject to the Departments prior approval. The actual level
of dividends paid in any year is determined after an assessment of available dividend capacity,
holding company liquidity and cash needs as well as the impact the dividends will have on the
statutory surplus of the applicable insurance company. CCCs earned surplus was negative at December 31, 2004. As a result, CCC obtained approval from
the Department in December of 2004, for extraordinary dividends in the amount of approximately $125
million to be used to fund the CNAFs 2005 debt service requirements. CCCs earned surplus was
restored to a positive position, in part, as a result of a $500 million dividend received from its
subsidiary, CAC, during the first quarter of 2005. By agreement with the New Hampshire Insurance
Department, the CIC Group may not pay dividends to CCC until after January 1, 2006. 41




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) Combined statutory capital and surplus and net income, determined in accordance with accounting
practices prescribed or permitted by insurance regulatory authorities for the property and casualty
and the life and group insurance subsidiaries, were as follows. Preliminary Statutory Information Statutory Net IncomeStatutory Capital and Surplus
    
    
    Three months ended March 31March 31, 2005
    
    
    December 31, 2004
    
    
    2005
    
    
    2004(In millions)Property and casualty companies
    
    $
    7,130
    
    
    $
    6,998
    
    
    $
    563
    
    
    $
    183Life and group insurance companies (a)
    
    
    717
    
    
    
    1,178
    
    
    
    22
    
    
    
    303
 (a) Statutory capital and surplus for the property and casualty insurance companies includes the
property and casualty companies equity ownership of the life and group companys capital and
surplus Note Q.  Restatement for Reinsurance and Equity Investee Accounting In May of 2005, the Company filed an amendment to its 2004 Annual Report on Form 10-K to
correct its accounting for several reinsurance contracts, primarily with a former affiliate, and
its equity accounting for that affiliate. The Company has restated its previously reported
financial statements as of December 31, 2004 and 2003, and for
the years ended December 31, 2004, 2003 and 2002 and all related disclosures, as well as
its interim financial data for all interim periods of 2004 and 2003. This restatement is based
upon reconsideration of the Companys accounting for its former equity interest in Accord Re Ltd.
(Accord) and for several reinsurance contracts with Accord, but also includes two reinsurance
agreements with unaffiliated parties that are immaterial in the aggregate. A subsidiary of The
Continental Corporation (TCC) acquired a 49% ownership interest in Accord, a Bermuda company, in
1989 upon Accords formation. TCC also provided capital support to Accord through a guarantee from
a TCC subsidiary. TCC was acquired by the Company in 1995. Reinsurance relationships with Accord involved both property and casualty assumed reinsurance risks
that were written by TCC subsidiaries and 100% ceded to Accord or reinsured from other cedents by
Accord. Stop-loss protection in relation to those risks was obtained by Accord from a wholly-owned
TCC subsidiary. All of the Companys reinsurance agreements with Accord relating to property risks were commuted as
of year-end 2001, leaving six reinsurance agreements with Accord relating to casualty risks
outstanding at that time. As of March 31, 2005 the Company provides no capital support to and has
no ownership interest in Accord. During the period of the Companys minority ownership Accord also
maintained reinsurance relationships with reinsurers unaffiliated with the Company. The Company accounted for its reinsurance cessions to Accord and related retrocessions from
Accord as reinsurance. The Company has now concluded
that the reinsurance cession and retrocession should be viewed as a single transaction which does
not transfer risk. The restatement corrections apply deposit accounting to the Companys
reinsurance cessions to Accord. The restatement corrections also include adjustments to the
Companys historical equity method accounting for its ownership and economic interest in Accord,
including the effects of applying deposit accounting to certain of Accords reinsurance contracts
with parties other than the Company. The remaining restatement corrections relate to applying
deposit accounting to two small reinsurance treaties unrelated to Accord that were previously
accounted for using reinsurance accounting. 42




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED) The effect of the restatement on the March 31, 2004 Condensed Consolidated Statement of Operations
is included in the table below. (In millions, except per share data)
    
    As Previously
    
    
    AsReported
    
    
    RestatedFor the three months ended March 31, 2004Consolidated statements of operations:Net investment income
    
    $
    473
    
    
    $
    475Income tax benefit (expense)
    
    
    54
    
    
    
    53Net income (loss)
    
    
    (125
    )
    
    
    (124
    )Basic and diluted earnings (loss) per
share available to common stockholders:
    
    $
    (0.55
    )
    
    $
    (0.55
    )
 The restatement had no effect on cash flows from operating, investing or financing activities
for the three months ended March 31, 2004. 43




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion highlights significant factors impacting the consolidated operations
and financial condition of CNA Financial Corporation (CNAF) and its subsidiaries (collectively CNA
or the Company). Based on 2003 statutory net written premiums, CNA is the fourteenth largest
property and casualty company. Loews Corporation (Loews) owned approximately 91% of the outstanding common stock and 100% of the
Series H preferred stock of CNAF as of March 31, 2005. The following discussion should be read in
conjunction with the Condensed Consolidated Financial Statements in Item 1 of Part 1 of this Form 10-Q
and the Managements Discussion and Analysis of Financial Condition and Results of Operations
included in CNAFs Form 10-K/A filed with the Securities and Exchange Commission (SEC) for the year
ended December 31, 2004. In May of 2005, the Company filed an amendment to its 2004 Annual Report on Form 10-K to correct
its accounting for several reinsurance contracts, primarily with a former affiliate, and to correct
its equity accounting for that affiliate. The Company has restated its previously reported
financial statements as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and
2002 and all related disclosures, as well as
its interim financial data for all interim periods of 2004 and 2003. This MD&A reflects the effect
of the restatement. This restatement is based upon reconsideration of the Companys accounting for
its former equity interest in Accord Re Ltd. (Accord) and for several reinsurance contracts with
Accord, but also includes two reinsurance agreements with unaffiliated parties that are immaterial
in the aggregate. A subsidiary of The Continental Corporation (TCC) acquired a 49% ownership
interest in Accord, a Bermuda company, in 1989 upon Accords formation. TCC also provided capital
support to Accord through a guarantee from a TCC subsidiary. TCC was acquired by the Company in
1995. Reinsurance relationships with Accord involved both property and casualty assumed reinsurance risks
that were written by TCC subsidiaries and 100% ceded to Accord or reinsured from other cedents by
Accord. Stop-loss protection in relation to those risks was obtained by Accord from a wholly-owned
TCC subsidiary. All of the Companys reinsurance agreements with Accord relating to property risks were commuted as
of year-end 2001, leaving six reinsurance agreements with Accord relating to casualty risks
outstanding at that time. As of March 31, 2005 the Company provides no capital support to and has
no ownership interest in Accord. During the period of the Companys minority ownership Accord also
maintained reinsurance relationships with reinsurers unaffiliated with the Company. As previously reported the Company continues to respond to various subpoenas, interrogatories and
other requests for information received from state and federal regulatory authorities relating to
on-going insurance industry investigations of non-traditional insurance products, including finite
reinsurance. As also previously reported, the Company agreed to undergo a state regulatory
financial examination of Continental Casualty Company and its insurance subsidiaries as of December
31, 2003. Such review includes examination of certain of the finite reinsurance contracts entered
into by the Company and whether such contracts possess sufficient risk transfer characteristics
necessary to qualify for accounting treatment as reinsurance. In the course of complying with these
requests the Company conducted a comprehensive review of its finite reinsurance relationships,
including contracts with Accord. It is possible that the Companys analyses of, or accounting
treatment for, other finite reinsurance contracts could be questioned or disputed in the context of
the referenced state regulatory examination, and further restatements of the Companys financial
results are possible as a consequence, which could have a material adverse impact on the Companys
financial condition. The Company accounted for its reinsurance cessions to Accord and related retrocessions from Accord
as reinsurance. In connection with the aforementioned review, the Company has now concluded that
the reinsurance cession and retrocession should be viewed as a single transaction which does not
transfer risk. The restatement corrections apply deposit accounting to the Companys reinsurance
cessions to Accord. The restatement corrections also include adjustments to the Companys
historical equity method accounting for its ownership and economic interest in Accord, including
the effects of applying deposit accounting to certain of Accords reinsurance contracts with
parties other than the Company. The remaining restatement corrections relate to applying deposit
accounting to two small reinsurance treaties unrelated to Accord that were previously accounted for
using reinsurance accounting. 44




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The effect of the restatement on the March 31, 2004 Condensed Consolidated Statement of Operations
is included in the table below. (In millions, except per share data)
    
    As Previously
    
    
    AsReported
    
    
    RestatedFor the three months ended March 31, 2004Consolidated statements of operations:Net investment income
    
    $
    473
    
    
    $
    475Income tax benefit (expense)
    
    
    54
    
    
    
    53Net income (loss)
    
    
    (125
    )
    
    
    (124
    )Basic and diluted earnings (loss) per
share available to common stockholders:
    
    $
    (0.55
    )
    
    $
    (0.55
    )
 The restatement had no effect on cash flows from operating, investing or financing activities
for the three months ended March 31, 2004. CONSOLIDATED OPERATIONS Results of Operations The following table includes the consolidated results of operations. For more detailed
components of CNAs business operations, see the segment discussions within this Managements
Discussion and Analysis (MD&A). For the three months ended March 31
    
    2005
    
    
    2004(In millions, except per share data)RevenuesNet earned premiums
    
    $
    1,899
    
    
    $
    2,168Net investment income
    
    
    406
    
    
    
    475Realized
investment gains (losses), net of
participating policyholders and minority
interests
    
    
    (19
    )
    
    
    (458
    )Other revenues
    
    
    78
    
    
    
    82Total revenues
    
    
    2,364
    
    
    
    2,267Claims, Benefits and ExpensesInsurance claims and policyholders benefits
    
    
    1,434
    
    
    
    1,638Amortization of deferred acquisition costs
    
    
    378
    
    
    
    433Other operating expenses
    
    
    274
    
    
    
    332Interest
    
    
    37
    
    
    
    35Total claims, benefits and expenses
    
    
    2,123
    
    
    
    2,438Income (loss) before income tax and minority interest
    
    
    241
    
    
    
    (171
    )Income tax (expense) benefit
    
    
    (56
    )
    
    
    53Minority interest
    
    
    (7
    )
    
    
    (6
    )Net income (loss)
    
    $
    178
    
    
    $
    (124
    )Basic and Diluted Earnings (Loss) Per ShareBasic and diluted earnings (loss) per share
available to common stockholders
    
    $
    0.63
    
    
    $
    (0.55
    )Weighted average outstanding common stock and common
stock equivalents
    
    
    256.0
    
    
    
    255.9
 Net results increased $302 million for the three months ended March 31, 2005 as compared with
the same period in 2004. The improvement in net results was primarily due to an after-tax
impairment loss recorded in the first quarter 45




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued of 2004 of $406 million ($569 million pretax) related to the sale of CNAs individual life
insurance business. This increase was partially offset by increased unfavorable net prior year
development of $45 million after-tax ($69 million pretax) and reduced net investment income. Realized investment losses were $19 million and $458 million for the three months ended March 31,
2005 and 2004. The $439 million improvement in net realized results is largely related to a pretax
impairment loss recorded in first quarter of 2004 for
$569 million related to the sale of CNAs
individual life business. This improvement was partly offset by decreased results in the fixed
maturity securities portfolio and $32 million of total pretax impairment losses recorded across
various market sectors, including a pretax impairment loss of $13 million related to loans made
under a credit facility to a national contractor. For 2004, there were no impairments other than
the individual life sale loss discussed above. Net earned premiums decreased $269 million for the three months ended March 31, 2005 as compared
with the same period in 2004. The decrease in net earned premiums was due primarily to reduced
premiums from the individual life business of $105 million and CNA Re of $77 million, as a result
of the decisions made in 2003 to focus on the core property and casualty business. Additionally,
earned premiums decreased in the Standard Lines segment due to lower new business and intentional
underwriting actions. These decreases were partially offset by favorable premium development. See
the Standard Lines segment discussion in this MD&A for further information. Unfavorable net prior year development of $68 million was recorded for the three months ended March
31, 2005, including $133 million of unfavorable claim and allocated claim adjustment expense
reserve development and $65 million of favorable premium development. Favorable net prior year
development of $1 million was recorded for the three months ended March 31, 2004, including $17
million of unfavorable claim and allocated claim adjustment expense reserve development and $18
million of favorable premium development. Critical Accounting Estimates The preparation of the Condensed Consolidated Financial Statements (Unaudited) in conformity with
accounting principles generally accepted in the United States of America (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the amounts of revenues and expenses reported during the period. Actual results may
differ from those estimates. CNAs Condensed Consolidated Financial Statements (Unaudited) and accompanying notes have been
prepared in accordance with GAAP applied on a consistent basis. CNA continually evaluates the
accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements.
In general, managements estimates are based on historical experience, evaluation of current
trends, information from third party professionals and various other assumptions that are believed
to be reasonable under the known facts and circumstances. The accounting estimates discussed below are considered by management to be critical to an
understanding of CNAs Condensed Consolidated Financial Statements as their application places the
most significant demands on managements judgment. Note A of the Consolidated Financial Statements
included under Item 8 of the Companys Form 10-K/A for the year ended December 31, 2004, should be
read in conjunction with this section to assist with obtaining an understanding of the underlying
accounting policies related to these estimates. Due to the inherent uncertainties involved with
these types of judgments, actual results could differ significantly from estimates and may have a
material adverse impact on the Companys results of operations or equity. Insurance Reserves Insurance reserves are established for both short and long-duration insurance contracts.
Short-duration contracts are primarily related to property and casualty insurance policies where
the reserving process is based on actuarial estimates of the amount of loss, including amounts for
known and unknown claims. Long-duration contracts typically include traditional life insurance and
long term care products and are estimated using actuarial estimates about mortality and morbidity,
as well as assumptions about expected investment returns. Changes in estimates of claim and
allocated claim adjustment expense reserves and premium accruals for prior accident years are
defined as 46




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued development within this MD&A. These changes can be favorable or unfavorable. The inherent risks
associated with the reserving process are discussed in the Reserves  Estimates and Uncertainties
section below. Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim
adjustment expense reserves or future policy benefits reserves and are reported as receivables in
the Condensed Consolidated Balance Sheets. The ceding of insurance does not discharge the primary
liability of the Company. An estimated allowance for doubtful accounts is recorded on the basis of
periodic evaluations of balances due from reinsurers, reinsurer solvency, managements experience
and current economic conditions. 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. Considerable judgment by management may be necessary to determine if risk transfer
requirements are met. The Company believes it has appropriately applied reinsurance accounting
principles in its evaluation of risk transfer. However, the Companys evaluation of risk transfer
and the resulting accounting could be challenged in connection with regulatory reviews or possible
changes in accounting and/or financial reporting rules related to reinsurance, which could
materially adversely affect the Companys results of operations and/or equity. Further information
on reinsurance is provided in the Reinsurance section below. Valuation of Investments and Impairment of Securities Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the value of these assets, it is possible that changes in risks in the near term
could have an adverse material impact on the Companys results of operations or equity. The Companys investment portfolio is subject to market declines below book value that may be
other-than-temporary. The Company has an Impairment Committee, which reviews the investment
portfolio on a quarterly basis, with ongoing analysis as new information becomes available. Any
decline that is determined to be other-than-temporary is recorded as an impairment loss in the
results of operations in the period in which the determination occurred. The Company continues to monitor potential changes in authoritative guidance related to recognizing
other-than-temporary impairments. Any such changes may cause the Company to recognize impairment
losses in results of operations which would not be recognized under the current guidance, or to
recognize such losses in earlier periods, especially those due to increases in interest rates.
Such changes could also impact the recognition of investment income on impaired securities. While
the impact of changes in authoritative guidance could increase earnings volatility in future
periods, because fluctuations in the fair value of securities are already reflected in
shareholders equity, any changes would not be expected to have a significant impact on equity.
Further information on the Companys process for evaluating impairments is provided in the
Investments section below. Long Term Care Products The Companys reserves and deferred acquisition costs for its long term care products are based on
certain assumptions including morbidity, policy persistency and interest rates. Actual experience
may differ from these assumptions. The recoverability of deferred acquisition costs and the
adequacy of the reserves are contingent on actual experience related to these key assumptions and
other factors including potential future premium increases and future health care cost trends. The
results of operations and/or equity may be materially, adversely affected if actual experience
varies significantly from these assumptions. Pension and Postretirement Benefit Obligations The Company is required to make a significant number of assumptions in order to estimate the
liabilities and costs related to its pension and postretirement benefit obligations to employees
under its benefit plans. The assumptions that have the most impact on pension costs are the
discount rate, the expected return on plan assets and the rate of 47




