##### 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 June 30, 2005
OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  Commission File Number 1-5823
   CNA FINANCIAL CORPORATION
  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 July 25, 2005Common Stock, Par value $2.50
    
    255,953,958




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CNA
FINANCIAL CORPORATION
INDEX
  
 Item
    
    
    
    PageNumber
    
    
    
    NumberPART I. Financial Information1.
    
    Condensed Consolidated Financial Statements (Unaudited):Condensed
Consolidated Balance Sheets at June 30, 2005 and at December 31, 2004
    
    
    3Condensed
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004 (as restated)
    
    
    4Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (as restated)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    62.
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    533.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    1114.
    
    Controls and Procedures
    
    
    115PART II. Other Information1.
    
    Legal Proceedings
    
    
    1166.
    
    Exhibits
    
    
    116Signatures
    
    
    118Certifications
    
    
    119Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



CNA FINANCIAL CORPORATION
 
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 June 30,
    
    
    December 31,(In millions, except share data)
    
    2005
    
    
    2004AssetsInvestments:Fixed maturity securities at fair value (amortized cost of $31,290 and $30,266)
    
    $
    32,542
    
    
    $
    31,327Equity securities at fair value (cost of $377 and $320)
    
    
    492
    
    
    
    456Limited partnership investments
    
    
    1,562
    
    
    
    1,549Other invested assets
    
    
    44
    
    
    
    36Short-term investments at cost, which approximates fair value
    
    
    5,300
    
    
    
    5,863Total investments
    
    
    39,940
    
    
    
    39,231Cash
    
    
    70
    
    
    
    95Reinsurance receivables (less allowance for uncollectible receivables of $551 and $546)
    
    
    13,971
    
    
    
    15,342Insurance receivables (less allowance for doubtful accounts of $457 and $502)
    
    
    2,095
    
    
    
    2,065Accrued investment income
    
    
    291
    
    
    
    297Receivables for securities sold
    
    
    1,238
    
    
    
    496Deferred acquisition costs
    
    
    1,248
    
    
    
    1,268Prepaid reinsurance premiums
    
    
    966
    
    
    
    1,128Deferred income taxes
    
    
    767
    
    
    
    709Property and equipment at cost (less accumulated depreciation of $539 and $524)
    
    
    223
    
    
    
    235Goodwill and other intangible assets
    
    
    145
    
    
    
    162Other assets
    
    
    1,092
    
    
    
    815Separate account business
    
    
    571
    
    
    
    568Total assets
    
    $
    62,617
    
    
    $
    62,411Liabilities and Stockholders EquityLiabilities:Insurance reserves:Claim and claim adjustment expense
    
    $
    30,798
    
    
    $
    31,523Unearned premiums
    
    
    4,414
    
    
    
    4,522Future policy benefits
    
    
    6,069
    
    
    
    5,883Policyholders funds
    
    
    1,654
    
    
    
    1,725Collateral on loaned securities and derivatives
    
    
    981
    
    
    
    918Payables for securities purchased
    
    
    1,027
    
    
    
    288Participating policyholders funds
    
    
    66
    
    
    
    63Short term debt
    
    
    83
    
    
    
    531Long term debt
    
    
    1,668
    
    
    
    1,726Federal income taxes payable (includes $226 and $(7) due to (from) Loews Corporation)
    
    
    216
    
    
    
    Reinsurance balances payable
    
    
    2,782
    
    
    
    2,980Other liabilities
    
    
    2,274
    
    
    
    2,231Separate account business
    
    
    571
    
    
    
    568Total liabilities
    
    
    52,603
    
    
    
    52,958Commitments and contingencies (Notes F, G, I and K)Minority interest
    
    
    276
    
    
    
    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
    
    
    6,038
    
    
    
    5,572Accumulated other comprehensive income
    
    
    742
    
    
    
    650Treasury stock (2,223,327 shares), at cost
    
    
    (69
    )
    
    
    (69
    )9,807
    
    
    
    9,249Notes receivable for the issuance of common stock
    
    
    (69
    )
    
    
    (71
    )Total stockholders equity
    
    
    9,738
    
    
    
    9,178Total liabilities and stockholders equity
    
    $
    62,617
    
    
    $
    62,411
  3




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CNA FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months
    
    
    Six monthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions, except per share data)
    
    
    
    
    
    Restated
    
    
    
    
    
    
    RestatedSee Note Q
    
    
    
    
    
    
    See Note QRevenuesNet earned premiums
    
    $
    1,912
    
    
    $
    2,106
    
    
    $
    3,811
    
    
    $
    4,274Net investment income
    
    
    439
    
    
    
    381
    
    
    
    845
    
    
    
    856Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    26
    
    
    
    105
    
    
    
    7
    
    
    
    (353
    )Other revenues
    
    
    193
    
    
    
    72
    
    
    
    271
    
    
    
    154Total revenues
    
    
    2,570
    
    
    
    2,664
    
    
    
    4,934
    
    
    
    4,931Claims, Benefits and ExpensesInsurance claims and policyholders benefits
    
    
    1,581
    
    
    
    1,620
    
    
    
    3,015
    
    
    
    3,258Amortization of deferred acquisition costs
    
    
    374
    
    
    
    307
    
    
    
    752
    
    
    
    740Other operating expenses
    
    
    251
    
    
    
    375
    
    
    
    525
    
    
    
    707Interest
    
    
    30
    
    
    
    31
    
    
    
    67
    
    
    
    66Total claims, benefits and expenses
    
    
    2,236
    
    
    
    2,333
    
    
    
    4,359
    
    
    
    4,771Income before income tax and minority interest
    
    
    334
    
    
    
    331
    
    
    
    575
    
    
    
    160Income tax (expense) benefit
    
    
    (48
    )
    
    
    (31
    )
    
    
    (104
    )
    
    
    22Minority interest
    
    
    2
    
    
    