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued compensation increases. These assumptions are evaluated relative to current market factors such as
inflation, interest rates and fiscal and monetary policies. Changes in these assumptions can have
a material impact on pension obligations and pension expense. Further information on the Companys
pension and postretirement benefit obligations is included in Note J of the Condensed Consolidated
Financial Statements included under Item 1. Legal Proceedings The Company is involved in various legal proceedings that have arisen during the ordinary course of
business. The Company evaluates the facts and circumstances of each situation, and when the
Company determines it necessary, a liability is estimated and recorded. Further information on the
Companys legal proceedings and related contingent liabilities is provided in Notes F and G of the
Condensed Consolidated Financial Statements included under Item 1. Loans to National Contractor CNA Surety has provided significant surety bond protection for a large national contractor that
undertakes projects for the construction of government and private facilities, a substantial
portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity
needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has
provided loans to the contractor through a credit facility. In December of 2004, the credit
facility was amended to increase the maximum available loans to $106 million from $86 million. The
amendment also provides that CNAF may in its sole discretion further increase the amounts available
for loans under the credit facility, up to an aggregate maximum of $126 million. As of March 31,
2005 and December 31, 2004, there was $112 million and $99 million of total debt outstanding under
the credit facility. Additional loans in April of 2005, pursuant to CNAFs discretion to increase
the amount available for loans under the credit facility as referenced above, brought the total
debt outstanding under the credit facility, less accrued interest, to $132 million as of April 30,
2005. Loews, through a participation agreement with CNAF, provided funds for and owned a
participation of $33 million and $29 million of the loans outstanding as of March 31, 2005 and
December 31, 2004, and has agreed to participation of one-third of any additional loans which may
be made above the original $86 million credit facility limit up to the $126 million maximum
available line. In connection with the amendment to increase the maximum available line under the credit facility
in December of 2004, the term of the loan under the credit facility was extended to mature in March
of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum,
effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the
facility are at or below the original $86 million limit. Loans under the credit facility are secured by a pledge of substantially all of the assets of the
contractor and certain of its affiliates. In connection with the credit facility, CNAF has also
guaranteed or provided collateral for letters of credit which are charged against the maximum
available line and, if drawn upon, would be treated as loans under the credit facility. As of
March 31, 2005 and December 31, 2004, these guarantees and collateral obligations aggregated $13
million. As of March 31, 2005, the aggregate amount of outstanding principal and accrued interest under the
credit facility was $79 million, net of participation by Loews in the amount of $33 million. The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and
appointed a chief restructuring officer to manage execution of the plan. In the course of
addressing various expense, operational and strategic issues, however, the contractor has decided
to substantially reduce the scope of its original business and to concentrate on those segments
determined to be potentially profitable. As a consequence, operating cash flow, and in turn the
capacity to service debt, has been reduced below previous levels. Restructuring plans have also
been extended to accommodate these circumstances. In light of these developments, CNA took an
impairment charge of $56 million pretax ($36 million after-tax) for the fourth quarter of 2004, net
of the participation by Loews, with respect to amounts loaned under the facility, and further
impairment charges with respect to amounts loaned under the credit facility in 2005 of $13 million
pretax ($9 million after-tax) as of March 31, 2005. Any further draws under the credit facility,
if agreed to by CNAF pursuant to additional credit facility amendment, or further changes in the
national contractors business plan or projections may necessitate further impairment charges.
Indemnification and subrogation rights, including rights to contract proceeds on construction
projects in the event of default, exist that reduce CNA Suretys and ultimately the Companys
exposure to loss. While CNAF believes that the contractors restructuring efforts may be successful
and provide sufficient cash flow for its operations, the 48




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued contractors failure to achieve its restructuring plan or perform its contractual obligations under
the credit facility or under the Companys surety bonds could have a material adverse effect on the
Companys results of operations and/or equity. If such failures occur, the Company estimates the
surety loss, net of indemnification and subrogation recoveries, but before the effects of minority
interest, to be approximately $200 million pretax. In addition, such failures could cause the
remaining unimpaired amount due under the credit facility to be uncollectible. Further information on the Companys exposure to this national contractor and this credit agreement
are provided in Note O of the Condensed Consolidated Financial Statements included under Item 1. Reserves  Estimates and Uncertainties The Company maintains reserves to cover its estimated ultimate unpaid liability for claim and
claim adjustment expenses, including the estimated cost of the claims adjudication process, for
claims that have been reported but not yet settled (case reserves) and claims that have been
incurred but not reported (IBNR). Claim and claim adjustment expense reserves are reflected as
liabilities and are included on the Consolidated Balance Sheets under the heading Insurance
Reserves. 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. The carried case and
IBNR reserves are provided in the Segment Results section of this MD&A and in Note G of the
Condensed Consolidated Financial Statements included under Item 1. The level of reserves maintained by the Company represents managements best estimate, as of a
particular point in time, of what the ultimate settlement and administration of claims will cost
based on its assessment of facts and circumstances known at that time. Reserves are not an exact
calculation of liability but instead are complex estimates that are derived by the Company,
generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions
and expectations about future events, both internal and external, many of which are highly
uncertain. Among the many uncertain future events about which the Company makes assumptions and estimates,
many of which have become increasingly unpredictable, are claims severity, frequency of claims,
mortality, morbidity, expected interest rates, inflation, claims handling and case reserving
policies and procedures, underwriting and pricing policies, changes in the legal and regulatory
environment and the lag time between the occurrence of an insured event and the time it is
ultimately settled, referred to in the insurance industry as the tail. These factors must be
individually considered in relation to the Companys evaluation of each type of business. Many of
these uncertainties are not precisely quantifiable, particularly on a prospective basis, and
require significant management judgment. Given the factors described above, it is not possible to quantify precisely the ultimate exposure
represented by claims and related litigation. As a result, the Company regularly reviews the
adequacy of its reserves and reassesses its reserve estimates as historical loss experience
develops, additional claims are reported and settled and additional information becomes available
in subsequent periods. In addition, the Company is subject to the uncertain effects of emerging or potential claims and
coverage issues that arise as industry practices and legal, judicial, social and other
environmental conditions change. These issues have had, and may continue to have, a negative
effect on the Companys business by either extending coverage beyond the original underwriting
intent or by increasing the number or size of claims. Examples of emerging or potential claims
and coverage issues include:  
    increases in the number and size of water damage claims, including those related to
expenses for testing and remediation of mold conditions;
    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;  49




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued  
    increases in the number of 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. The impact of these and other unforeseen emerging or potential claims and coverage issues is
difficult to predict and could materially adversely affect the adequacy of the Companys claim and
claim adjustment expense reserves and could lead to future reserve additions. See the Segment
Results sections of this MD&A for a discussion of changes in reserve estimates and the impact on
the Companys results of operations. The Companys experience has been that establishing reserves for casualty coverages relating to
asbestos, environmental pollution and mass tort (APMT) claim and claim adjustment expenses is
subject to uncertainties that are greater than those presented by other claims. 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:  
    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. It is also not possible to predict changes in the legal and legislative environment and the impact
on the future development of APMT claims. This development will be affected by future court
decisions and interpretations, as well as changes in applicable legislation. It is difficult to
predict the ultimate outcome of large coverage disputes until settlement negotiations near
completion and significant legal questions are resolved or, failing settlement, until the dispute
is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations
often involve a large number of claimants and other parties and require court approval to be
effective. A further uncertainty exists as to whether a national privately financed trust to
replace litigation of asbestos claims with payments to claimants from the trust will be established
and approved through federal legislation, and, if established and approved, whether it will contain
funding requirements in excess of the Companys carried loss reserves. Due to the factors described above, among others, 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 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 estimation techniques and methodologies, many of which involve
significant judgments that are required of management. Due to the inherent uncertainties in
estimating reserves for APMT claim and claim adjustment expenses and the degree of variability due
to, among other things, the factors described above, the Company may be required to record material
changes in its claim and claim adjustment expense reserves in the future, should new information
become available or other developments emerge. See the Asbestos and 50




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Environmental Pollution and Mass Tort Reserves section of this MD&A for additional information
relating to APMT claims and reserves. The Companys recorded reserves, including APMT reserves, reflect managements best estimate as of
a particular point in time based upon known facts, current law and managements judgment. The
reserve analyses performed by the Companys actuaries result in point estimates. Management uses
these point estimates as the primary factor in determining the carried reserve. The carried
reserve may differ from the actuarial point estimate as the result of managements consideration of
the factors noted above including, but not limited to, the potential volatility of the projections
associated with the specific product being analyzed and the effects of changes in claims handling,
underwriting and other factors impacting claims costs that may not be quantifiable through
actuarial analysis. For APMT reserves, the reserve analysis performed by the Companys actuaries
results in both a point estimate and a range. Management uses the point estimate as the primary
factor in determining the carried reserve but also considers the range given the volatility of APMT
exposures, as noted above. For Standard Lines, the March 31, 2005 carried net claim and claim adjustment expense reserve is
slightly higher than the actuarial point estimate. For Specialty Lines, the March 31, 2005 carried
net claim and claim adjustment expense reserve is also slightly higher than the actuarial point
estimate. For both Standard Lines and Specialty Lines, the difference is primarily due to the 2004
and 2005 accident years. The data from these recent accident years is very immature from a claim
and claim adjustment expense point of view so it is prudent to wait until experience confirms that
the loss ratios should be adjusted. For Corporate and Other Non-Core, the March 31, 2005 carried
net claim and claim adjustment expense reserve is slightly higher than the actuarial point
estimate. While the actuarial estimates for APMT exposures reflect current knowledge, management
feels it is prudent, based on the history of developments in this area, to reflect some volatility
in the carried reserve until the ultimate outcome of the issues associated with these exposures is
clearer. In light of the many uncertainties associated with establishing the estimates and making the
assumptions necessary to establish reserve levels, the Company reviews its reserve estimates on a
regular basis and makes adjustments in the period that the need for such adjustments is determined
(see discussion on net prior year development above). These reviews have resulted in the Company
identifying information and trends that have caused the Company to increase its reserves in prior
periods and could lead to the identification of a need for additional material increases in claim
and claim adjustment expense reserves, which could materially adversely affect the Companys
results of operations, equity, business and insurer financial strength and debt ratings (see the
Ratings section of this MD&A). 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, a credit exposure exists with respect to property and casualty and life
reinsurance ceded to the extent that any reinsurer is unable to meet the obligations 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. 51




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued The following table summarizes the amounts receivable from reinsurers at March 31, 2005 and
December 31, 2004. Components of reinsurance receivables
    
    March 31, 2005
    
    
    December 31, 2004(In millions)Reinsurance receivables related to insurance reserves:Ceded claim and claim adjustment expense
    
    $
    13,496
    
    
    $
    13,879Ceded future policy benefits
    
    
    1,239
    
    
    
    1,260Ceded policyholders funds
    
    
    63
    
    
    
    65Billed reinsurance receivables
    
    
    789
    
    
    
    684Reinsurance receivables
    
    
    15,587
    
    
    
    15,888Allowance for uncollectible reinsurance
    
    
    (517
    )
    
    
    (531
    )Reinsurance receivables, net of allowance for
uncollectible reinsurance
    
    $
    15,070
    
    
    $
    15,357
 The Company has established an allowance for uncollectible reinsurance receivables. The
allowance for uncollectible reinsurance receivables was $517 million and $531 million at March 31,
2005 and December 31, 2004. The net decrease in the allowance for uncollectible reinsurance
receivables was primarily due to release of the previously established allowance due to an adverse
arbitration ruling and commutations in the first quarter of 2005, partially offset by a net
increase in the allowance for other reinsurance receivables. The expenses incurred related to
uncollectible reinsurance receivables are presented as a component of Insurance claims and
policyholders benefits on 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. In certain circumstances, including significant deterioration of a reinsurers financial strength
ratings, the Company may engage in commutation discussions with individual reinsurers. The outcome
of such discussions may result in a lump sum settlement that is less than the recorded receivable,
net of any applicable allowance for doubtful accounts. Losses arising from commutations could have
an adverse material impact on the Companys results of operations. 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
generally assesses risk transfer for each contract 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. In 2003, the Company discontinued purchases and sales of such contracts. 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 records these deposits as either reinsurance
receivables or other assets for ceded recoverables and reinsurance balances payable or other
liabilities for assumed liabilities. 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 52




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued 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 is 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. The following table summarizes the pretax impact of the Companys funds withheld reinsurance
arrangements, including the corporate aggregate reinsurance treaties discussed in further detail
below. Three months ended March 31
    Aggregate Cover
    
    CCC Cover
    
    
    All Other
    
    
    Total(In millions)2005Ceded earned premium
    
    $
    (12
    )
    
    $
    
    
    
    $
    62
    
    
    $
    50Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (69
    )
    
    
    (69
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )Interest charges
    
    
    (24
    )
    
    
    (16
    )
    
    
    2
    
    
    
    (38
    )Pretax expense
    
    $
    (36
    )
    
    $
    (16
    )
    
    $
    (38
    )
    
    $
    (90
    )2004Ceded earned premium
    
    $
    
    
    
    $
    
    
    
    $
    2
    
    
    $
    2Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Interest charges
    
    
    (20
    )
    
    
    (11
    )
    
    
    (16
    )
    
    
    (47
    )Pretax expense
    
    $
    (20
    )
    
    $
    (11
    )
    
    $
    (16
    )
    
    $
    (47
    )
 Included in "All Other" above
for the first quarter of 2005 is approximately $24 million of pretax
expense related to Standard Lines which resulted from an unfavorable
arbitration ruling on two reinsurance treaties impacting ceded earned
premiums, ceded claim and claim adjustment expenses, ceding
commissions and interest charges. This unfavorable outcome was
partially offset by a release of previously established reinsurance
bad debt reserves resulting in a net impact of $10 million pretax
expense for the three months ended March 31, 2005. The pretax impact by operating segment of the Companys funds withheld reinsurance
arrangements, including the corporate aggregate reinsurance treaties was as follows: Three months ended March 31
    
    2005
    
    
    2004(In millions)Standard Lines
    
    $
    (66
    )
    
    $
    (37
    )Specialty Lines
    
    
    (7
    )
    
    
    (2
    )Corporate and Other
    
    
    (17
    )
    
    
    (8
    )Pretax expense
    
    $
    (90
    )
    
    $
    (47
    )
 Interest cost on reinsurance contracts accounted for on a funds withheld basis is incurred
during all periods in which a funds withheld liability exists, and is included in
net investment income. The amount subject to interest crediting rates on such contracts was $2,463 million and
$2,564 million at March 31, 2005 and December 31, 2004. Certain funds withheld reinsurance
contracts, including the corporate aggregate reinsurance treaties, require interest on additional
premiums arising from ceded losses as if those premiums were payable at the inception of the
contract. The amount subject to interest crediting on these funds withheld contracts will vary over time
based on a number of factors, including the timing of loss payments and ultimate gross losses
incurred. The Company expects that it will continue to incur significant interest costs on these
contracts for several years. 53




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Corporate Aggregate Reinsurance Treaties The Company has an aggregate reinsurance treaty related to the 1999 through 2001 accident years
that covers substantially all of the Companys property and casualty lines of business (the
Aggregate Cover). The Aggregate Cover provides for two sections of coverage. These coverages
attach at defined loss ratios for each accident year. Coverage under the first section of the
Aggregate Cover, which is available for all accident years covered by the treaty, has a $500
million limit per accident year of ceded losses and an aggregate limit of $1 billion of ceded
losses for the three accident years. The ceded premiums associated with the first section are a
percentage of ceded losses and for each $500 million of limit the ceded premium is $230 million.
The second section of the Aggregate Cover, which only relates to accident year 2001, provides
additional coverage of up to $510 million of ceded losses for a maximum ceded premium of $310
million. Under the Aggregate Cover, interest charges on the funds withheld liability accrue at 8%
per annum. The aggregate loss ratio for the three-year period has exceeded certain thresholds
which requires additional premiums to be paid and an increase in the rate at which interest charges
are accrued. This rate will increase to 8.25% per annum commencing in 2006. Also, if an
additional aggregate loss ratio threshold is exceeded, additional premiums of 10% of amounts in
excess of the aggregate loss ratio threshold are to be paid retroactively with interest. The
aggregate limits under both sections of the Aggregate Cover have been fully utilized. In 2001, the Company entered into a one-year aggregate reinsurance treaty related to the 2001
accident year covering substantially all property and casualty lines of business in the Continental
Casualty Company pool (the CCC Cover). The loss protection provided by the CCC Cover has an
aggregate limit of approximately $761 million of ceded losses. The ceded premiums are a percentage
of ceded losses. The ceded premium related to full utilization of the $761 million of limit is
$456 million. The CCC Cover provides continuous coverage in excess of the second section of the
Aggregate Cover discussed above. Under the CCC Cover, interest charges on the funds withheld are
accrued at 8% per annum. The interest rate increases to 10% per annum if the aggregate loss ratio
exceeds certain thresholds. The aggregate loss ratio exceeded that threshold in the fourth quarter
of 2004 which required retroactive interest charges on funds withheld. The CCC Cover was fully
utilized in 2003. At the Companys discretion, the contract can be commuted annually on the anniversary date of the
contract. The CCC Cover requires mandatory commutation on December 31, 2010, if the agreement has
not been commuted on or before such date. Upon mandatory commutation of the CCC Cover, the
reinsurer is required to release to the Company the existing balance of the funds withheld account
if the unpaid ultimate ceded losses at the time of commutation are less than or equal to the funds
withheld account balance. If the unpaid ultimate ceded losses at the time of commutation are
greater than the funds withheld account balance, the reinsurer will release the existing balance of
the funds withheld account and pay CNA the present value of the projected amount the reinsurer
would have had to pay from its own funds absent a commutation. The present value is calculated
using 1-year LIBOR as of the date of the commutation. Terrorism Insurance CNA and the insurance industry incurred substantial losses related to the 2001 World Trade
Center event. For the most part, the industry was able to absorb the loss of capital from these
losses, but the capacity to withstand the effect of any additional terrorism events was
significantly diminished. The Terrorism Risk Insurance Act of 2002 (the Act) established a program within the Department of
the Treasury under which the federal government will share the risk of loss by commercial property
and casualty insurers arising from future terrorist attacks. The Act expires on December 31, 2005.
Each participating insurance company must pay a deductible, ranging from 7% of direct earned
premiums from commercial insurance lines in 2003 to 15% in 2005, before federal government
assistance becomes available. For losses in excess of a companys deductible, the federal
government will cover 90% of the excess losses, while companies retain the remaining 10%. Losses
covered by the program will be capped annually at $100 billion; above this amount, insurers are not
liable for covered losses and Congress is to determine the procedures for and the source of any
payments. Amounts paid by the federal government under the program over certain phased limits are
to be recouped by the Department of the Treasury through policy surcharges, which cannot exceed 3%
of annual premium. 54




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued The Company is required to participate in the program, but it does not cover life or health
insurance products. State law limitations applying to premiums and policies for terrorism coverage
are not generally affected under the program. The Act required insurers to offer terrorism
coverage through 2004. On June 18, 2004, the Department of the Treasury announced its decision to
extend this offer requirement until December 31, 2005. While the Act provides the property and casualty industry with an increased ability to withstand
the effect of a terrorist event through 2005, given the unpredictability of the nature, targets,
severity or frequency of potential terrorist events, the Companys results of operations or equity
could nevertheless be materially adversely impacted by them. The Company is attempting to mitigate
this exposure through its underwriting practices, policy terms and conditions (where applicable).
In addition, under state laws, the Company is generally prohibited from excluding terrorism
exposure from its primary workers compensation. In those states that mandate property insurance
coverage of damage from fire following a loss, the Company is also prohibited from excluding
terrorism exposure under such coverage. Terrorism-related reinsurance losses are not covered by the Act. The Companys assumed reinsurance
arrangements either exclude terrorism coverage or significantly limit the level of coverage. There are currently two pending bills in Congress, H.R. 1153 and S. 467, to reauthorize the Act.
These bills would extend the Act for two additional years and require that terrorism coverage be
made available for all years. Deductibles under the bills would be held at 15% in 2006 and raised
to 20% in 2007. The House and the Senate have both held hearings on the subject and it is expected
that they will act on the bills closer to the release of the U.S. Treasury Departments report in
June, 2005. The President has also stated that Congress should address the Acts reauthorization.
Notwithstanding these developments, enactment of a law extending the Act is not assured. Over the past several years, CNA has been underwriting its business to manage its terrorism
exposure. If the Act is not reauthorized, CNA will utilize conditional terrorism exclusions for
risks that present terrorism exposure, where permitted by law. Strict underwriting standards and
risk avoidance measures will be taken where exclusions are not permitted. Annual policy renewals
with effective dates of January 1, 2005 or later are being underwritten with the assumption that
the Act will not be extended and that no Federal backstop for terrorism exposure will be available.
In July 2004, the National Association of Insurance Commissioners adopted a Model Bulletin
available for use in states that intend to approve terrorism coverage limitations in the event the
Act is not reauthorized. To date, conditional terrorism exclusions have been approved in all states
except New York, Florida and Georgia. Accordingly, if the Act is not extended, CNA will utilize
these conditional terrorism exclusions in all states where so allowed. Notwithstanding CNAs
efforts, however, there is no assurance that CNA will be able to eliminate or limit terrorism
exposure risks in coverages, or that all regulatory authorities will approve policy exclusions for
terrorism. Restructuring As discussed in the Companys 2004 Form 10-K/A, the Company continues to manage the
liabilities from a restructuring plan related to restructuring the property and casualty segments
and the Life and Group Non-Core segment, discontinuation of the variable life and annuity business
and consolidation of real estate locations (the 2001 Plan). No restructuring and other related
charges related to the 2001 Plan were incurred for the three months ended March 31, 2005 and 2004.
During the first three months of 2005, $1 million in payments for lease termination costs were
charged against the liability. As of March 31, 2005, the accrued liability, relating primarily to
lease termination costs, was $14 million. Of the remaining accrual, approximately $2 million is
expected to be paid in 2005. 55




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEGMENT RESULTS The following discusses the results of operations for the Companys operating segments. In
evaluating the results of the Standard Lines and Specialty Lines, management utilizes the combined
ratio, the loss ratio, the expense ratio, and the dividend ratio. These ratios are calculated
using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim
adjustment expenses to net earned premiums. The expense ratio is the percentage of underwriting
and acquisition expenses, including the amortization of deferred acquisition costs, to net earned
premiums. The dividend ratio is the ratio of dividends incurred to net earned premiums. The
combined ratio is the sum of the loss, expense and dividend ratios. 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 the Reinsurance section of this MD&A for
further discussion of the corporate aggregate reinsurance treaties. For the three months ended
March 31, 2005, the Company recorded unfavorable net prior year development of $12 million related
to the corporate aggregate reinsurance treaties, consisting of $9 million of unfavorable
development in Standard Lines, $5 million of favorable development in Specialty Lines and $8
million of unfavorable development in Corporate and Other Non-Core. Reclassification of Change in Allowance for Uncollectible Reinsurance In 2004, the expenses incurred related to
uncollectible reinsurance receivables were reclassified from Other operating expenses to
Insurance claims and policyholders benefits on the Consolidated Statements of Operations. Prior
period amounts and ratios have been reclassified to conform to the current year presentation. This
reclassification had no impact on net income (loss) or the combined ratios in any period; however,
this change generally had an unfavorable impact on the loss and loss adjustment expense ratios and
a favorable impact on the expense ratios. STANDARD LINES The following table summarizes the results of operations for Standard Lines. Results of Operations For the three months ended March 31
    
    2005
    
    
    2004(In millions)Net written premiums
    
    $
    1,171
    
    
    $
    1,265Net earned premiums
    
    
    1,169
    
    
    
    1,258Income before net realized investment gains (losses)
    
    
    101
    
    
    
    114Net realized investment gains (losses)
    
    
    (8
    )
    
    
    38Net income
    
    
    93
    
    
    
    152RatiosLoss and loss adjustment expense
    
    
    71.0
    %
    
    
    65.5
    %Expense
    
    
    32.4
    
    
    
    33.5Dividend
    
    
    0.3
    
    
    
    0.7Combined
    
    
    103.7
    %
    
    
    99.7
    %
 Net written premiums for Standard Lines decreased $94 million and net earned premiums
decreased $89 million for the three months ended March 31, 2005 as compared with the same period in
2004. These decreases were driven by reduced new business and decreased retention primarily in
large account business, including workers compensation. Specifically impacting retention was the
impact of intentional underwriting actions primarily within unprofitable lines of business,
including reductions in workers compensation policies classified as high hazard. These decreases
were partially offset by favorable premium development as discussed below. Standard Lines rate was unchanged for the three months ended March 31, 2005 as compared to rate
increases of 6-7% for same period in 2004 for the contracts that renewed during the period.
Retention rates of 69% and 74% were achieved for those contracts that were up for renewal. CNA
expects rate to continue to moderate as competition for premiums continues to accelerate in these
lines of business. 56




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income decreased $59 million for the three months ended March 31, 2005 as compared with the
same period in 2004, primarily due to decreased net realized investment results. First quarter of
2005 results were also adversely impacted by increased unfavorable net prior year development,
partially offset by a decrease in the bad debt provision for insurance and reinsurance receivables,
improved current accident year results and lower operating expenses. See the Investments section
of the MD&A for further discussion on net investment income and net realized investment results. The combined ratio increased 4.0 points for the three months ended March 31, 2005 as compared with
the same period in 2004. The loss ratio increased 5.5 points due principally to increased
unfavorable net prior year development. The unfavorable net prior year development was primarily
related to an adverse arbitration ruling involving two reinsurance treaties as discussed below.
This arbitration decision also adversely affected acquisition expenses. These unfavorable impacts
were partially offset by a release of a previously established allowance for reinsurance
receivables related to this arbitration. Unfavorable net prior year development of $33 million was recorded for the three months ended March
31, 2005, including $132 million of unfavorable claim and allocated claim adjustment expense
reserve development and $99 million of favorable premium development. Favorable net prior year
development of $18 million, including $2 million of favorable claim and allocated claim adjustment
expense reserve development and $16 million of favorable premium development, was recorded for the
three months ended March 31, 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 $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. Other net prior year
claim and allocated claim adjustment expense reserve development was due to improvement in the
severity and number of claims for property coverages, primarily in accident year 2004, partially
offset by unfavorable net prior year development due to increased severity on older individual
claims, primarily workers compensation. Favorable net prior year premium development was recorded
as a result of additional premium resulting from audits and endorsements on recent policies,
primarily workers compensation. Additionally, there was approximately $18 million of unfavorable
net prior year claim and allocated claim adjustment expense development and $9 million of favorable
premium development related to the corporate aggregate reinsurance treaties in the first quarter of
2005. The following table summarizes the gross and net carried reserves as of March 31, 2005 and December
31, 2004 for Standard Lines. Gross and Net Carried
Claim and Claim Adjustment Expense Reserves March 31, 2005
    
    
    December 31, 2004(In millions)Gross Case Reserves
    
    $
    6,796
    
    
    $
    6,904Gross IBNR Reserves
    
    
    7,396
    
    
    
    7,398Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,192
    
    
    $
    14,302Net Case Reserves
    
    $
    4,580
    
    
    $
    4,761Net IBNR Reserves
    
    
    4,816
    
    
    
    4,547Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    9,396
    
    
    $
    9,308
 The expense ratio decreased 1.1 points for the three months ended March 31, 2005 as compared
with the same period in 2004. This decrease in 2005 was primarily due to reduced operating
expenses as compared with the same period in 2004 and a decrease in the bad debt provision for
insurance receivables. Partially offsetting these favorable impacts were reduced ceding
commissions as a result of the unfavorable arbitration ruling discussed above. 57




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The dividend ratio decreased 0.4 points for the three months ended March 31, 2005 as compared with
the same period in 2004 due primarily to favorable net prior year dividend development of $2
million recorded in the first quarter of 2005, primarily in package property and boiler and
machinery products. SPECIALTY LINES The following table summarizes the results of operations for Specialty Lines. Results of OperationsFor the three months ended March 31
    
    2005
    
    
    2004(In millions)Net written premiums
    
    $
    594
    
    
    $
    581Net earned premiums
    
    
    573
    
    
    
    529Income before net realized investment gains
    
    
    79
    
    
    
    75Net realized investment gains
    
    
    3
    
    
    
    13Net income
    
    
    82
    
    
    
    88RatiosLoss and loss adjustment expense
    
    
    62.3
    %
    
    
    63.1
    %Expense
    
    
    26.9
    
    
    
    26.4Dividend
    
    
    0.2
    
    
    
    0.4Combined
    
    
    89.4
    %
    
    
    89.9
    %
 Net written premiums for Specialty Lines increased $13 million and net earned premiums
increased $44 million for the three months ended March 31, 2005 as compared with the same period in
2004. This increase was primarily due to improved retention and rate increases across several
professional liability insurance lines of business. Premiums were also favorably impacted by a
decreased use of reinsurance due to the second quarter of 2004 discontinuation of a reinsurance
program for coverages provided to health care professionals. These favorable impacts were
partially offset by decreased written premiums for the warranty business, due to a change in the
warranty product offering. Fees related to the new warranty product are included within other
revenues. Specialty Lines averaged rate increases of 2% and 13% for the three months ended March 31, 2005 and
2004 for the contracts that renewed during those periods. Retention rates of 89% and 83% were
achieved for those contracts that were up for renewal. CNA expects rate achievement will continue
to moderate as competition for premiums continues to accelerate in these lines of business. Net income decreased $6 million for the three months ended March 31, 2005 as compared with the same
period in 2004. This decrease was driven primarily by increased unfavorable net prior year
development, decreased net investment income and decreased net realized investment results. These
decreases were partially offset by increased earned premiums as discussed above and a decrease in
the provision for bad debt allowance for reinsurance receivables. See the Investments section of
this MD&A for further discussion on net investment income and net realized investment results. The combined ratio decreased 0.5 points for the three months ended March 31, 2005 as compared with
the same period in 2004. The loss ratio decreased 0.8 points due principally to an improvement in
the current accident year results and a decrease in the bad debt provision for reinsurance
receivables. These favorable impacts to the loss ratio were partially offset by increased
unfavorable net prior year development as discussed below. Unfavorable net prior year development of $30 million was recorded for the three months ended March
31, 2005, including $13 million of unfavorable claim and allocated claim adjustment expense and $17
million of unfavorable premium development. Unfavorable net prior year development was not
significant for the three months ended March 31, 2004. Approximately $27 million of unfavorable net prior year claim and allocated claim adjustment
expense development was related to large directors and officers 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 $29
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. Additionally, there was approximately $25 million of
favorable net 58




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS prior year claim and allocated claim adjustment expense development and $20 million of unfavorable
premium development related to the corporate aggregate reinsurance treaties in the first quarter of
2005. The following table summarizes the gross and net carried reserves as of March 31, 2005 and December
31, 2004 for Specialty Lines. Gross and Net Carried
Claim and Claim Adjustment Expense Reserves March 31, 2005
    
    
    December 31, 2004(In millions)Gross Case Reserves
    
    $
    1,762
    
    
    $
    1,659Gross IBNR Reserves
    
    
    3,159
    
    
    
    3,201Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    4,921
    
    
    $
    4,860Net Case Reserves
    
    $
    1,198
    
    
    $
    1,191Net IBNR Reserves
    
    
    2,157
    
    
    