    (7
    )
    
    
    (5
    )
    
    
    (13
    )Net income
    
    $
    288
    
    
    $
    293
    
    
    $
    466
    
    
    $
    169Basic and Diluted Earnings Per ShareBasic and diluted earnings per share
available to common stockholders
    
    $
    1.06
    
    
    $
    1.08
    
    
    $
    1.69
    
    
    $
    0.53Weighted average outstanding common stock and
common stock equivalents
    
    
    256.0
    
    
    
    255.9
    
    
    
    256.0
    
    
    
    255.9
  4




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CNA FINANCIAL CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six months ended June 30
    
    2005
    
    
    2004(In millions)
    
    
    
    
    
    RestatedSee Note QCash Flows from Operating ActivitiesNet income
    
    $
    466
    
    
    $
    169Adjustments to reconcile net income to net cash flows provided by operating activities:Change in bad debt expense (recovery) for insurance and reinsurance receivables
    
    
    43
    
    
    
    (57
    )Minority interest
    
    
    5
    
    
    
    13Deferred income tax provision
    
    
    (120
    )
    
    
    (14
    )Realized investment gains/losses, net of participating policyholders and minority interests
    
    
    (7
    )
    
    
    353Equity method income
    
    
    (116
    )
    
    
    (107
    )Amortization of bond (discount) premium
    
    
    (55
    )
    
    
    1Depreciation
    
    
    28
    
    
    
    36Changes in:Receivables, net
    
    
    1,298
    
    
    
    (986
    )Deferred acquisition costs
    
    
    20
    
    
    
    118Accrued investment income
    
    
    6
    
    
    
    (32
    )Federal income taxes payable/recoverable
    
    
    216
    
    
    
    511Prepaid reinsurance premiums
    
    
    162
    
    
    
    73Reinsurance balances payable
    
    
    (198
    )
    
    
    (203
    )Insurance reserves
    
    
    (718
    )
    
    
    957Other, net
    
    
    (215
    )
    
    
    (145
    )Net purchases of trading securities
    
    
    29
    
    
    
    (4
    )Total adjustments
    
    
    378
    
    
    
    514Net cash flows provided by operating activities
    
    
    844
    
    
    
    683Cash Flows from Investing ActivitiesPurchases of fixed maturity securities
    
    
    (34,087
    )
    
    
    (31,300
    )Proceeds from fixed maturity securities:Sales
    
    
    30,877
    
    
    
    23,439Maturities, calls and redemptions
    
    
    2,159
    
    
    
    2,751Purchases of equity securities
    
    
    (182
    )
    
    
    (112
    )Proceeds from sales of equity securities
    
    
    150
    
    
    
    309Change in short-term investments
    
    
    626
    
    
    
    3,941Change in collateral on loaned securities and derivatives
    
    
    63
    
    
    
    (219
    )Change in other investments
    
    
    36
    
    
    
    63Purchases of property and equipment
    
    
    (17
    )
    
    
    (24
    )Dispositions
    
    
    12
    
    
    
    631Other, net
    
    
    (1
    )
    
    
    (21
    )Net cash flows used by investing activities
    
    
    (364
    )
    
    
    (542
    )Cash Flows from Financing ActivitiesPrincipal payments on debt
    
    
    (507
    )
    
    
    (536
    )Proceeds from issuance of surplus notes
    
    
    
    
    
    
    346Returns and deposits of policyholder account balances on investment contracts
    
    
    
    
    
    
    10Other
    
    
    2
    
    
    
    3Net cash flows used by financing activities
    
    
    (505
    )
    
    
    (177
    )Net change in cash
    
    
    (25
    )
    
    
    (36
    )Cash, beginning of period
    
    
    95
    
    
    
    139Cash, end of period
    
    $
    70
    
    
    $
    103Supplemental Disclosures of Cash Flow Information:Cash paid (received):Interest
    
    $
    72
    
    
    $
    57Federal income taxes
    
    
    1
    
    
    
    (540
    )
  5




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CNA FINANCIAL CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Note A. Basis of Presentation
     6




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note B. Earnings Per Share
    Earnings Per Share
 Period ended June 30
    
    Three Months
    
    
    Six Months(In millions, except per share amounts)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    288
    
    
    $
    293
    
    
    $
    466
    
    
    $
    169Less: undeclared preferred stock dividend
    
    
    (18
    )
    
    
    (16
    )
    
    
    (35
    )
    
    
    (32
    )Net income available to common stockholders
    
    $
    270
    
    
    $
    277
    
    
    $
    431
    
    
    $
    137Weighted average outstanding common stock and common
stock equivalents
    
    
    256.0
    
    
    
    255.9
    
    
    
    256.0
    
    
    
    255.9Effect of dilutive securities, employee stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted average outstanding common stock
and common stock equivalents assuming conversions
    
    
    256.0
    
    
    
    255.9
    
    
    
    256.0
    
    
    
    255.9Basic and diluted earnings per share available to
common stockholders
    
    $
    1.06
    
    
    $
    1.08
    
    
    $
    1.69
    
    
    $
    0.53
 Accounting for Stock Issued to Employees
 7




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Accounting for Stock-Based Compensation
 Pro Forma Effect of SFAS 123 on Net Income and Earnings Per Share
 Period ended June 30
    
    Three Months
    
    
    Six Months(In millions, except per share amounts)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net income available to common stockholders
    
    $
    270
    
    
    $
    277
    
    
    $
    431
    
    
    $
    137Less: Total stock-based compensation cost determined
under the fair value method, net of tax
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Pro forma net income available to common stockholders
    
    $
    270
    
    
    $
    277
    
    
    $
    430
    
    
    $
    136Basic and diluted earnings per share, as reported
    
    $
    1.06
    
    
    $
    1.08
    
    
    $
    1.69
    
    
    $
    0.53Basic and diluted earnings per share, pro forma
    
    $
    1.06
    
    
    $
    1.08
    
    
    $
    1.69
    
    
    $
    0.53
 8




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note C. Investments
  Net Investment Income
 Period ended June 30
    