    2,042Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    3,355
    
    
    $
    3,233
 The expense ratio increased 0.5 points for the three months ended March 31, 2005 as compared
with the same period in 2004. This increase was primarily due to lower ceding commissions related
to the second quarter of 2004 discontinuation of a reinsurance program for coverages provided to
health care professionals. These increases were partially offset by an increased earned premium
base. The dividend ratio decreased 0.2 points for the three months ended March 31, 2005 as compared with
the same period in 2004. This decrease was primarily due to decreased surety dividends and an
increased earned premium base. LIFE AND GROUP NON-CORE The following table summarizes the results of operations for Life and Group Non-Core. Results of Operations For the three months ended March 31
    
    2005
    
    
    2004(In millions)Net earned premiums
    
    $
    166
    
    
    $
    326Income before net realized investment losses
    
    
    1
    
    
    
    19Net realized investment losses
    
    
    (3
    )
    
    
    (401
    )Net loss
    
    
    (2
    )
    
    
    (382
    )
 Net earned premiums for Life and Group Non-Core decreased $160 million in the first quarter of
2005 as compared with the same period in 2004. The decrease in net earned premiums was due
primarily to the absence of premiums from the individual life business of $105 million and a
decrease in premiums of the specialty medical business of $31 million. The individual life
business was sold on April 30, 2004, and the specialty medical business was sold on January 6,
2005. Additionally, decreased earned premiums from the structured settlement business contributed
to the decline in net earned premium. In February of 2004, CNA ceased sales to new customers in
its structured settlement business. Net results increased $380 million in the first quarter of 2005 as compared with the same period in
2004. The increase in net results related primarily to the absence of the impairment loss of $406
million after-tax ($569 million pretax) recorded in the first quarter of 2004 for the individual
life insurance business and an improvement in net results for life settlement contracts. Partially
offsetting these increases to 2005 net results is the decrease in results from the individual life
business of $9 million, before the impairment described above, and decreased results related to
indexed group annuity contracts. See the Investments section of this MD&A for additional
information on net realized investment losses and net investment income. 59




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CORPORATE AND OTHER NON-CORE The following table summarizes the results of operations for the Corporate and Other Non-Core
segment, including APMT and intrasegment eliminations. Results of Operations For the three months ended March 31
    
    2005
    
    
    2004(In millions)Net investment income
    
    $
    61
    
    
    $
    69Revenues
    
    
    35
    
    
    
    134Income before net realized investment gains (losses)
    
    
    11
    
    
    
    1Net realized investment gains (losses)
    
    
    (6
    )
    
    
    17Net income
    
    
    5
    
    
    
    18
 Revenues decreased $99 million for the three months ended March 31, 2005 as compared with the
same period in 2004. The decrease in revenues was due primarily to reduced net earned premiums in
CNA Re of $77 million due to the exit from the assumed reinsurance business in 2003 and an
additional pre-tax impairment loss of $13 million recorded in the first quarter of 2005 related to
loans made under a credit facility to a national contractor. See the Critical Accounting Estimates
section of this MD&A for additional information on loans to the national contractor. As previously disclosed, CNA sold its personal insurance business to Allstate Corporation
(Allstate) in 1999. Under the revised terms of this transaction, Allstate purchased an option
exercisable during 2005 to purchase 100% of the common stock of five CNA subsidiaries at the fair
market value as of the exercise date. CNA expects Allstate to exercise its option in the fourth
quarter of 2005, at which time CNA will recognize a previously deferred gain from the sale of these
subsidiaries of $12 million. CNA expects to write new and renewal personal insurance policies and
to reinsure this business with Allstate companies, and earn related royalty fees, until Allstate
exercises its option. Royalty fees earned for the three months ended March 31, 2005 and 2004 were
approximately $7 million and $6 million. Net income decreased $13 million for the three months ended March 31, 2005 as compared with the
same period in 2004. The decrease in net income was due primarily to lower revenues, including
lower investment results in the segment for the current year. Partially offsetting these decreases
was the absence of an increase in the allowance for reinsurance receivables of $16 million
after-tax ($25 million pretax) recorded in 2004. Unfavorable net prior year development of $21 million, including $4 million of unfavorable claim
and allocated claim adjustment expense development and $17 million of unfavorable premium
development, was recorded for the three months ended March 31, 2005. Unfavorable net prior year development of $19 million, including $4 million of unfavorable claim
and allocated claim adjustment expense development and $15 million of unfavorable premium
development, was recorded in CNA Re. The unfavorable claim and allocated claim adjustment expense
development was primarily related to the corporate aggregate reinsurance treaties. The unfavorable
premium development was driven by $13 million of additional ceded reinsurance premium on agreements
where the ceded premium depends on the ceded loss and $1 million of additional premium ceded to the
corporate aggregate reinsurance treaties. The remaining unfavorable net prior year development recorded in the Corporate and Other Non-Core
segment resulted from commutations and increases to net reserves due to reducing ceded losses. 60




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS The following table summarizes the gross and net carried reserves as of March 31, 2005 and December
31, 2004 for Corporate and Other Non-Core. Gross and Net Carried
Claim and Claim Adjustment Expense Reserves March 31, 2005
    
    
    December 31, 2004(In millions)Gross Case Reserves
    
    $
    3,642
    
    
    $
    3,806Gross IBNR Reserves
    
    
    4,693
    
    
    
    4,875Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    8,335
    
    
    $
    8,681Net Case Reserves
    
    $
    1,597
    
    
    $
    1,588Net IBNR Reserves
    
    
    1,443
    
    
    
    1,691Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    3,040
    
    
    $
    3,279
 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. 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 future increase in asbestos and environmental pollution
claims which cannot now be anticipated; a future 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 payments that may exhaust
underlying umbrella and excess coverages at accelerated rates; and future developments pertaining
to the Companys ability to recover reinsurance for asbestos, pollution and mass tort claims. CNA regularly performs ground up reviews of all open APMT accounts 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 61




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 reasonable
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 after 1989. 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 reserves for APMT claim and claim adjustment
expenses 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, and 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. 62




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table provides data related to CNAs APMT claim and claim adjustment expense
reserves. Asbestos and Environmental Pollution and Mass Tort Reserves March 31, 2005
    
    
    December 31, 2004Environmental
    
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    
    Pollution and(In millions)
    
    Asbestos
    
    
    Mass Tort
    
    
    Asbestos
    
    
    Mass TortGross reserves
    
    $
    3,116
    
    
    $
    688
    
    
    $
    3,218
    
    
    $
    755Ceded reserves
    
    
    (1,481
    )
    
    
    (238
    )
    
    
    (1,532
    )
    
    
    (258
    )Net reserves
    
    $
    1,635
    
    
    $
    450
    
    
    $
    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. In the past several years, CNA has experienced, at certain points in time, significant increases in
claim counts for asbestos-related claims. The factors that led to these increases included, among
other things, intensive advertising campaigns by lawyers for asbestos claimants, mass medical
screening programs sponsored by plaintiff lawyers and the addition of new defendants such as the
distributors and installers of products containing asbestos. During 2004 and continuing in the
first quarter of 2005, the rate of new filings appears to have decreased from the filing rates seen
in the past several years. Various challenges to mass screening claimants have been mounted.
Nevertheless, the Company continues to experience an overall increase in total asbestos claim
counts. The majority of asbestos bodily injury claims are filed by persons exhibiting few, if any,
disease symptoms. Recent studies have concluded that the percentage of unimpaired claimants to
total claimants ranges between 66% and up to 90%. Some courts, including the federal district
court responsible for pre-trial proceedings in all federal asbestos bodily injury actions, have
ordered that so-called unimpaired claimants may not recover unless at some point the claimants
condition worsens to the point of impairment. Several factors are, in managements view, negatively impacting asbestos claim trends. Plaintiff
attorneys who previously sued entities who are now bankrupt are seeking other viable targets. As a
result, companies with few or no previous asbestos claims are becoming targets in asbestos
litigation and, although they may have little or no liability, nevertheless must be defended.
Additionally, plaintiff attorneys and trustees for future claimants are demanding that policy
limits be paid lump-sum into the bankruptcy asbestos trusts prior to presentation of valid claims
and medical proof of these claims. Various challenges to these practices are currently in
litigation and the ultimate impact or success of these tactics remains uncertain. Plaintiff
attorneys and trustees for future claimants are also attempting to devise claims payment procedures
for bankruptcy trusts that would allow asbestos claims to be paid under lax standards for injury,
exposure and causation. This also presents the potential for exhausting policy limits in an
accelerated fashion. As a result of bankruptcies and insolvencies, management has observed an increase in the total
number of policyholders with current asbestos claims as additional defendants are added to existing
lawsuits and are named in new asbestos bodily injury lawsuits. New asbestos bodily injury claims
have also increased substantially in 2003, but the rate of increase has moderated in 2004. As of March 31, 2005 and December 31, 2004, CNA carried approximately $1,635 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 $2 million and $9 million of
unfavorable asbestos-related net claim and claim adjustment expense reserve development for the
three months ended March 31, 2005 and 2004. The Company paid asbestos-related claims, net of
reinsurance recoveries, of $53 million and $64 million for the three months ended March 31, 2005
and 2004. 63




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has resolved a number of its large asbestos accounts by negotiating settlement
agreements. Structured settlement agreements provide for payments over multiple years as set forth
in each individual agreement. At March 31, 2005, CNA had 13 structured settlement agreements with
a reserve net of reinsurance of $158 million. At December 31, 2004, CNA had eleven structured
settlement agreements with a reserve net of reinsurance of $175 million. As to the 13 structured
settlement agreements existing at March 31, 2005, payment obligations under those settlement
agreements are projected to terminate by 2016. In 1985, 47 asbestos producers and their insurers, including CIC, executed the Wellington
Agreement. The agreement intended to resolve all issues and litigation related to coverage for
asbestos exposures. Under this agreement, signatory insurers committed scheduled policy limits and
made the limits available to pay asbestos claims based upon coverage blocks designated by the
policyholders in 1985, subject to extension by policyholders. CIC was a signatory insurer to the
Wellington Agreement. At March 31, 2005, CNA had obligations for four accounts. With respect to
these four remaining unpaid Wellington obligations, CNA has evaluated its exposure and the expected
reinsurance recoveries under these agreements and has a recorded reserve of $17 million, net of
reinsurance. At December 31, 2004, CNA had fulfilled its Wellington Agreement obligations as to
all but four accounts and had a recorded reserve of $17 million, net of reinsurance. CNA has also used coverage in place agreements to resolve large asbestos exposures. Coverage in
place agreements are typically agreements between CNA and its policyholders identifying the
policies and the terms for payment of asbestos related liabilities. Claims payments are contingent
on presentation of adequate documentation showing exposure during the policy periods and other
documentation supporting the demand for claims payment. Coverage in place agreements may have
annual payment caps. Coverage in place agreements are evaluated based on claims filings trends and
severities. As of March 31, 2005, CNA had negotiated 33 coverage in place agreements. The Company
has evaluated these commitments and the expected reinsurance recoveries under these agreements and
has recorded a reserve of $71 million, net of reinsurance as of March 31, 2005. As of December 31,
2004, CNA had negotiated 33 coverage in place agreements. The Company had evaluated these
commitments and the expected reinsurance recoveries under these agreements and had recorded a
reserve of $76 million, net of reinsurance, as of December 31, 2004. The Company categorizes active asbestos accounts as large or small accounts. CNA defines a large
account as an active account with more than $100,000 of cumulative paid losses. The Company has
made closing large accounts a significant management priority. At March 31, 2005, CNA had 184
large accounts with reserves of $360 million, net of reinsurance. At December 31, 2004, the
Company had 180 large accounts and had established reserves of $368 million, net of reinsurance.
Small accounts are defined as active accounts with $100,000 or less cumulative paid losses. At
March 31, 2005, CNA had 1,084 small accounts, approximately 82% of its total active asbestos
accounts, with reserves of $132 million, net of reinsurance. At December 31, 2004, the Company had
1,109 small accounts, approximately 83% of its total active asbestos accounts, with reserves of
$141 million, net of reinsurance. Small accounts are typically representative of policyholders
with limited connection to asbestos. As entities which were historic targets in asbestos
litigation continue to file for bankruptcy protection, plaintiffs attorneys are seeking other
viable targets. As a result, companies with few or no previous asbestos claims are becoming
targets in asbestos litigation and nevertheless must be defended by CNA under its policies.
Bankruptcy filings and increased claims filings in the last few years could potentially increase
costs incurred in defending small accounts. The Company also evaluates its asbestos liabilities arising from its assumed reinsurance business
and its participation in various pools. At March 31, 2005 and December 31, 2004, CNA had $147
million and $148 million of reserves, net of reinsurance, related to these asbestos liabilities
arising from the Companys assumed reinsurance obligations and CNAs participation in pools,
including Excess & Casualty Reinsurance Association (ECRA). At March 31, 2005 and December 31, 2004, the unassigned IBNR reserve was $696 million and $707
million, net of reinsurance. This IBNR reserve relates to potential development on accounts that
have not settled and potential future claims from unidentified policyholders. 64




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The tables below depict CNAs overall pending asbestos accounts and associated reserves at March
31, 2005 and December 31, 2004. Pending Asbestos Accounts and Associated Reserves March 31, 2005 Net Paid Losses
    
    
    Net Asbestos
    
    
    Percent ofNumber of
    
    
    in 2005
    
    
    Reserves
    
    
    AsbestosPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    Net ReservesPolicyholders with settlement agreementsStructured Settlements
    
    
    13
    
    
    $
    18
    
    
    $
    158
    
    
    
    10
    %Wellington
    
    
    4
    
    
    
    1
    
    
    
    17
    
    
    
    1Coverage in place
    
    
    33
    
    
    
    5
    
    
    
    71
    
    
    
    4Fibreboard
    
    
    1
    
    
    
    
    
    
    
    54
    
    
    
    3Total with settlement agreements
    
    
    51
    
    
    
    24
    
    
    
    300
    
    
    
    18Other policyholders with active accountsLarge asbestos accounts
    
    
    184
    
    
    
    20
    
    
    
    360
    
    
    
    22Small asbestos accounts
    
    
    1,084
    
    
    
    8
    
    
    
    132
    
    
    
    8Total other policyholders
    
    
    1,268
    
    
    
    28
    
    
    
    492
    
    
    
    30Assumed reinsurance and pools
    
    
    
    
    
    
    1
    
    
    
    147
    
    
    
    9Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    696
    
    
    
    43Total
    
    
    1,319
    
    
    $
    53
    
    
    $
    1,635
    
    
    
    100
    %
 Pending Asbestos Accounts and Associated Reserves December 31, 2004 Net Paid Losses
    
    
    Net Asbestos
    
    
    Percent ofNumber of
    
    
    in 2004
    
    
    Reserves
    
    
    AsbestosPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    Net ReservesPolicyholders with settlement agreementsStructured Settlements
    
    
    11
    
    
    $
    39
    
    
    $
    175
    
    
    
    10
    %Wellington
    
    
    4
    
    
    
    4
    
    
    
    17
    
    
    
    1Coverage in place
    
    
    33
    
    
    
    14
    
    
    
    76
    
    
    
    5Fibreboard
    
    
    1
    
    
    
    
    
    
    
    54
    
    
    
    3Total with settlement agreements
    
    
    49
    
    
    
    57
    
    
    
    322
    
    
    
    19Other policyholders with active accountsLarge asbestos accounts
    
    
    180
    
    
    
    47
    
    
    
    368
    
    
    
    22Small asbestos accounts
    
    
    1,109
    
    
    
    23
    
    
    
    141
    
    
    
    8Total other policyholders
    
    
    1,289
    
    
    
    70
    
    
    
    509
    
    
    
    30Assumed reinsurance and pools
    
    
    
    
    
    
    8
    
    
    
    148
    
    
    
    9Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    707
    
    
    
    42Total
    
    
    1,338
    
    
    $
    135
    
    
    $
    1,686
    
    
    
    100
    %
 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 65




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 number of
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 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, filed in 2003, with underlying plaintiffs who have
asbestos bodily injury claims against the former Robert A. Keasbey Company (Keasbey) in New York
state court (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. 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 is now
being appealed. 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 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 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 claimed 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 66