    Three Months
    
    
    Six Months(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Fixed maturity securities
    
    $
    410
    
    
    $
    386
    
    
    $
    774
    
    
    $
    793Short term investments
    
    
    29
    
    
    
    9
    
    
    
    61
    
    
    
    25Limited partnerships
    
    
    38
    
    
    
    30
    
    
    
    117
    
    
    
    105Equity securities
    
    
    8
    
    
    
    4
    
    
    
    12
    
    
    
    8Income (loss) from trading portfolio (a)
    
    
    14
    
    
    
    14
    
    
    
    (16
    )
    
    
    34Interest on funds withheld and other
deposits
    
    
    (50
    )
    
    
    (55
    )
    
    
    (89
    )
    
    
    (103
    )Other
    
    
    4
    
    
    
    1
    
    
    
    11
    
    
    
    11Gross investment income
    
    
    453
    
    
    
    389
    
    
    
    870
    
    
    
    873Investment expense
    
    
    (14
    )
    
    
    (8
    )
    
    
    (25
    )
    
    
    (17
    )Net investment income
    
    $
    439
    
    
    $
    381
    
    
    $
    845
    
    
    $
    856
 (a) The change in net unrealized gains (losses) on trading securities, included in net
investment income, was $1 million and $(7) million for the three and six months ended June 30, 2005
and $(2) million and $2 million for the three and six months ended June 30, 2004.
 9




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Realized Investment Gains (Losses)
 Period ended June 30
    
    Three Months
    
    
    Six Months(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Realized investment gains (losses):Fixed maturity securities:U.S. Government bonds
    
    $
    14
    
    
    $
    (1
    )
    
    $
    (12
    )
    
    $
    9Corporate and other taxable bonds
    
    
    (24
    )
    
    
    27
    
    
    
    (45
    )
    
    
    33Tax-exempt bonds
    
    
    27
    
    
    
    (92
    )
    
    
    34
    
    
    
    (19
    )Asset-backed bonds
    
    
    4
    
    
    
    (4
    )
    
    
    11
    
    
    
    35Redeemable preferred stock
    
    
    
    
    
    
    3
    
    
    
    10
    
    
    
    5Total fixed maturity securities
    
    
    21
    
    
    
    (67
    )
    
    
    (2
    )
    
    
    63Equity securities
    
    
    25
    
    
    
    166
    
    
    
    39
    
    
    
    177Derivative securities
    
    
    (23
    )
    
    
    49
    
    
    
    (19
    )
    
    
    17Other, including disposition of businesses net of
participating policyholders interest
    
    
    4
    
    
    
    (39
    )
    
    
    (13
    )
    
    
    (604
    )Realized investment gains (losses) before allocation to
participating policyholders and minority interests
    
    
    27
    
    
    
    109
    
    
    
    5
    
    
    
    (347
    )Allocated to participating policyholders and minority interest
    
    
    (1
    )
    
    
    (4
    )
    
    
    2
    
    
    
    (6
    )Realized investment gains (losses)
    
    $
    26
    
    
    $
    105
    
    
    $
    7
    
    
    $
    (353
    )
   10




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note D. Derivative Financial Instruments
  Derivative Financial Instruments Recognized Gains (Losses)
 Period ended June 30
    
    Three Months
    
    
    Six Months(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004General accountSwaps
    
    $
    (23
    )
    
    $
    22
    
    
    $
    (20
    )
    
    $
    23Futures purchased
    
    
    7
    
    
    
    15
    
    
    
    (26
    )
    
    
    28Futures sold, not yet purchased
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    (6
    )Forwards
    
    
    
    
    
    
    (1
    )
    
    
    1
    
    
    
    1Forwards sold, not yet purchased
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    5Commitments to purchase government and municipal securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Equity warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Options purchased
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Options written
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    2Collateralized debt obligation liabilities
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    4Options embedded in convertible debt securities
    
    
    (15
    )
    
    
    43
    
    
    
    (27
    )
    
    
    15Total
    
    $
    (32
    )
    
    $
    108
    
    
    $
    (72
    )
    
    $
    61
 11




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Derivative Financial Instruments
 Contractual/
    
    
    Estimated
    
    
    EstimatedJune 30, 2005
    
    Notional
    
    
    Fair Value
    
    
    Fair Value(In millions)
    
    Amount
    
    
    Asset
    
    
    (Liability)General accountSwaps
    
    $
    2,838
    
    
    $
    
    
    
    $
    (21
    )Futures purchased
    
    
    1,309
    
    
    
    
    
    
    
    (7
    )Futures sold, not yet purchased
    
    
    772
    
    
    
    
    
    
    
    Forwards purchased
    
    
    41
    
    
    
    
    
    
    
    (1
    )Forwards sold, not yet purchased
    
    
    36
    
    
    
    2
    
    
    
    Commitments to purchase government and municipal securities
    
    
    72
    
    
    
    1
    
    
    
    Equity warrants
    
    
    6
    
    
    
    2
    
    
    
    Options purchased
    
    
    124
    
    
    
    
    
    
    
    Options written
    
    
    124
    
    
    
    
    
    
    
    (1
    )Options embedded in convertible debt securities
    
    
    358
    
    
    
    118
    
    
    
    Total
    
    $
    5,680
    
    
    $
    123
    
    
    $
    (30
    )Separate accountsOptions written
    
    $
    8
    
    
    $
    
    
    
    $
    Total
    
    $
    8
    
    
    $
    
    
    
    $
    
 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
    
    
    $
    
    
    
    $
    
  12




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Note E. Income Taxes
      Note F. Legal Proceedings and Contingent Liabilities
 Global Crossing Limited Litigation
   13