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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 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 claimed 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 78,254 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 CNA and other insurers in four jurisdictions: Ohio,
Texas, West Virginia and Montana. In the Ohio actions, plaintiffs allege that the defendants
negligently performed duties undertaken to protect workers and the public from the effects of
asbestos (Varner v. Ford Motor Co., et al. (Cuyahoga County, Ohio, filed on June 12, 2003);
Peplowski v. ACE American Ins. Co., et al. (U.S. D. C. N.D. Ohio, filed on April 1, 2004)
and Cross v. Garlock, Inc., et al. (Trumbull County, Ohio, filed on September 1, 2004)).
The Cuyahoga County court granted insurers, including CNA, summary judgment against an initial
group of plaintiffs, ruling that insurers had no duty to warn plaintiffs about the dangers of
asbestos. That ruling is on appeal. 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 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 67




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 against CNA beginning in 2002 against CNA, and other insurers
and non-insurer corporate defendants asserting liability for failing to warn of the dangers of
asbestos (Boson v. Union Carbide Corp., et al. (Nueces County, Texas)). During 2003, many
of the Texas claims were dismissed as time-barred by the applicable Statute of Limitations. In
other claims, the Texas courts ruled that the carriers did not owe any duty to the plaintiffs or
the general public to advise on the effects of asbestos thereby dismissing these claims. Certain
of the Texas courts rulings have been appealed. 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. CNA was named in Adams v. Aetna, Inc., et al. (Circuit Court of Kanawha County, West
Virginia, filed June 23, 2002), a purported class action against CNA and other insurers, alleging
that the defendants violated West Virginias Unfair Trade Practices Act in handling and resolving
asbestos claims against their policyholders. The Adams litigation had been stayed pending a planned
motion by plaintiffs to file an amended complaint that reflects two June 2004 decisions of the West
Virginia Supreme Court of Appeals. The Adams case is related to proceedings and mediation in the
Bankruptcy Court in New York with jurisdiction over the Manville Bankruptcy. At issue, in those
proceedings is the extent to which actions such as Adams violate injunctions against claims that
insurers of Manville obtained in the Manville Bankruptcy. That issue is now on appeal to the
United States District Court for the Southern District of New York. With respect to the Adams
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 issues
include: (a) the legal sufficiency of the novel statutory and common law claims pled by the
claimants; (b) the applicability of claimants legal theories to insurers who 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; and (e) 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. 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 68




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS developments with respect to any of these matters could have a material adverse effect on CNAs
business, insurer financial strength and debt ratings and 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 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. 69




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 an 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. A number of proposals to modify Superfund have been made by various parties. However, no
modifications were enacted by Congress during 2004. In the first three months of 2005, Congress
has not enacted modification to Superfund, and it is unclear what positions Congress or the
Administration will take and what legislation, if any, will result in the future. If there is
legislation, and in some circumstances even if there is no legislation, the federal role in
environmental cleanup may be significantly reduced in favor of state action. Substantial changes
in the federal statute or the activity of the EPA may cause states to reconsider their
environmental cleanup statutes and regulations. There can be no meaningful prediction of the
pattern of regulation that would result or the possible effect upon CNAs results of operations or
equity. As of March 31, 2005 and December 31, 2004, CNA carried approximately $450 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 no environmental pollution and
mass tort net claim and claim adjustment expense reserve development recorded for the three months
ended March 31, 2005 and 2004. The Company recorded $5 million of current accident year losses
related to mass tort for the three months ended March 31, 2005. The Company recorded no current
accident year losses related to mass tort for the three months ended March 31, 2004. The Company
paid environmental pollution-related claims and mass tort-related claims, net of reinsurance
recoveries, of $52 million and $36 million for the three months ended March 31, 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. The Company classifies its environmental pollution accounts into several categories, which include
structured settlements, coverage in place agreements and active accounts. Structured settlement
agreements provide for payments over multiple years as set forth in each individual agreement. At
March 31, 2005, CNA had 4 structured settlement agreements with its policyholders for which it had
future payment obligations with a recorded reserve of $9 million, net of reinsurance. At December
31, 2004, CNA had two structured settlement agreements and has established reserves of $5 million,
net of reinsurance, to fund future payment obligations under the agreements. CNA has also used coverage in place agreements to resolve pollution exposures. Coverage in place
agreements are typically agreements between CNA and its policyholders identifying the policies and
the terms for payment of pollution related liabilities. Claims payments are contingent on
presentation of adequate documentation of damages during the policy periods and other documentation
supporting the demand for claims payment. Coverage in place agreements may have annual payment
caps. At March 31, 2005, CNA had 16 such agreements with a recorded reserve of $16 million, net of
reinsurance. At December 31, 2004, CNA had negotiated 15 coverage in place agreements and had
established a reserve of $16 million, net of reinsurance. The Company categorizes active accounts as large or small accounts in the pollution area. CNA
defines a large account as an active account with more than $100,000 cumulative paid losses. At
March 31, 2005, CNA had 130 large accounts with a collective reserve of $71 million, net of
reinsurance. At December 31, 2004, the Company had 134 large accounts with a collective reserve of
$75 million, net of reinsurance. The Company has made closing large accounts a significant
management priority. Small accounts are defined as active accounts with $100,000 or less
cumulative paid losses. At March 31, 2005, CNA had 385 small accounts with a collective reserve of 70




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS $43 million, net of reinsurance. At December 31, 2004, CNA had 405 small accounts with a
collective reserve of $47 million, net of reinsurance. The Company also evaluates its environmental pollution exposures arising from its assumed
reinsurance and its participation in various pools, including ECRA. CNA has a reserve of $35
million and $36 million related to these liabilities as of March 31, 2005 and December 31, 2004. As of March 31, 2005 and December 31, 2004, CNA carried unassigned IBNR reserves for environmental
pollution of $143 million, net of reinsurance and $163 million, net of reinsurance. This IBNR
reserve relates to potential development on accounts that have not settled and potential future
claims from unidentified policyholders. The charts below depict CNAs overall pending environmental pollution accounts and associated
reserves at March 31, 2005 and December 31, 2004. NetEnvironmental
    
    
    Percent ofNet Paid Losses
    
    
    Pollution
    
    
    EnvironmentalNumber of
    
    
    in 2005
    
    
    Reserves
    
    
    Pollution NetAt March 31, 2005
    
    Policyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    ReservePolicyholders with Settlement AgreementsStructured settlements
    
    
    4
    
    
    $
    4
    
    
    $
    9
    
    
    
    3
    %Coverage in place
    
    
    16
    
    
    
    3
    
    
    
    16
    
    
    
    5Total with Settlement Agreements
    
    
    20
    
    
    
    7
    
    
    
    25
    
    
    
    8Other Policyholders with Active AccountsLarge pollution accounts
    
    
    130
    
    
    
    10
    
    
    
    71
    
    
    
    22Small pollution accounts
    
    
    385
    
    
    
    6
    
    
    
    43
    
    
    
    14Total Other Policyholders
    
    
    515
    
    
    
    16
    
    
    
    114
    
    
    
    36Assumed Reinsurance & Pools
    
    
    
    
    
    
    1
    
    
    
    35
    
    
    
    11Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    143
    
    
    
    45Total
    
    
    535
    
    
    $
    24
    
    
    $
    317
    
    
    
    100
    %
 NetEnvironmental
    
    
    Percent ofNet Paid Losses
    
    
    Pollution
    
    
    EnvironmentalNumber of
    
    
    in 2004
    
    
    Reserves
    
    
    Pollution NetAt December 31, 2004
    
    Policyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    ReservePolicyholders with Settlement AgreementsStructured settlements
    
    
    2
    
    
    $
    14
    
    
    $
    5
    
    
    
    1
    %Coverage in place
    
    
    15
    
    
    
    5
    
    
    
    16
    
    
    
    5Total with Settlement Agreements
    
    
    17
    
    
    
    19
    
    
    
    21
    
    
    
    6Other Policyholders with Active AccountsLarge pollution accounts
    
    
    134
    
    
    
    18
    
    
    
    75
    
    
    
    22Small pollution accounts
    
    
    405
    
    
    
    14
    
    
    
    47
    
    
    
    14Total Other Policyholders
    
    
    539
    
    
    
    32
    
    
    
    122
    
    
    
    36Assumed Reinsurance & Pools
    
    
    
    
    
    
    2
    
    
    
    36
    
    
    
    10Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    163
    
    
    
    48Total
    
    
    556
    
    
    $
    53
    
    
    $
    342
    
    
    
    100
    %
 71




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INVESTMENTS Net Investment Income The significant components of net investment income are presented in the following table. Net Investment Income Three months ended March 31
    
    2005
    
    
    2004(In millions)Fixed maturity securities
    
    $
    364
    
    
    $
    407Short term investments
    
    
    32
    
    
    
    16Limited partnerships
    
    
    79
    
    
    
    75Equity securities
    
    
    4
    
    
    
    4Income (loss) from trading portfolio (a)
    
    
    (30
    )
    
    
    20Interest on funds withheld and other deposits
    
    
    (39
    )
    
    
    (48
    )Other
    
    
    7
    
    
    
    10Gross investment income
    
    
    417
    
    
    
    484Investment expense
    
    
    (11
    )
    
    
    (9
    )Net investment income
    
    $
    406
    
    
    $
    475
 (a) The change in net unrealized gains (losses) on trading securities, included in net
investment income, was $(8) million and $4 million for the three months ended March 31, 2005 and
2004. The Company experienced lower net investment income for the three months ended March 31, 2005
compared with the same period of 2004. This decrease was due primarily to a decline in trading
portfolio results of $50 million and reduced investment income in the fixed maturity portfolio,
which largely relates to the sale of the individual life business. The reduced income from the
trading portfolio was largely offset by a corresponding reduction in the policyholders funds
reserves supported by the trading portfolio. These declines were partly offset by improved short
term and limited partnership results in addition to reduced interest expense on funds withheld and
other deposits. See the Reinsurance section of the MD&A regarding additional information about
interest costs on funds withheld and other deposits. The bond segment of the investment portfolio yielded 4.6% and 4.7% for the three months ended March
31, 2005 and 2004. 72




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Realized Investment Gains (Losses) The components of net realized investment results for available for sale securities are
presented in the following table. Net Realized Investment Gains (Losses) Three months ended March 31
    
    2005
    
    
    2004(In millions)Realized investment gains (losses):Fixed maturity securities:U.S. Government bonds
    
    $
    (26
    )
    
    $
    10Corporate and other taxable bonds
    
    
    (21
    )
    
    
    6Tax-exempt bonds
    
    
    7
    
    
    
    73Asset-backed bonds
    
    
    7
    
    
    
    39Redeemable preferred stock
    
    
    10
    
    
    
    1Total fixed maturity securities
    
    
    (23
    )
    
    
    129Equity securities
    
    
    14
    
    
    
    11Derivative securities
    
    
    4
    
    
    
    (32
    )Impairment loss on Individual Life business, net of
participating policyholders interest
    
    
    
    
    
    
    (569
    )Other, including disposition of businesses
    
    
    (17
    )
    
    
    4Realized investment gains (losses) before allocation to
participating policyholders and minority interests
    
    
    (22
    )
    
    
    (457
    )Allocated to participating policyholders and minority interests
    
    
    3
    
    
    
    (1
    )Income tax benefit
    
    
    5
    
    
    
    125Net realized investment gains (losses), net of participating
policyholders and minority interests
    
    $
    (14
    )
    
    $
    (333
    )
 Net realized investment losses were $14 million and $333 million for the three months ended
March 31, 2005 and 2004. The $319 million improvement in net realized results is largely related to
an after-tax impairment loss recorded in the first quarter of 2004 of $406 million ($569 million
pretax) related to the sale of CNAs individual life business. This improvement was partly offset
by decreased results in the fixed maturity securities portfolio and $21 million ($32 million
pretax) of total impairment losses recorded across various market sectors, including an impairment
loss of $9 million after-tax ($13 million pretax) related to loans made under a credit facility to
a national contractor. For 2004, there were no impairments other than the individual life sale
loss discussed above. A primary objective in the management of the fixed maturity and equity portfolios is to maximize
total return relative to underlying liabilities and respective liquidity needs. The Companys
views on the current interest rate environment, tax regulations, asset class valuations, specific
security issuer and broader industry segment conditions and the domestic and global economic
conditions are some of the factors that may enter into a decision to move between asset classes.
Based on the Companys consideration of these factors, in the course of normal investment activity
the Company may, in pursuit of the total return objective, be willing to sell securities that, in
its analysis, are overvalued on a risk adjusted basis relative to other opportunities that are
available at the time in the market; in turn the Company may purchase other securities that,
according to its analysis, are undervalued in relation to other securities in the market. In
making these value decisions, securities may be bought and sold that shift the investment portfolio
between asset classes. The Company also continually monitors exposure to issuers of securities
held and broader industry sector exposures and may from time to time reduce such exposures based on
its views of a specific issuer or industry sector. These activities will produce realized gains or
losses. The investment portfolio is periodically analyzed for changes in duration and related price change
risk. Additionally, the Company periodically reviews the sensitivity of the portfolio to the level
of foreign exchange rates and other factors that contribute to market price changes. A summary of
these risks and specific analysis on changes is included in Item 3  Quantitative and Qualitative
Disclosures about Market Risks included herein. Under certain economic conditions, including but
not limited to a changing interest rate environment, the Company may hedge the value of the
investment portfolio by utilizing derivative strategies. 73




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A further consideration in the management of the investment portfolio is the characteristics of the
underlying liabilities and the ability to align the duration of the portfolio to those liabilities
to meet future liquidity needs, minimize interest rate risk and maintain a level of income
sufficient to support the underlying insurance liabilities. For portfolios where future liability
cash flows are determinable and long term in nature, the Company segregates assets for asset
liability management purposes. CNA classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity
securities as either available-for-sale or trading, and as such, they are carried at fair value.
The amortized cost of fixed maturity securities is adjusted for amortization of premiums and
accretion of discounts to maturity, which is included in net investment income. Changes in fair
value related to available-for-sale securities are reported as a component of other comprehensive
income. Changes in fair value of trading securities are reported within net investment income. The following table provides further detail of gross realized gains and gross realized losses on
available-for-sale fixed maturity securities and equity securities. Realized Gains and Losses Three months ended March 31
    
    2005
    
    
    2004(In millions)Net realized gains (losses) on fixed maturity securities
and equity securities:Fixed maturity securities:Gross realized gains
    
    $
    176
    
    
    $
    225Gross realized losses
    
    
    (199
    )
    
    
    (96
    )Net realized gains (losses) on fixed maturity securities
    
    
    (23
    )
    
    
    129Equity securities:Gross realized gains
    
    
    20
    
    
    
    13Gross realized losses
    
    
    (6
    )
    
    
    (2
    )Net realized gains on equity securities
    
    
    14
    
    
    
    11Net realized gains (losses) on fixed maturity and equity
securities
    
    $
    (9
    )
    
    $
    140
 74




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table provides details of the largest realized losses from sales of securities
aggregated by issuer, including: the fair value of the securities at date of sale, the amount of
the loss recorded and the period of time that the security had been in an unrealized loss position
prior to sale. The period of time that the security had been in an unrealized loss position prior
to sale can vary due to the timing of individual security purchases. Also included is a narrative
providing the industry sector along with the facts and circumstances giving rise to the loss. Largest Realized Losses from Securities Sold at a Loss
    
    Three Months Ended March 31, 2005Fair
    
    
    
    
    
    
    Months inValue at
    
    
    
    
    
    
    UnrealizedDate of
    
    
    Loss
    
    
    Loss PriorIssuer Description and Discussion
    
    Sale
    
    
    On Sale
    
    
    To Sale(In millions)Various notes and bonds issued by the United States
Treasury. Volatility of interest rates prompted movement
to other asset classes.
    
    $
    6,040
    
    
    $
    36
    
    
    
    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 actions to
reduce issuer exposure.
    
    
    260
    
    
    
    28
    
    
    
    0-12+Issuer of high grade state general obligation bonds.
Loss was incurred as a result of unfavorable interest
rate change.
    