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 IGI Contingency
      California Wage and Hour Litigation
 Ernestine Samora, et al. v. CCC Brian Wenzel v. Galway Insurance Company
 14




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
   Voluntary Market Premium Litigation
 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)
  Asbestos, Environmental Pollution and Mass Tort (APMT) Reserves
  Other Litigation
 
 15




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note G. Claim and Claim Adjustment Expense Reserves
     16




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  June 30, 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
    
    $
    6,720
    
    
    $
    1,765
    
    
    $
    2,753
    
    
    $
    3,562
    
    
    $
    14,800Gross IBNR Reserves
    
    
    7,451
    
    
    
    3,231
    
    
    
    839
    
    
    
    4,477
    
    
    
    15,998Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,171
    
    
    $
    4,996
    
    
    $
    3,592
    
    
    $
    8,039
    
    
    $
    30,798Net Case Reserves
    
    $
    4,406
    
    
    $
    1,178
    
    
    $
    1,420
    
    
    $
    1,537
    
    
    $
    8,541Net IBNR Reserves
    
    
    5,157
    
    
    
    2,268
    
    
    
    415
    
    
    
    1,786
    
    
    
    9,626Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    9,563
    
    
    $
    3,446
    
    
    $
    1,835
    
    
    $
    3,323
    
    
    $
    18,167
 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
   17




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
       18




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Asbestos and Environmental Pollution and Mass Tort Reserves
 June 30, 2005
    
    
    December 31, 2004Environmental
    
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    
    Pollution and(In millions)
    
    Asbestos
    
    

Mass Tort
    
    
    Asbestos
    
    

Mass TortGross reserves
    
    $
    3,132
    
    
    $
    663
    
    
    $
    3,218
    
    
    $
    755Ceded reserves
    
    
    (1,512
    )
    
    
    (234
    )
    
    
    (1,532
    )
    
    
    (258
    )Net reserves
    
    $
    1,620
    
    
    $
    429
    
    
    $
    1,686
    
    
    $
    497
 Asbestos
      19




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##### Table of Contents



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




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Continental Insurance Co., et al. v. Honeywell
International Inc.
 Varner v. Ford Motor Co., et al. Peplowski v. ACE American Ins. Co., et al. Cross v. Garlock, Inc. et. al
 21




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Boson
v. Union Carbide Corp., et al.
 Adams v. Aetna, Inc., et al. Adams v. Ins. Co. of North America (INA) et al.
 Pennock, et al. v. Maryland Casualty,
et al.
 22




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
     Environmental Pollution and Mass Tort
  23




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
     Net Prior Year Development
   24




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
   Net Prior Year DevelopmentCorporateFor the six months ended June 30, 2005
    
    Standard
    
    
    Specialty
    
    
    and Other(In millions)
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    TotalPretax unfavorable net prior year claim and allocated claim
adjustment expense development excluding the impact of the
corporate aggregate reinsurance treaties:Core (Non-APMT)
    
    $
    165
    
    
    $
    63
    
    
    $
    58
    
    
    $
    286APMT
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Total
    
    
    165
    
    
    
    63
    
    
    
    68
    
    
    
    296Ceded losses related to corporate aggregate reinsurance treaties
    
    
    19
    
    
    
    (25
    )
    
    
    6
    
    
    
    Pretax unfavorable net prior year development before impact of
premium development
    
    
    184
    
    
    
    38
    
    
    
    74
    
    
    
    296Unfavorable (favorable) premium development, excluding
impact of corporate aggregate reinsurance treaties
    
    
    (107
    )
    
    
    (15
    )
    
    
    10
    
    
    
    (112
    )Ceded premiums related to corporate aggregate reinsurance
treaties
    
    
    (5
    )
    
    
    19
    
    
    
    4
    
    
    
    18Total premium development
    
    
    (112
    )
    
    
    4
    
    
    
    14
    
    
    
    (94
    )Total unfavorable net prior year development (pretax)
    
    $
    72
    
    
    $
    42
    
    
    $
    88
    
    
    $
    202
 25




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Net Prior Year DevelopmentCorporateFor the six months ended June 30, 2004
    
    Standard
    
    
    Specialty
    
    
    and Other(In millions)
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    TotalPretax unfavorable net prior year claim and allocated
claim adjustment expense development excluding the
impact of the corporate aggregate reinsurance
treaties:Core (Non-APMT)
    
    $
    113
    
    
    $
    74
    
    
    $
    9
    
    
    $
    196APMT
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    40Pretax unfavorable net prior year development before
impact of premium development
    
    
    113
    
    
    
    74
    
    
    
    49
    
    
    
    236Unfavorable (favorable) premium development,
excluding impact of corporate aggregate
reinsurance treaties
    
    
    (108
    )
    
    
    (14
    )
    
    
    10
    
    
    
    (112
    )Ceded premiums related to corporate aggregate
reinsurance treaties
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    3Total premium development
    
    
    (106
    )
    
    
    (14
    )
    
    
    11
    
    
    
    (109
    )Total unfavorable net prior year development (pretax)
    
    $
    7
    
    
    $
    60
    
    
    $
    60
    
    
    $
    127
 Standard Lines
       26




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
   Specialty Lines
        27




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Corporate and Other Non-Core
    28




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note H. Reinsurance
    Components of reinsurance receivables
    
    June 30, 2005
    
    
    December 31, 2004(In millions)Reinsurance receivables related to insurance reserves:Ceded claim and claim adjustment expense
    
    $
    12,631
    
    
    $
    13,879Ceded future policy benefits
    
    
    1,224
    
    
    
    1,260Ceded policyholders funds
    
    
    61
    
    
    
    65Billed reinsurance receivables
    
    
    606
    
    
    
    684Reinsurance receivables
    
    
    14,522
    
    
    
    15,888Allowance for uncollectible reinsurance
    
    
    (551
    )
    
    
    (546
    )Reinsurance receivables, net of allowance
for uncollectible reinsurance
    
    $
    13,971
    
    
    $
    15,342
   29




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Components of Earned PremiumsThree months ended June 30(In millions)
    
    Direct
    
    
    Assumed
    
    
    Ceded
    
    
    Net2005Property and casualty
    
    $
    2,530
    
    
    $
    1
    
    
    $
    824
    
    
    $
    1,707Accident and health
    
    
    252
    
    
    
    10
    
    
    
    57
    
    
    
    205Life
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    Total earned premiums
    
    $
    2,819
    
    
    $
    11
    
    
    $
    918
    
    
    $
    1,9122004Property and casualty
    
    $
    2,750
    
    
    $
    49
    
    
    $
    895
    
    
    $
    1,904Accident and health
    
    
    316
    
    
    
    10
    
    
    
    136
    
    
    
    190Life
    
    
    83
    
    
    
    
    
    
    
    71
    
    
    
    12Total earned premiums
    
    $
    3,149
    
    
    $
    59
    
    
    $
    1,102
    
    
    $
    2,106
 Six months ended June 30(In millions)
    
    Direct
    
    
    Assumed
    
    
    Ceded
    
    
    Net2005Property and casualty
    
    $
    5,052
    
    
    $
    59
    
    
    $
    1,670
    
    
    $
    3,441Accident and health
    
    
    560
    
    
    
    24
    
    
    
    215
    
    
    
    369Life
    
    
    82
    
    
    
    
    
    
    
    81
    
    
    
    1Total earned premiums
    
    $
    5,694
    
    
    $
    83
    
    
    $
    1,966
    
    
    $
    3,8112004Property and casualty
    
    $
    5,393
    
    
    $
    127
    
    
    $
    1,758
    
    
    $
    3,762Accident and health
    
    
    659
    
    
    
    26
    
    
    
    291
    
    
    
    394Life
    
    
    323
    
    
    
    
    
    
    
    205
    
    
    
    118Total earned premiums
    
    $
    6,375
    
    
    $
    153
    
    
    $
    2,254
    
    
    $
    4,274
    30




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Funds Withheld Reinsurance Arrangements
  31




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Three months ended June 30(In millions)
    
    Aggregate Cover
    
    
    CCC Cover
    
    
    All Other
    
    
    Total2005Ceded earned premium
    
    $
    (6
    )
    
    $
    
    
    
    $
    3
    
    
    $
    (3
    )Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Ceding commissions
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Interest charges
    
    
    (18
    )
    
    
    (16
    )
    
    
    (12
    )
    
    
    (46
    )Pretax benefit (expense)
    
    $
    (24
    )
    
    $
    (16
    )
    
    $
    (4
    )
    
    $
    (44
    )2004Ceded earned premium
    
    $
    (3
    )
    
    $
    
    
    
    $
    6
    
    
    $
    3Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest charges
    
    
    (22
    )
    
    
    (11
    )
    
    
    (17
    )
    
    
    (50
    )Pretax benefit (expense)
    
    $
    (25
    )
    
    $
    (11
    )
    
    $
    (23
    )
    
    $
    (59
    )
 Six months ended June 30(In millions)
    
    Aggregate Cover
    
    
    CCC Cover
    
    
    All Other
    
    
    Total2005Ceded earned premium
    
    $
    (18
    )
    
    $
    
    
    
    $
    65
    
    
    $
    47Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    (67
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    (30
    )Interest charges
    
    
    (42
    )
    
    
    (32
    )
    
    
    (10
    )
    
    
    (84
    )Pretax benefit (expense)
    
    $
    (60
    )
    
    $
    (32
    )
    
    $
    (42
    )
    
    $
    (134
    )2004Ceded earned premium
    
    $
    (3
    )
    
    $
    
    
    
    $
    8
    
    
    $
    5Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Interest charges
    
    
    (42
    )
    
    
    (22
    )
    
    
    (33
    )
    
    
    (97
    )Pretax benefit (expense)
    
    $
    (45
    )
    
    $
    (22
    )
    
    $
    (39
    )
    
    $
    (106
    )
  32




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
  Period ended June 30
    
    Three Months
    
    
    Six Months(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Standard Lines
    
    $
    (30
    )
    
    $
    (43
    )
    
    $
    (96
    )
    
    $
    (80
    )Specialty Lines
    
    
    
    
    
    
    (2
    )
    
    
    (7
    )
    
    
    (4
    )Corporate and Other
    
    
    (14
    )
    
    
    (14
    )
    
    
    (31
    )
    
    
    (22
    )Pretax benefit (expense)
    
    $
    (44
    )
    
    $
    (59
    )
    
    $
    (134
    )
    
    $
    (106
    )
   Corporate Aggregate Reinsurance Treaties
    33




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
   34




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note I. Debt
  Debt
 June 30,
    
    
    December 31,(In millions)
    
    2005
    
    
    2004Variable 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
    
    
    
    
    
    
    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
    
    $
    1,751
    
    
    $
    2,257Short term debt
    
    $
    83
    
    
    $
    531Long term debt
    
    
    1,668
    
    
    
    1,726Total debt
    
    $
    1,751
    
    
    $
    2,257
     35




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
   Maturity of Debt
 (In millions)2005
    
    $
    322006
    
    
    3032007
    
    
    112008
    
    
    3532009
    
    
    3Thereafter
    
    
    1,059Less original issue discount
    
    
    (10
    )Total
    
    $
    1,751
 36




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note J. Benefit Plans
 Pension and Postretirement Healthcare and Life Insurance Benefit Plans
     Net Periodic Benefit Costs
 Period ended June 30
    
    Three Months
    
    
    Six Months(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Pension BenefitsService cost
    
    $
    5
    
    
    $
    15
    
    
    $
    14
    
    
    $
    24Interest cost on projected benefit obligation
    
    
    36
    
    
    