    
    227
    
    
    
    5
    
    
    
    0-12Total
    
    $
    6,527
    
    
    $
    69
 75




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Valuation and Impairment of Investments The following table details the carrying value of CNAs general account investment portfolios. Carrying Value of Investments March 31,
    
    
    
    
    
    
    December 31,2005
    
    
    %
    
    
    2004
    
    
    %(In millions)General account investments:Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations of government
agencies
    
    $
    2,692
    
    
    
    7
    %
    
    $
    4,346
    
    
    
    11
    %Asset-backed securities
    
    
    8,572
    
    
    
    22
    
    
    
    7,788
    
    
    
    20States, municipalities and political subdivisions  tax-exempt
    
    
    9,452
    
    
    
    24
    
    
    
    8,857
    
    
    
    22Corporate securities
    
    
    5,750
    
    
    
    14
    
    
    
    6,513
    
    
    
    17Other debt securities
    
    
    2,789
    
    
    
    7
    
    
    
    3,053
    
    
    
    8Redeemable preferred stock
    
    
    140
    
    
    
    
    
    
    
    146
    
    
    
    Options embedded in convertible debt securities
    
    
    214
    
    
    
    1
    
    
    
    234
    
    
    
    1Total fixed maturity securities available-for-sale
    
    
    29,609
    
    
    
    75
    
    
    
    30,937
    
    
    
    79Fixed maturity securities trading:U.S. Treasury securities and obligations of government
agencies
    
    
    81
    
    
    
    
    
    
    
    27
    
    
    
    Asset-backed securities
    
    
    127
    
    
    
    
    
    
    
    125
    
    
    
    Corporate securities
    
    
    247
    
    
    
    1
    
    
    
    199
    
    
    
    1Other debt securities
    
    
    44
    
    
    
    
    
    
    
    35
    
    
    
    Redeemable preferred stock
    
    
    6
    
    
    
    
    
    
    
    4
    
    
    
    Total fixed maturity securities trading
    
    
    505
    
    
    
    1
    
    
    
    390
    
    
    
    1Equity securities available-for-sale:Common stock
    
    
    260
    
    
    
    1
    
    
    
    260
    
    
    
    1Non-redeemable preferred stock
    
    
    105
    
    
    
    
    
    
    
    150
    
    
    
    Total equity securities available-for-sale
    
    
    365
    
    
    
    1
    
    
    
    410
    
    
    
    1Total equity securities trading
    
    
    3
    
    
    
    
    
    
    
    46
    
    
    
    Short term investments available-for-sale
    
    
    7,053
    
    
    
    18
    
    
    
    5,404
    
    
    
    14Short term investments trading
    
    
    472
    
    
    
    1
    
    
    
    459
    
    
    
    1Limited partnerships
    
    
    1,633
    
    
    
    4
    
    
    
    1,549
    
    
    
    4Other investments
    
    
    43
    
    
    
    
    
    
    
    36
    
    
    
    Total general account investments
    
    $
    39,683
    
    
    
    100
    %
    
    $
    39,231
    
    
    
    100
    %
 The Companys general account investment portfolio consists primarily of publicly traded
government bonds, asset-backed and mortgage-backed securities, short-term investments, municipal
bonds and corporate bonds. Investments in the general account had a total net unrealized gain of $736 million at March 31,
2005 compared with $1,197 million at December 31, 2004. The unrealized position at March 31, 2005
was composed of a net unrealized gain of $613 million for fixed maturities and a net unrealized
gain of $123 million for equity securities. The unrealized position at December 31, 2004 was
composed of a net unrealized gain of $1,061 million for fixed maturities and a net unrealized gain
of $136 million for equity securities. 76




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unrealized Gains (Losses) on Fixed Maturity and Equity Securities Cost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    NetAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    UnrealizedMarch 31, 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
    
    $
    2,580
    
    
    $
    115
    
    
    $
    2
    
    
    $
    1
    
    
    $
    112Asset-backed securities
    
    
    8,582
    
    
    
    60
    
    
    
    65
    
    
    
    5
    
    
    
    (10
    )States, municipalities and political
subdivisions  tax-exempt
    
    
    9,446
    
    
    
    122
    
    
    
    95
    
    
    
    21
    
    
    
    6Corporate securities
    
    
    5,470
    
    
    
    363
    
    
    
    68
    
    
    
    15
    
    
    
    280Other debt securities
    
    
    2,564
    
    
    
    248
    
    
    
    21
    
    
    
    2
    
    
    
    225Redeemable preferred stock
    
    
    140
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    Options embedded in convertible debt
securities
    
    
    214
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities
available-for-sale
    
    
    28,996
    
    
    
    910
    
    
    
    253
    
    
    
    44
    
    
    
    613Total fixed maturity securities trading
    
    
    505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securities available-for-sale:Common stock
    
    
    154
    
    
    
    107
    
    
    
    1
    
    
    
    
    
    
    
    106Non-redeemable preferred stock
    
    
    88
    
    
    
    18
    
    
    
    1
    
    
    
    
    
    
    
    17Total equity securities available-for-sale
    
    
    242
    
    
    
    125
    
    
    
    2
    
    
    
    
    
    
    
    123Total equity securities trading
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity and equity securities
    
    $
    29,746
    
    
    $
    1,035
    
    
    $
    255
    
    
    $
    44
    
    
    $
    736
 Unrealized Gains (Losses) on Fixed Maturity and Equity Securities Cost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    NetAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    UnrealizedDecember 31, 2004
    
    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
    
    $
    4,233
    
    
    $
    126
    
    
    $
    13
    
    
    $
    
    
    
    $
    113Asset-backed securities
    
    
    7,706
    
    
    
    105
    
    
    
    19
    
    
    
    4
    
    
    
    82States, municipalities and political
subdivisions  tax-exempt
    
    
    8,699
    
    
    
    189
    
    
    
    28
    
    
    
    3
    
    
    
    158Corporate securities
    
    
    6,093
    
    
    
    477
    
    
    
    52
    
    
    
    5
    
    
    
    420Other debt securities
    
    
    2,769
    
    
    
    295
    
    
    
    11
    
    
    
    
    
    
    
    284Redeemable preferred stock
    
    
    142
    
    
    
    6
    
    
    
    
    
    
    
    2
    
    
    
    4Options embedded in convertible debt
securities
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities
available-for-sale
    
    
    29,876
    
    
    
    1,198
    
    
    
    123
    
    
    
    14
    
    
    
    1,061Total fixed maturity securities trading
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securities available-for-sale:Common stock
    
    
    148
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    112Non-redeemable preferred stock
    
    
    126
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    24Total equity securities available-for-sale
    
    
    274
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    136Total equity securities trading
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity and equity securities
    
    $
    30,586
    
    
    $
    1,334
    
    
    $
    123
    
    
    $
    14
    
    
    $
    1,197
 77




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Companys investment policies for both the general account and separate account emphasize
high credit quality and diversification by industry, issuer and issue. Assets supporting interest
rate sensitive liabilities are segmented within the general account to facilitate asset/liability
duration management. At March 31, 2005, the carrying value of the general account fixed maturities was $30,114 million,
representing 76% of the total investment portfolio. The net unrealized gain related to this fixed
maturity portfolio was $613 million, comprised of $910 million in gross unrealized gains and $297
million in gross unrealized losses. Municipal securities represented 39%, corporate bonds
represented 28%, asset-backed securities represented 24%, and all other fixed maturity securities
represented 9% of the gross unrealized losses. Within corporate bonds, the largest industry
sectors were consumer cyclical and financial, which represented 33%, and 28% of the gross
unrealized losses. Gross unrealized losses in any single issuer were less than 0.1% of the
carrying value of the total general account fixed maturity portfolio. 78




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table provides the composition of fixed maturity securities with an unrealized loss
at March 31, 2005 in relation to the total of all fixed maturity securities with an unrealized loss
by contractual maturities. Contractual Maturity Percent of
    
    
    Percent ofMarket
    
    
    UnrealizedValue
    
    
    LossDue in one year or less
    
    
    
    %
    
    
    
    %Due after one year through five years
    
    
    9
    
    
    
    6Due after five years through ten years
    
    
    7
    
    
    
    11Due after ten years
    
    
    45
    
    
    
    59Asset-backed securities
    
    
    39
    
    
    
    24Total
    
    
    100
    %
    
    
    100
    %
 The following table summarizes, for fixed maturity and equity securities in an unrealized loss
position at March 31, 2005 and December 31, 2004, the aggregate fair value and gross unrealized
loss by length of time those securities have been continuously in an unrealized loss position. Unrealized Loss Aging March 31, 2005
    
    
    December 31, 2004Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In millions)Fixed maturity securities:Investment grade:0-6 months
    
    $
    11,979
    
    
    $
    199
    
    
    $
    7,742
    
    
    $
    537-12 months
    
    
    1,084
    
    
    
    26
    
    
    
    2,448
    
    
    
    5913-24 months
    
    
    1,002
    
    
    
    40
    
    
    
    368
    
    
    
    12Greater than 24 months
    
    
    12
    
    
    
    
    
    
    
    2
    
    
    
    Total investment grade
    
    
    14,077
    
    
    
    265
    
    
    
    10,560
    
    
    
    124Non-investment grade:0-6 months
    
    
    528
    
    
    
    24
    
    
    
    188
    
    
    
    77-12 months
    
    
    37
    
    
    
    4
    
    
    
    69
    
    
    
    413-24 months
    
    
    39
    
    
    
    4
    
    
    
    20
    
    
    
    2Greater than 24 months
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    
    614
    
    
    
    32
    
    
    
    277
    
    
    
    13Total fixed maturity securities
    
    
    14,691
    
    
    
    297
    
    
    
    10,837
    
    
    
    137Equity securities:0-6 months
    
    
    41
    
    
    
    2
    
    
    
    4
    
    
    
    7-12 months
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    13-24 months
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Greater than 24 months
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Total equity securities
    
    
    47
    
    
    
    2
    
    
    
    9
    
    
    
    Total fixed maturity and equity securities
    
    $
    14,738
    
    
    $
    299
    
    
    $
    10,846
    
    
    $
    137
 A significant judgment in the valuation of investments is the determination of when an
other-than-temporary decline in value has occurred. The Company follows a consistent and
systematic process for impairing securities that sustain other-than-temporary declines in value.
The Company has established a committee responsible for the impairment process. This committee,
referred to as the Impairment Committee, is made up of three officers appointed by the Companys
Chief Financial Officer. The Impairment Committee is responsible for analyzing watch list
securities on at least a quarterly basis. The watch list includes individual securities that fall
below certain thresholds or that exhibit evidence of impairment indicators including, but not
limited to, a significant adverse 79




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##### Table of Contents



CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS change in the financial condition and near term prospects of the investment or a significant
adverse change in legal factors, the business climate or credit ratings. When a security is placed on the watch list, it is monitored for further fair value changes and
additional news related to the issuers financial condition. The focus is on objective evidence
that may influence the evaluation of impairment factors. The decision to impair a security incorporates both quantitative criteria and qualitative
information. The Impairment Committee considers a number of factors including, but not limited to:
(a) the length of time and the extent to which the fair value has been less than book value, (b)
the financial condition and near term prospects of the issuer, (c) the intent and ability of the
Company to retain its investment for a period of time sufficient to allow for any anticipated
recovery in value, (d) whether the debtor is current on interest and principal payments and (e)
general market conditions and industry or sector specific factors. The Impairment Committees decision to impair a security is primarily based on whether the
securitys fair value is likely to remain significantly below its book value in light of all of the
factors considered. For securities that are impaired, the security is written down to fair value
and the resulting losses are recognized in realized gains/losses in the Consolidated Statements of
Operations. The Companys non-investment grade fixed maturity securities available-for-sale as of March 31,
2005 that were in a gross unrealized loss position had a fair value of $614 million. As discussed
previously, a significant judgment in the valuation of investments is the determination of when an
other-than-temporary impairment has occurred. The Companys Impairment Committee analyzes
securities placed on the watch list on at least a quarterly basis. Part of this analysis is to
monitor the length of time and severity of the decline below book value of the watch list
securities. The following tables summarize the fair value and gross unrealized loss of
non-investment grade securities categorized by the length of time those securities have been in a
continuous unrealized loss position and further categorized by the severity of the unrealized loss
position in 10% increments as of March 31, 2005 and December 31, 2004. Unrealized Loss Aging for Non-investment Grade Securities Fair Value as a Percentage of Book Value
    
    
    GrossEstimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedMarch 31, 2005
    
    Fair Value
    
    
    90-99%
    
    
    80-89%
    
    
    70-79%
    
    
    <70%
    
    
    Loss(In millions)Fixed maturity securities:Non-investment grade:0-6 months
    
    $
    528
    
    
    $
    20
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    247-12 months
    
    
    37
    
    
    
    1
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    413-24 months
    
    
    39
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    4Greater than 24 months
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    $
    614
    
    
    $
    23
    
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    32
 80




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unrealized Loss Aging for Non-investment Grade Securities Fair Value as a Percentage of Book Value
    
    
    GrossEstimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedDecember 31, 2004
    
    Fair Value
    
    
    90-99%
    
    
    80-89%
    
    
    70-79%
    
    
    <70%
    
    
    Loss(In millions)Fixed maturity securities:Non-investment grade:0-6 months
    
    $
    188
    
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    77-12 months
    
    
    69
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    413-24 months
    
    
    20
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    2Greater than 24 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    $
    277
    
    
    $
    10
    
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    13
 As part of the ongoing impairment monitoring process, the Impairment Committee has evaluated
the facts and circumstances based on available information for each of the non-investment grade
securities and determined that no further impairments were appropriate at March 31, 2005. This
determination was based on a number of factors that the Impairment Committee regularly considers
including, but not limited to: the issuers ability to meet current and future interest and
principal payments, an evaluation of the issuers financial condition and near term prospects, the
Companys sector outlook and estimates of the fair value of any underlying collateral. In all
cases where a decline in value is judged to be temporary, the Company has the intent and ability to
hold these securities for a period of time sufficient to recover the book value of its investment
through a recovery in the fair value of such securities or by holding the securities to maturity.
In many cases, the securities held are matched to liabilities as part of ongoing asset/liability
duration management. As such, the Impairment Committee continually assesses its ability to hold
securities for a time sufficient to recover any temporary loss in value or until maturity. The
Company maintains sufficient levels of liquidity so as to not impact the asset/liability management
process. The Companys equity securities available for sale as of March 31, 2005 that were in an unrealized
loss position had a fair value of $47 million. The Companys Impairment Committee, under the same
process as followed for fixed maturity securities, monitors the equity securities for
other-than-temporary declines in value. In all cases where a decline in value is judged to be
temporary, the Company expects to recover the book value of its investment through a recovery in
the fair value of the security. Invested assets are exposed to various risks, such as interest rate, market and credit risk. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the value of these assets, it is possible that changes in risks in the near term,
including increases in interest rates, could have an adverse material impact on the Companys
results of operations or equity. The general account portfolio consists primarily of high quality bonds, 92% and 93% of which were
rated as investment grade (rated BBB or higher) at March 31, 2005 and December 31, 2004. The
following table summarizes the ratings of CNAs general account bond portfolio at carrying value. 81




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Account Bond Ratings March 31,
    
    
    
    
    
    
    December 31,2005
    
    
    %
    
    
    2004
    
    
    %(In millions)U.S. Government and affiliated agency securities
    
    $
    3,015
    
    
    
    10
    %
    
    $
    4,640
    
    
    
    15
    %Other AAA rated
    
    
    16,113
    
    
    
    54
    
    
    
    14,628
    
    
    
    47AA and A rated
    
    
    4,978
    
    
    
    17
    
    
    
    5,597
    
    
    
    18BBB rated
    
    
    3,438
    
    
    
    11
    
    
    
    4,072
    
    
    
    13Below investment-grade
    
    
    2,424
    
    
    
    8
    
    
    
    2,240
    
    
    
    7Total
    
    $
    29,968
    
    
    
    100
    %
    
    $
    31,177
    
    
    