    77
    
    
    
    72
    
    
    
    121Expected return on plan assets
    
    
    (39
    )
    
    
    (82
    )
    
    
    (77
    )
    
    
    (127
    )Prior service cost amortization
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2Actuarial loss
    
    
    4
    
    
    
    3
    
    
    
    11
    
    
    
    10Net periodic pension cost
    
    $
    6
    
    
    $
    14
    
    
    $
    21
    
    
    $
    30Postretirement benefitsService cost
    
    $
    1
    
    
    $
    2
    
    
    $
    1
    
    
    $
    4Interest cost on projected benefit obligation
    
    
    2
    
    
    
    13
    
    
    
    5
    
    
    
    19Prior service cost amortization
    
    
    (7
    )
    
    
    (12
    )
    
    
    (14
    )
    
    
    (17
    )Actuarial loss
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    3Net periodic postretirement cost (benefit)
    
    $
    (3
    )
    
    $
    4
    
    
    $
    (6
    )
    
    $
    9
  37




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note K. Commitments, Contingencies and Guarantees
 Commitments and Contingencies
        Guarantees
  38




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
         39




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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 (Loss)
 Period ended June 30
    
    Three Months
    
    
    Six Months(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    288
    
    
    $
    293
    
    
    $
    466
    
    
    $
    169Other comprehensive income (loss):Net change in unrealized gains/losses on general account
investments, net of tax benefit (expense) of $(221), $459,
$(59) and $397
    
    
    411
    
    
    
    (854
    )
    
    
    111
    
    
    
    (739
    )Net change in unrealized gains/losses on separate accounts and
other, net of tax benefit (expense) of $3, $7, $0 and $20
    
    
    7
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    (54
    )Foreign currency translation adjustment
    
    
    (12
    )
    
    
    (29
    )
    
    
    (18
    )
    
    
    (13
    )Allocation to participating policyholders and minority interests
    
    
    (10
    )
    
    
    15
    
    
    
    
    
    
    
    17Other comprehensive income (loss), net of tax benefit (expense) of
$(218), $466, $(59) and $417
    
    
    396
    
    
    
    (872
    )
    
    
    92
    
    
    
    (789
    )Total comprehensive income (loss)
    
    $
    684
    
    
    $
    (579
    )
    
    $
    558
    
    
    $
    (620
    )
 40




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note M. Business Segments
       41




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 For the three months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    CorporateJune 30, 2005
    
    Standard
    
    
    Specialty
    
    
    Life and Group
    
    
    and Other(In millions)
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalNet earned premiums
    
    $
    1,084
    
    
    $
    630
    
    
    $
    204
    
    
    $
    (3
    )
    
    $
    (3
    )
    
    $
    1,912Net investment income
    
    
    171
    
    
    
    67
    
    
    
    146
    
    
    
    55
    
    
    
    
    
    
    
    439Other revenues
    
    
    27
    
    
    
    29
    
    
    
    25
    
    
    
    128
    
    
    
    (16
    )
    
    
    193Total operating revenues
    
    
    1,282
    
    
    
    726
    
    
    
    375
    
    
    
    180
    
    
    
    (19
    )
    
    
    2,544Claims, benefits and expenses:Net incurred claims and benefits
    
    
    772
    
    
    
    435
    
    
    
    284
    
    
    
    80
    
    
    
    
    
    
    
    1,571Policyholders dividends
    
    
    8
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    10Amortization of deferred acquisition costs
    
    
    237
    
    
    
    132
    
    
    
    6
    
    
    
    (1
    )
    
    
    
    
    
    
    374Other insurance related expenses
    
    
    103
    
    
    
    24
    
    
    
    71
    
    
    
    
    
    
    
    (3
    )
    
    
    195Other operating expenses
    
    
    33
    
    
    
    25
    
    
    
    16
    
    
    
    28
    
    
    
    (16
    )
    
    
    86Total claims, benefits and expenses
    
    
    1,153
    
    
    
    617
    
    
    
    377
    
    
    
    108
    
    
    
    (19
    )
    
    
    2,236Operating income (loss) before income tax and minority interest
    
    
    129
    
    
    
    109
    
    
    
    (2
    )
    
    
    72
    
    
    
    
    
    
    
    308Income tax (expense) benefit on operating income (loss)
    
    
    (27
    )
    
    
    (32
    )
    
    
    7
    
    
    
    14
    
    
    
    
    
    
    
    (38
    )Minority interest
    
    
    (2
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Net operating income
    
    
    100
    
    
    
    81
    
    
    
    5
    
    
    
    86
    
    
    
    
    
    
    
    272Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    25
    
    
    
    8
    
    
    
    (1
    )
    
    
    (6
    )
    
    
    
    
    
    
    26Income tax (expense) benefit on realized investment gains
(losses)
    
    
    (8
    )
    
    
    (3
    )
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (10
    )Net income
    
    $
    117
    
    
    $
    86
    
    
    $
    4
    
    
    $
    81
    
    
    $
    
    
    
    $
    288
 42




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 For the three months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    CorporateJune 30, 2004
    
    Standard
    
    
    Specialty
    
    
    Life and Group
    
    
    and Other(In millions)
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalNet earned premiums
    
    $
    1,315
    
    
    $
    567
    
    
    $
    202
    
    
    $
    26
    
    
    $
    (4
    )
    
    $
    2,106Net investment income
    
    
    119
    
    
    
    59
    
    
    
    142
    
    
    
    61
    
    
    
    
    
    
    
    381Other revenues
    
    
    30
    
    
    
    32
    
    
    
    26
    
    
    
    9
    
    
    
    (25
    )
    
    
    72Total operating revenues
    
    
    1,464
    
    
    
    658
    
    
    
    370
    
    
    
    96
    
    
    
    (29
    )
    
    
    2,559Claims, benefits and expenses:Net incurred claims and benefits
    
    
    927
    
    
    
    364
    
    
    
    329
    
    
    
    17
    
    
    
    
    
    
    
    1,637Policyholders dividends
    
    
    (15
    )
    
    
    1
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Amortization of deferred acquisition costs
    
    
    202
    
    
    
    134
    
    
    
    (36
    )
    
    
    7
    
    
    
    
    
    
    
    307Other insurance related expenses
    
    
    197
    
    
    
    11
    
    
    
    104
    
    
    
    20
    
    
    
    (4
    )
    
    
    328Other operating expenses
    
    
    28
    
    
    
    28
    
    
    
    20
    
    
    
    27
    
    
    
    (25
    )
    
    
    78Total claims, benefits and expenses
    
    
    1,339
    
    
    
    538
    
    
    
    414
    
    
    
    71
    
    
    
    (29
    )
    
    
    2,333Operating income (loss) before income tax and minority interest
    
    
    125
    
    
    
    120
    
    
    
    (44
    )
    
    
    25
    
    
    
    
    
    
    
    226Income tax (expense) benefit on operating income (loss)
    
    
    (25
    )
    
    
    (34
    )
    
    
    18
    
    
    
    (3
    )
    
    
    
    
    
    
    (44
    )Minority interest
    
    
    (2
    )
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )Net operating income (loss)
    
    
    98
    
    
    
    81
    
    
    
    (26
    )
    
    
    22
    
    
    
    
    
    
    
    175Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    77
    
    
    
    30
    
    
    
    (56
    )
    
    
    54
    
    
    
    
    
    
    
    105Income tax (expense) benefit on realized investment gains
(losses)
    
    
    (27
    )
    
    
    (12
    )
    
    
    70
    
    
    
    (18
    )
    
    
    
    
    
    
    13Net income (loss)
    
    $
    148
    
    
    $
    99
    
    
    $
    (12
    )
    
    $
    58
    
    
    $
    
    
    
    $
    293
 43




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 For the six months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    CorporateJune 30, 2005
    
    Standard
    
    
    Specialty
    
    
    Life and Group
    
    
    and Other(In millions)
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalNet earned premiums
    
    $
    2,253
    
    
    $
    1,203
    
    
    $
    370
    
    
    $
    (9
    )
    
    $
    (6
    )
    
    $
    3,811Net investment income
    
    
    354
    
    
    
    123
    
    
    
    252
    
    
    
    116
    
    
    
    
    
    
    
    845Other revenues
    
    
    48
    
    
    
    60
    
    
    
    58
    
    
    
    140
    
    
    
    (35
    )
    
    
    271Total operating revenues
    
    
    2,655
    
    
    
    1,386
    
    
    
    680
    
    
    
    247
    
    
    
    (41
    )
    
    
    4,927Claims, benefits, and expenses:Net incurred claims and benefits
    
    
    1,602
    
    
    
    792
    
    
    
    518
    
    
    
    90
    
    
    
    (2
    )
    
    
    3,000Policyholders dividends
    
    
    12
    
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    15Amortization of deferred acquisition costs
    
    
    476
    
    
    
    262
    
    
    
    13
    
    
    
    1
    
    
    
    
    
    
    
    752Other insurance related expenses
    
    
    242
    
    
    
    48
    
    
    
    125
    
    
    
    10
    
    
    
    (4
    )
    
    
    421Other operating expenses
    
    
    59
    
    
    
    53
    
    
    
    30
    
    
    
    64
    
    
    
    (35
    )
    
    
    171Total claims, benefits and expenses
    
    
    2,391
    
    
    
    1,157
    
    
    
    686
    
    
    
    166
    
    
    
    (41
    )
    
    
    4,359Operating income (loss) before income tax and minority interest
    
    
    264
    
    
    
    229
    
    
    
    (6
    )
    
    
    81
    
    
    
    
    
    
    
    568Income tax (expense) benefit on operating income (loss)
    
    
    (59
    )
    
    
    (68
    )
    
    
    12
    
    
    
    16
    
    
    
    
    
    
    
    (99
    )Minority interest
    
    
    (4
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Net operating income
    
    
    201
    
    
    
    160
    
    
    
    6
    
    
    
    97
    
    
    
    
    
    
    
    464Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    20
    
    
    
    9
    
    
    
    (6
    )
    
    
    (16
    )
    
    
    
    
    
    
    7Income tax (expense) benefit on realized investment gains
(losses)
    
    
    (11
    )
    
    
    (1
    )
    
    
    2
    
    
    
    5
    
    
    
    
    
    
    
    (5
    )Net income
    
    $
    210
    
    
    $
    168
    
    
    $
    2
    
    
    $
    86
    
    
    $
    
    
    
    $
    466As of June 30, 2005(In millions)Reinsurance receivables
    
    $
    4,719
    
    
    $
    1,616
    
    
    $
    3,128
    
    
    $
    5,059
    
    
    $
    
    
    
    $
    14,522Insurance receivables
    
    $
    1,984
    
    
    $
    461
    
    
    $
    84
    
    
    $
    23
    
    
    $
    
    
    
    $
    2,552Insurance reserves:Claim and claim adjustment expense
    
    $
    14,171
    
    
    $
    4,996
    
    
    $
    3,592
    
    
    $
    8,039
    
    
    $
    
    
    
    $
    30,798Unearned premiums
    
    
    2,045
    
    
    
    1,603
    
    
    
    173
    
    
    
    599
    
    
    
    (6
    )
    
    
    4,414Future policy benefits
    
    
    
    
    
    
    
    
    
    
    6,069
    
    
    
    
    
    
    
    
    
    
    
    6,069Policyholders funds
    
    
    45
    
    
    
    
    
    
    
    1,609
    
    
    
    
    
    
    
    
    
    
    
    1,654Deferred acquisition costs
    
    $
    444
    
    
    $
    279
    
    
    $
    524
    
    
    $
    1
    
    
    $
    
    
    