    100
    %
 At March 31, 2005 and at December 31, 2004, approximately 98% and 99% of the general account
portfolio was U.S. Government and affiliated agency securities or was rated by Standard & Poors
(S&P) or Moodys Investors Service (Moodys). The remaining bonds were rated by other rating
agencies or Company management. Non-investment grade bonds, as presented in the table above, are high-yield securities rated below
BBB by bond rating agencies, as well as other unrated securities that, in the opinion of
management, are below investment-grade. High-yield securities generally involve a greater degree
of risk than investment-grade securities. However, expected returns should compensate for the
added risk. This risk is also considered in the interest rate assumptions for the underlying
insurance products. The carrying value of non-traded securities at March 31, 2005 was $188 million which represents
0.5% of the Companys total investment portfolio. These securities were in a net unrealized gain
position of $66 million at March 31, 2005. Of the non-traded securities, 49% are priced by
unrelated third party sources. Included in CNAs general account fixed maturity securities at March 31, 2005 were $8,699 million
of asset-backed securities, at fair value, consisting of approximately 68% in collateralized
mortgage obligations (CMOs), 20% in corporate mortgage-backed pass-through certificates, 8% in
corporate asset-backed obligations, and 4% in U.S. Government agency issued pass-through
certificates. The majority of CMOs held are actively traded in liquid markets and are priced by
broker-dealers. 82




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The carrying value of the components of the general account short-term investment portfolio is
presented in the following table. Short-term Investments March 31,
    
    
    December 31,2005
    
    
    2004(In millions)Short-term investments available-for-sale:Commercial paper
    
    $
    3,849
    
    
    $
    1,655U.S. Treasury securities
    
    
    1,625
    
    
    
    2,382Money market funds
    
    
    244
    
    
    
    174Other
    
    
    1,335
    
    
    
    1,193Total short-term investments available-for-sale
    
    
    7,053
    
    
    
    5,404Short-term investments trading:Commercial paper
    
    
    42
    
    
    
    46U.S. Treasury securities
    
    
    72
    
    
    
    300Money market funds
    
    
    332
    
    
    
    99Other
    
    
    26
    
    
    
    14Total short-term investments trading
    
    
    472
    
    
    
    459Total short-term investments
    
    $
    7,525
    
    
    $
    5,863
 CNA invests in certain derivative financial instruments primarily to reduce its exposure to
market risk (principally interest rate, equity price and foreign currency risk) and credit risk
(risk of non-performance of underlying obligor). Derivative securities are recorded at fair value
at the reporting date. The Company also uses derivatives to mitigate market risk by purchasing S&P
500â index futures in a notional amount equal to the contract liability relating
to Life and Group Non-Core indexed group annuity contracts. LIQUIDITY AND CAPITAL RESOURCES Cash Flow The principal operating cash flow sources of CNAs insurance subsidiaries are premiums and
investment income. The primary operating cash flow uses are payments for claims, policy benefits
and operating expenses. For the three months ended March 31, 2005, net cash provided by operating activities was $124
million as compared with $37 million provided for the same period in 2004. The increase in cash
provided by operating activities related primarily to a reduction in claims and expense payments,
which was partly offset by decreased net premium collections in 2005 as compared with 2004. The
decrease in net premium collections is primarily due to the sale of the individual life business. Cash flows from investing activities include the purchase and sale of financial instruments, as
well as the purchase and sale of land, buildings, equipment and other assets not generally held for
resale. For the three months ended March 31, 2005, net cash used by investing activities was $115 million
as compared with $441 million used for the same period in 2004. Cash flows used for investing
activities related principally to purchases of fixed maturity securities. Cash flows from financing activities include proceeds from the issuance of debt or equity
securities, outflows for dividends or repayment of debt and outlays to reacquire equity
instruments. For the three months ended March 31, 2005, net cash used by financing activities was $11 million as
compared with $346 million provided for the same period in 2004. Cash flows used by financing
activities in the first quarter of 2005 were related principally to the repayment of debt. Cash
flows provided by financing activities in the first quarter of 2004 related to the proceeds
received from the issuance of surplus notes, which were subsequently repaid during 2004. 83




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Debt and Other Commitments See Note I of the Notes to the Condensed Consolidated Financial Statements for a detailed
discussion of the Companys debt. See Note O of the Notes to the Condensed Consolidated Financial Statements for information related
to CNA Suretys and a large national contractors related party transactions with CNAF. The impact
of these transactions should be considered when evaluating the Companys liquidity and capital
resources. See Note K of the Notes to the Condensed Consolidated Financial Statements for information related
to the Companys commitments and contingencies. The impact of these commitments and contingencies
should be considered when evaluating the Companys liquidity and capital resources. A summary of the Companys commitments as of March 31, 2005 is presented in the following table. Commitments 2010 andMarch 31, 2005
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Beyond
    
    
    Total(In millions)Debt (a)
    
    $
    640
    
    
    $
    414
    
    
    $
    104
    
    
    $
    440
    
    
    $
    72
    
    
    $
    1,617
    
    
    $
    3,287Lease obligations
    
    
    51
    
    
    
    56
    
    
    
    47
    
    
    
    39
    
    
    
    29
    
    
    
    63
    
    
    
    285Claim and claim expense reserves (b)
    
    
    6,143
    
    
    
    6,196
    
    
    
    4,469
    
    
    
    3,104
    
    
    
    2,219
    
    
    
    10,887
    
    
    
    33,018Future policy benefits reserves (c)
    
    
    151
    
    
    
    178
    
    
    
    173
    
    
    
    174
    
    
    
    170
    
    
    
    8,655
    
    
    
    9,501Policyholder funds reserves (c)
    
    
    398
    
    
    
    877
    
    
    
    149
    
    
    
    36
    
    
    
    9
    
    
    
    161
    
    
    
    1,630Guaranteed payment contracts (d)
    
    
    15
    
    
    
    13
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Total
    
    $
    7,398
    
    
    $
    7,734
    
    
    $
    4,947
    
    
    $
    3,793
    
    
    $
    2,499
    
    
    $
    21,383
    
    
    $
    47,754
  (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 March 31, 2005.
See the Reserves  Estimates and Uncertainties section of this MD&A for further
information. Claim and claim adjustment expense reserves of $25 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 March 31, 2005. Future
policy benefit reserves of $1,003 million and policyholder fund reserves of $57 million
related to business which has been 100% ceded to unaffiliated parties in connection with
the individual life sale are not included. Additional information on future policy
benefits and policyholder funds reserves is included in Note A of the Consolidated
Financial Statements included under Item 1.(d)
    Primarily relating to telecommunications and software services. Regulatory Matters The Loews consolidated federal income tax returns have been settled with the Internal Revenue
Service (IRS) through the 1997 tax year. The federal income tax returns for 1998 through 2001,
including related carryback claims and prior claims for refund, have been examined and are
currently under review by the Joint Committee on Taxation. Although the Companys ultimate tax
obligation for these years is subject to review and final determination, in the opinion of
management, the outcome of the review and final determination of the Companys ultimate tax
obligation will not have a material effect on the financial condition or results of operations of
CNA and its eligible subsidiaries (CNA Tax Group). Pending the outcome of the review and final
determination of the Companys tax obligations for these years, interest on any tax refunds net of
any tax deficiencies is subject to computation, review and final determination. The amount of any
net refund interest ultimately due to the Company may have a material impact on the results of
operations in the period in which the review is finalized. The federal income tax returns for 2002
and 2003 are currently under examination by the IRS. The Company believes the
outcome of the 2002 and 2003 examinations will not have a material effect on the financial
condition or results of operations of the CNA Tax Group. The Company has established a plan to reorganize and streamline its U.S. property and casualty
insurance legal entity structure. One phase of this multi-year plan was completed during 2003.
This phase served to consolidate the Companys U.S. property and casualty insurance risks into CCC,
as well as realign the capital supporting these risks. As part of this phase, the Company
implemented in the fourth quarter of 2003 a 100% quota share reinsurance agreement, effective
January 1, 2003, ceding all of the net insurance risks of CIC and its 14 affiliated insurance 84




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS companies (CIC Group) to CCC. Additionally, the ownership of the CIC Group was transferred to CCC
during 2003 in order to align the insurance risks with the supporting capital. In subsequent
phases of this plan, the Company will continue its efforts to reduce both the number of U.S.
property and casualty insurance entities it maintains and the number of states in which such
entities are domiciled. In order to facilitate the execution of this plan, the Company, CCC and
CIC have agreed to participate in a working group consisting of several states of the National
Association of Insurance Commissioners. In connection with the approval process for aspects of the reorganization and streamlining plan,
the Company agreed to undergo a state regulatory financial examination of CCC and CIC as of
December 31, 2003, including a review of insurance reserves by an independent actuarial firm.
These state regulatory financial examinations are currently underway. Such review includes
examination of certain of the finite reinsurance contracts entered into by the Company and whether
such contracts possess sufficient risk transfer characteristics necessary to qualify for accounting
treatment as reinsurance. The Company is presently engaged in discussions related to the
examination with state regulatory agencies. Final examination reports are expected to be issued in
the second quarter of 2005 by the state authorities. Pursuant to its participation in the working group referenced above, the Company has agreed to
certain time frames and informational provisions in relation to the reorganization plan. The
Company has also agreed that any proceeds from the sale of any member of the CIC pool, net of
transaction expenses, will be retained in CIC or one of its subsidiaries until the dividend
stipulation discussed below expires. Along with other companies in the industry, the Company has received subpoenas, interrogatories and
inquiries: (i) from California, Connecticut, Delaware, Florida, Hawaii, Illinois, Minnesota, New
Jersey, New York, North Carolina, Pennsylvania, South Carolina, West Virginia and the Canadian
Council of Insurance Regulators concerning investigations into practices including contingent
compensation arrangements, fictitious quotes, and tying arrangements; (ii) from the Securities and
Exchange Commission, the New York State Attorney General, the Georgia Office of Insurance and
Safety Fire Commissioner and the California Department of Insurance concerning finite insurance
products purchased and sold by the Company; and (iii) from the New York State Attorney General
concerning declinations of attorney malpractice insurance. In the course of complying with the above matters, the Company conducted a comprehensive review of
its finite reinsurance relationships, including the contracts with Accord and other reinsurers that
were the subject of the previously referenced restatement. It is possible that the Companys
analyses of, or accounting treatment for, other finite reinsurance contracts could be questioned or
disputed in the context of the referenced state regulatory examinations, and further restatements
of the Companys financial results are possible as a consequence, which could have a material
adverse impact on the Companys financial condition. See the Critical Accounting Estimates section
of this MD&A for further information. Dividends from Subsidiaries CNAFs ability to pay dividends and other credit obligations is significantly dependent on receipt
of dividends from its subsidiaries. The payment of dividends to CNAF by its insurance subsidiaries
without prior approval of the insurance department of each subsidiarys domiciliary jurisdiction is
limited by formula. Dividends in excess of these amounts are subject to prior approval by the
respective state insurance departments. Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the
domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require
prior approval of the Illinois Department of Financial and Professional Regulation  Division of
Insurance (the Department), may be paid only from earned surplus, which is calculated by removing
unrealized gains from unassigned surplus. As of March 31, 2005, CCC is in a positive earned
surplus position, thereby enabling CCC to pay approximately $262 million in dividends for the
remainder of 2005 that would not be subject to the Departments prior approval. The actual level
of dividends paid in any year is determined after an assessment of available dividend capacity,
holding company liquidity and cash needs as well as the impact the dividends will have on the
statutory surplus of the applicable insurance company. CCCs earned surplus was negative at December 31, 2004. As a result, CCC obtained approval from
the Department in December of 2004, for extraordinary dividends in the amount of approximately $125
million to be 85




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS used to fund the CNAFs 2005 debt service requirements. CCCs earned surplus was
restored to a positive position, in part, as a result of a $500 million dividend received from its
subsidiary, CAC, during the first quarter of 2005. By agreement with the New Hampshire Insurance Department, the CIC Group may not pay dividends to
CCC until after January 1, 2006. Loews The Series H Cumulative Preferred Issue (Series H Issue) is held by Loews and accrues cumulative
dividends at an initial rate of 8% per year, compounded annually. As of March 31, 2005, the Company
has $144 million of undeclared but accumulated dividends. The Series H Issue dividend amounts for
the three months ended March 31, 2005 and 2004 have been subtracted from Net Income (Loss) to
determine income (loss) available to common stockholders. The Series H Cumulative Preferred Issue (Series H) is senior to CNAFs common stock as to the
payment of dividends and amounts payable upon any liquidation, dissolution or winding up. No
dividends may be declared on CNAFs common stock until all cumulative dividends on the Series H
Issue have been paid. CNAF may not issue any equity securities ranking senior to or on par with
the Series H Issue without the consent of a majority of its stockholders. The Series H Issue is
non-voting and is not convertible into any other securities of CNAF. It may be redeemed only upon
the mutual agreement of CNAF and a majority of the stockholders of the preferred stock. Ratings Ratings are an important factor in establishing the competitive position of insurance companies.
CNAs insurance company subsidiaries are rated by major rating agencies, and these ratings reflect
the rating agencys opinion of the insurance companys financial strength, operating performance,
strategic position and ability to meet its obligations to policyholders. Agency ratings are not a
recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by
the issuing organization. Each agencys rating should be evaluated independently of any other
agencys rating. One or more of these agencies could take action in the future to change the
ratings of CNAs insurance subsidiaries. The actions that can be taken by rating agencies are changes in ratings or modifiers. On Review,
Credit Watch and Rating Watch are modifiers used by the ratings agencies to alert those parties
relying on the Companys ratings of the possibility of a rating change in the near term. Modifiers
are utilized when the agencies are uncertain as to the impact of a Company action or initiative,
which could prove to be material to the current rating level. Modifiers are generally used to
indicate a possible change in rating within 90 days. Outlooks accompanied with ratings are
additional modifiers used by the rating agencies to alert those parties relying on the Companys
ratings of the possibility of a rating change in the longer term. The time frame referenced in an
outlook is not necessarily limited to ninety days as defined in the Credit-Watch category. 86




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The table below reflects the various group ratings issued by A.M. Best, Fitch, Moodys and S&P as
of April 21, 2005 for the Property and Casualty and Life companies. The table also includes the
ratings for CNAFs senior debt and Continental senior debt. Insurance Financial Strength Ratings
    
    
    
    Debt RatingsProperty & Casualty (a)
    
    Life
    
    CNAF
    
    ContinentalCCC
    
    CIC
    
    
    
    Senior
    
    SeniorGroup
    
    Group
    
    CAC (b)
    
    Debt
    
    DebtA.M. Best
    
    A
    
    A
    
    A-
    
    bbb
    
    Not ratedFitch
    
    A-
    
    A-
    
    A-
    
    BBB-
    
    BBB-Moodys
    
    A3
    
    A3
    
    Baa1
    
    Baa3
    
    Baa3S&P
    
    A-
    
    A-
    
    BBB+
    
    BBB-
    
    BBB-
 (a) Fitchs outlook for the Property & Casualty companies financial strength and holding
company debt ratings is stable. All others are negative. (b) A.M. Best, Fitch and Moodys have a stable outlook while S&P has a negative outlook on the CAC
rating. On March 11, 2005, Fitch Ratings concluded their annual review and affirmed CNAs debt and
financial strength ratings. The rating outlook was changed to stable from negative. If CNAs property and casualty insurance financial strength ratings were downgraded below current
levels, CNAs business and results of operations could be materially adversely affected. The
severity of the impact on CNAs business is dependent on the level of downgrade and, for certain
products, which rating agency takes the rating action. Among the adverse effects in the event of
such downgrades would be the inability to obtain a material volume of business from certain major
insurance brokers, the inability to sell a material volume of the Companys insurance products to
certain markets, and the required collateralization of certain future payment obligations or
reserves. In addition, the Company believes that a lowering of the debt ratings of Loews by certain of these
agencies could result in an adverse impact on CNAs ratings, independent of any change in
circumstances at CNA. Each of the major rating agencies which rates Loews currently maintains a
negative outlook, but none currently has Loews on negative Credit Watch. The Company has entered into several settlement agreements and assumed reinsurance contracts that
require collateralization of future payment obligations and assumed reserves if the Companys
ratings or other specific criteria fall below certain thresholds. The ratings triggers are
generally more than one level below the Companys current ratings. 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 is not
expected to have a significant impact on the results of operations or equity of the Company. In December of 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised
2004), Share-Based Payment (SFAS 123R), that amends Statement of Financial Accounting Standard No.
123 (SFAS 123), as originally issued in May of 1995. SFAS 123R addresses the accounting for
share-based payment transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the
enterprises equity instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). After the effective date of this standard, entities will not be permitted to
use the intrinsic value method specified in APB 25 to measure compensation expense and generally
would be required to measure compensation expense using a fair-value based method. Public
companies are to apply this standard using either the modified prospective method or the modified
retrospective method. The modified prospective 87




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS method requires a company to (a) record compensation expense for all awards it grants, modifies,
repurchases or cancels after the date it adopts the standard and (b) record compensation expense
for the unvested portion of previously granted awards that remain outstanding at the date of
adoption. The modified retrospective method requires companies to record compensation expense to
either (a) all prior years for which SFAS 123 was effective (i.e. for all fiscal years beginning
after December 15, 1994) or (b) only to prior interim periods in the year of initial adoption if
the effective date of SFAS 123R does not coincide with the beginning of the fiscal year. SFAS 123R
is effective for the Company beginning after January 1, 2006. Adoption of this standard is not
expected to have a material impact on the Companys results of operations and/or equity. 88




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report contains a number of forward-looking statements which relate to anticipated future
events rather than actual present conditions or historical events. You can identify
forward-looking statements because generally they include words such as believes, expects,
intends, anticipates, estimates, and similar expressions. Forward-looking statements in this
report include any and all statements regarding expected developments in the Companys insurance
business, including losses and loss reserves for asbestos, environmental pollution and mass tort
claims which are more uncertain, and therefore more difficult to estimate than loss reserves
respecting traditional property and casualty exposures; the impact of routine ongoing insurance
reserve reviews the Company is conducting; the ongoing state regulatory examinations of the
Companys primary insurance company subsidiaries, and the Companys responses to the results of
those reviews and examinations; the Companys expectations concerning its revenues, earnings,
expenses and investment activities; expected cost savings and other results from the Companys
expense reduction and restructuring activities; and the Companys proposed actions in response to
trends in its business. Forward-looking statements, by their nature, are subject to a variety of
inherent risks and uncertainties that could cause actual results to differ materially from the
results projected in the forward-looking statement. Many of these risks and uncertainties cannot
be controlled by the Company. Some examples of these risks and uncertainties are:  
    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 the
Company, 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 rules in relation to such products;
    regulatory limitations, impositions and restrictions upon the Company, 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 the Company operates, including changes in the Companys 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 of 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 ratio through more efficacious claims handling techniques;
    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;
    weather and other natural physical events, including the severity and frequency of
storms, hail, snowfall and other winter conditions, as well as of natural disasters such as
hurricanes and earthquakes;
    man-made disasters, including the possible occurrence of terrorist attacks and the
effect of the absence or insufficiency of applicable terrorism legislation on coverages; 89




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CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  
    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;
    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, and construction defect claims;
    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 the Companys established loss reserves or carried loss reserves;
    the sufficiency of the Companys loss reserves and the possibility of future
increases in reserves;
    regulatory limitations and restrictions, including limitations upon the Companys
ability to receive dividends from its 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 the Companys loss reserves as
outlined in the Reserves  Estimates and Uncertainties section of this Managements Discussion
and Analysis of Financial Condition and Results of Operations;
    the level of success in integrating acquired businesses and operations, and in
consolidating, or selling existing ones;
    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. The Companys forward-looking statements speak only as of the date on which they are made and the
Company does not have any obligation to update or revise any forward-looking statement to reflect
events or circumstances after the date of the statement, even if the Companys expectations or any
related events or circumstances change. 90




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CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk is a broad term related to changes in the fair value of a financial instrument.
Discussions herein regarding market risk focus on only one element of market risk  price risk.
Price risk relates to changes in the level of prices due to changes in interest rates, equity
prices, foreign exchange rates or other factors that relate to market volatility of the rate, index
or price underlying the financial instrument. The Companys primary market risk exposures are due
to changes in interest rates, although the Company has certain exposures to changes in equity
prices and foreign currency exchange rates. The fair value of the financial instruments is
adversely affected when interest rates rise, equity markets decline and the dollar strengthens
against foreign currency. Active management of market risk is integral to the Companys operations. The Company may use the
following tools to manage its exposure to market risk within defined tolerance ranges: (1) change
the character of future investments purchased or sold, (2) use derivatives to offset the market
behavior of existing assets and liabilities or assets expected to be purchased and liabilities to
be incurred, or (3) rebalance its existing asset and liability portfolios. Sensitivity Analysis CNA monitors its sensitivity to interest rate risk by evaluating the change in the value of
financial assets and liabilities due to fluctuations in interest rates. The evaluation is
performed by applying an instantaneous change in interest rates of varying magnitudes on a static
balance sheet to determine the effect such a change in rates would have on the Companys fair value
at risk and the resulting effect on stockholders equity. The analysis presents the sensitivity of
the fair value of the Companys financial instruments to selected changes in market rates and
prices. The range of change chosen reflects the Companys view of changes that are reasonably
possible over a one-year period. The selection of the range of values chosen to represent changes
in interest rates should not be construed as the Companys prediction of future market events, but
rather an illustration of the impact of such events. The sensitivity analysis estimates the decline in the fair value of the Companys interest
sensitive assets and liabilities that were held on March 31, 2005 and December 31, 2004 due to
instantaneous parallel increases in the period end yield curve of 100 and 150 basis points. The
sensitivity analysis also assumes an instantaneous 10% and 20% decline in the foreign currency
exchange rates versus the United States dollar from their levels at March 31, 2005 and December 31,
2004, with all other variables held constant. Equity price risk was measured assuming an instantaneous 10% and 25% decline in the S&P 500 Index
(Index) from its level at March 31, 2005 and December 31, 2004, with all other variables held
constant. The Companys equity holdings were assumed to be highly and positively correlated with
the Index. At March 31, 2005, a 10% and 25% decrease in the Index would result in a $194 million
and $485 million decrease compared to $214 million and $534 million decrease at December 31, 2004,
in the fair value of the Companys equity investments. Of these amounts, under the 10% and 25% scenarios, $5 million and $13 million at March 31, 2005 and
$5 million and $14 million at December 31, 2004 pertained to decreases in the fair value of the
separate account investments. These decreases would substantially be offset by decreases in
related separate account liabilities to customers. Similarly, increases in the fair value of the
separate account equity investments would also be offset by increases in the same related separate
account liabilities by the same approximate amounts. The following tables present the estimated effects on the fair value of the Companys financial
instruments at March 31, 2005 and December 31, 2004, due to an increase in interest rates of 100
basis points, a 10% decline in foreign currency exchange rates and a 10% decline in the Index. 91




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CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued Market Risk Scenario 1 Increase (Decrease)Market
    
    
    Interest
    
    
    Currency
    
    
    EquityMarch 31, 2005
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    29,609
    
    
    $
    (1,831
    )
    
    $
    (76
    )
    
    $
    (16
    )Fixed maturity securities trading
    
    
    505
    
    
    
    (6
    )
    
    
    
    
    
    
    (3
    )Equity securities available-for-sale
    
    
    365
    
    
    
    
    
    
    
    (9
    )
    
    
    (36
    )Equity securities trading
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    Short term investments available-for-sale
    
    
    7,053
    
    
    
    (6
    )
    
    
    (26
    )
    
    
    Short term investments trading
    
    
    472
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,633
    
    
    
    7
    
    
    
    
    
    
    
    (20
    )Other invested assets
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    Equity indexed futures for trading securities
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (114
    )Other derivative securities
    
    
    2
    
    
    
    3
    
    
    
    (24
    )
    
    
    Total general account
    
    
    39,683
    
    
    
    (1,820
    )
    
    
    (135
    )
    
    
    (189
    )Separate accounts:Fixed maturity securities
    
    
    483
    
    
    
    (24
    )
    
    
    
    
    
    
    Equity securities
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Short term investments
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    551
    
    
    
    (24
    )
    
    
    
    
    
    
    (5
    )Total securities
    
    $
    40,234
    
    
    $
    (1,844
    )
    
    $
    (135
    )
    
    $
    (194
    )Debt (carrying value)
    
    $
    2,244
    
    
    $
    (92
    )
    
    $
    
    
    
    $
    
 Market Risk Scenario 1 Increase (Decrease)Fair
    
    
    Interest
    
    
    Currency
    
    
    EquityDecember 31, 2004
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    30,937
    
    
    $
    (1,824
    )
    
    $
    (88
    )
    
    $
    (26
    )Fixed maturity securities trading
    
    
    390
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    (3
    )Equity securities available-for-sale
    
    
    410
    
    
    
    
    
    
    
    (9
    )
    
    
    (41
    )Equity securities trading
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Short term investments available-for-sale
    
    
    5,404
    
    
    
    (7
    )
    
    
    (10
    )
    
    
    Short term investments trading
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,549
    
    
    
    6
    
    
    
    
    
    
    
    (18
    )Other invested assets
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (8
    )
    
    
    8
    
    
    
    
    
    
    
    Equity index futures for trading
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (116
    )Other derivative securities
    
    
    2
    
    
    
    7
    
    
    
    (21
    )
    
    
    Total general account
    
    
    39,231
    
    
    
    (1,812
    )
    
    
    (129
    )
    
    
    (209
    )Separate accounts:Fixed maturity securities
    
    
    486
    
    
    
    (24
    )
    
    
    
    
    
    
    Equity securities
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Short term investments
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    561
    
    
    
    (24
    )
    
    
    
    
    
    
    (5
    )Total securities
    
    $
    39,792
    
    
    $
    (1,836
    )
    
    $
    (129
    )
    
    $
    (214
    )Debt (carrying value)
    
    $
    2,257
    
    
    $
    (97
    )
    
    $
    
    
    
    $
    
 92




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CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued The following tables present the estimated effects on the fair value of the Companys
financial instruments at March 31, 2005 and December 31, 2004, due to an increase in interest rates
of 150 basis points, a 20% decline in foreign currency exchange rates and a 25% decline in the
Index. Market Risk Scenario 2 Increase (Decrease)Market
    
    
    Interest
    
    
    Currency
    
    
    EquityMarch 31, 2005
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    29,609
    
    
    $
    (2,719
    )
    
    $
    (151
    )
    
    $
    (41
    )Fixed maturity securities trading
    
    
    505
    
    
    
    (9
    )
    
    
    
    
    
    
    (7
    )Equity securities available-for-sale
    
    
    365
    
    
    
    
    
    
    
    (17
    )
    
    
    (90
    )Equity securities trading
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Short term investments available-for-sale
    
    
    7,053
    
    
    
    (9
    )
    
    
    (52
    )
    
    
    Short term securities trading
    
    
    472
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,633
    
    
    
    10
    
    
    
    
    
    
    
    (49
    )Other invested assets
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    Equity indexed futures for trading
    
    
    
    
    
    
    3
    
    
    
    (1
    )
    
    
    (284
    )Other derivative securities
    
    
    2
    
    
    
    4
    
    
    
    (48
    )
    
    
    Total general account
    
    
    39,683
    
    
    
    (2,703
    )
    
    
    (269
    )
    
    
    (472
    )Separate accounts:Fixed maturity securities
    
    
    483
    
    
    
    (36
    )
    
    
    
    
    
    
    Equity securities
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    (13
    )Short term investments
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    551
    
    
    
    (36
    )
    
    
    
    
    
    
    (13
    )Total securities
    
    $
    40,234
    
    
    $
    (2,739
    )
    
    $
    (269
    )
    
    $
    (485
    )Debt (carrying value)
    
    $
    2,244
    
    
    $
    (133
    )
    
    $
    
    
    
    $
    
 93




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CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued Market Risk Scenario 2 Increase (Decrease)Fair
    
    
    Interest
    
    
    Currency
    
    
    EquityDecember 31, 2004
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    30,937
    
    
    $
    (2,703
    )
    
    $
    (177
    )
    
    $
    (63
    )Fixed maturity securities trading
    
    
    390
    
    
    
    (6
    )
    
    
    (1
    )
    
    
    (8
    )Equity securities available-for-sale
    
    
    410
    
    
    
    
    
    
    
    (18
    )
    
    
    (103
    )Equity securities trading
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Short term investments available-for-sale
    
    
    5,404
    
    
    
    (11
    )
    
    
    (20
    )
    
    
    Short term investments trading
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,549
    
    
    
    9
    
    
    
    
    
    
    
    (46
    )Other invested assets
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (8
    )
    
    
    12
    
    
    
    
    
    
    
    Equity index futures for trading
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    (289
    )Other derivative securities
    
    
    2
    
    
    
    10
    
    
    
    (38
    )
    
    
    Total general account
    
    
    39,231
    
    
    
    (2,686
    )
    
    
    (254
    )
    
    
    (520
    )Separate accounts:Fixed maturity securities
    
    
    486
    
    
    
    (35
    )
    
    
    
    
    
    
    Equity securities
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Short term investments
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    561
    
    
    
    (35
    )
    
    
    
    
    
    
    (14
    )Total securities
    
    $
    39,792
    
    
    $
    (2,721
    )
    
    $
    (254
    )
    
    $
    (534
    )Debt (carrying value)
    
    $
    2,257
    
    
    $
    (141
    )
    
    $
    
    
    
    $
    
 94




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CNA FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES The Company maintains a system of disclosure controls and procedures which are designed to
ensure that information required to be disclosed by the Company in reports that it files or submits
to the Securities and Exchange Commission under the Securities Exchange Act of 1934, including this
report, is recorded, processed, summarized and reported on a timely basis. These disclosure
controls and procedures include controls and procedures designed to ensure that information
required to be disclosed under the Exchange Act is accumulated and communicated to the Companys
management on a timely basis to allow decisions regarding required disclosure. The Companys principal executive officer and its principal financial officer undertook an
evaluation of the Companys disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this report and concluded that the
Companys controls and procedures were effective. CNAF restated its financial results for prior years
2002-2004 to correct accounting for several reinsurance contracts,
primarily with a former affiliate, and its equity accounting for that
affiliate. The management of CNAF
has concluded that a material weakness existed in the Companys
internal control over financial reporting as of December 31, 2004 as
defined under standards established by the Public Company Accounting
Oversight Board. Specifically, there were ineffective controls to
identify errors in the application of complex accounting
standards to several historical finite reinsurance arrangements.
Subsequent to December 31, 2004, the Company completed a
comprehensive review of its finite reinsurance relationships that
included its agreements with its former affiliate. As a result of this
remediation effort, in the Companys
best judgment, it has eliminated the aforementioned material weakness. There were no other changes in the Companys internal control over financial reporting
identified in connection with the foregoing evaluation that occurred during the Companys last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 95




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CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Information on CNAs legal proceedings is set forth in Notes F and G of the Condensed
Consolidated Financial Statements included under Part I, Item 1. Item 4. Matters Subject to a
Vote of Security Holders On April 27, 2005, the
shareholders of the Registrant voted to approve the CNA Financial
Corporation 2000 Incentive Compensation Plan (the Plan)
as amended and restated, effective as of February 9, 2005. As
originally adopted the Plan provided for the issuance of up to
2,000,000 shares of Common Stock (as defined in the Plan) pursuant to
awards made thereunder. As amended and restated pursuant to the
shareholders approval, the Plan authorizes the issuance of up to
4,000,000 such shares. The Plan as amended and restated was filed with
the Securities and Exchange Commission as Exhibit A to March 31, 2005
DEF 14A and is incorporated herein by reference. See the Form 8-K
filed with the Securities and Exchange Commission on May 2, 2005. 
 Item 6. Exhibits (a) Exhibits Description of Exhibit
    
    Exhibit NumberCertification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    31.1Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    31.2Certification 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
    *
  *
    Exhibits 32.1 and 32.2 are being furnished and shall not be deemed filed for the purpose
of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that Section. These Exhibits shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as amended. Amendment and Restatement to CNA Financial Corporation 2000 Incentive
Compensation Plan, effective as of February 9, 2005
    
    
    10.21
 96




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CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION 
 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. CNA Financial CorporationDated: May 10, 2005
    By:
    /s/ D. Craig MenseD. Craig MenseChief Financial Officer 97