    $
    1,248
 44




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 For the six months ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    CorporateJune 30, 2004
    
    Standard
    
    
    Specialty
    
    
    Life and Group
    
    
    and Other(In millions)
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalNet earned premiums
    
    $
    2,573
    
    
    $
    1,096
    
    
    $
    528
    
    
    $
    102
    
    
    $
    (25
    )
    
    $
    4,274Net investment income
    
    
    257
    
    
    
    121
    
    
    
    348
    
    
    
    130
    
    
    
    
    
    
    
    856Other revenues
    
    
    70
    
    
    
    57
    
    
    
    60
    
    
    
    16
    
    
    
    (49
    )
    
    
    154Total operating revenues
    
    
    2,900
    
    
    
    1,274
    
    
    
    936
    
    
    
    248
    
    
    
    (74
    )
    
    
    5,284Claims, benefits and expenses:Net incurred claims and benefits
    
    
    1,750
    
    
    
    698
    
    
    
    736
    
    
    
    94
    
    
    
    (21
    )
    
    
    3,257Policyholders dividends
    
    
    (6
    )
    
    
    3
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    1Amortization of deferred acquisition costs
    
    
    482
    
    
    
    216
    
    
    
    19
    
    
    
    23
    
    
    
    
    
    
    
    740Other insurance related expenses
    
    
    340
    
    
    
    69
    
    
    
    157
    
    
    
    31
    
    
    
    (4
    )
    
    
    593Other operating expenses
    
    
    59
    
    
    
    55
    
    
    
    41
    
    
    
    74
    
    
    
    (49
    )
    
    
    180Total claims, benefits and expenses
    
    
    2,625
    
    
    
    1,041
    
    
    
    956
    
    
    
    223
    
    
    
    (74
    )
    
    
    4,771Operating income (loss) before income tax and minority interest
    
    
    275
    
    
    
    233
    
    
    
    (20
    )
    
    
    25
    
    
    
    
    
    
    
    513Income tax (expense) benefit on operating income (loss)
    
    
    (59
    )
    
    
    (68
    )
    
    
    13
    
    
    
    (2
    )
    
    
    
    
    
    
    (116
    )Minority interest
    
    
    (4
    )
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )Net operating income (loss)
    
    
    212
    
    
    
    156
    
    
    
    (7
    )
    
    
    23
    
    
    
    
    
    
    
    384Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    134
    
    
    
    50
    
    
    
    (618
    )
    
    
    81
    
    
    
    
    
    
    
    (353
    )Income tax (expense) benefit on realized investment gains
(losses)
    
    
    (46
    )
    
    
    (19
    )
    
    
    231
    
    
    
    (28
    )
    
    
    
    
    
    
    138Net income (loss)
    
    $
    300
    
    
    $
    187
    
    
    $
    (394
    )
    
    $
    76
    
    
    $
    
    
    
    $
    169As 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
 45




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Revenue by Line of Business
 Period ended June 30
    
    Three Months
    
    
    Six Months(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Standard LinesProperty
    
    $
    156
    
    
    $
    168
    
    
    $
    309
    
    
    $
    333Casualty
    
    
    916
    
    
    
    1,135
    
    
    
    1,928
    
    
    
    2,235CNA Global
    
    
    235
    
    
    
    238
    
    
    
    438
    
    
    
    466Standard Lines revenue
    
    
    1,307
    
    
    
    1,541
    
    
    
    2,675
    
    
    
    3,034Specialty LinesProfessional Liability Insurance (CNA Pro)
    
    
    564
    
    
    
    521
    
    
    
    1,059
    
    
    
    997Surety
    
    
    95
    
    
    
    88
    
    
    
    189
    
    
    
    175Warranty
    
    
    75
    
    
    
    79
    
    
    
    147
    
    
    
    152Specialty Lines revenue
    
    
    734
    
    
    
    688
    
    
    
    1,395
    
    
    
    1,324Life and Group Non-CoreLife & Annuity
    
    
    93
    
    
    
    33
    
    
    
    136
    
    
    
    (258
    )Health
    
    
    220
    
    
    
    257
    
    
    
    449
    
    
    
    521Other
    
    
    61
    
    
    
    24
    
    
    
    89
    
    
    
    55Life and Group Non-Core revenue
    
    
    374
    
    
    
    314
    
    
    
    674
    
    
    
    318Corporate and Other Non-CoreCNA Re
    
    
    10
    
    
    
    58
    
    
    
    26
    
    
    
    163Other
    
    
    164
    
    
    
    92
    
    
    
    205
    
    
    
    166Corporate and Other Non-Core revenue
    
    
    174
    
    
    
    150
    
    
    
    231
    
    
    
    329Eliminations
    
    
    (19
    )
    
    
    (29
    )
    
    
    (41
    )
    
    
    (74
    )Total revenue
    
    $
    2,570
    
    
    $
    2,664
    
    
    $
    4,934
    
    
    $
    4,931
 46




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note N. Significant Transactions
 Managed Care Holdings Corporation
  Specialty Medical Business
  Individual Life Sale
   47




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 Note O. Related Party Transactions
         48




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
        49




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
 CNA Surety Corporation
  Note P. Statutory Accounting Practices
       50




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##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNAUDITED)
    Preliminary Statutory Information
 Statutory Capital and Surplus
    
    
    Statutory Net Income (Loss)
    
    
    Statutory Net Income (Loss)Three months ended June 30
    
    
    Six months ended June 30(In millions)
    
    June 30, 2005
    
    
    December 31, 2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Property and casualty companies
    
    $
    7,374
    
    
    $
    6,998
    
    
    $
    287
    
    
    $
    220
    
    
    $
    867
    
    
    $
    403Life and group insurance companies(a)
    
    
    742
    
    
    
    1,177
    
    
    
    32
    
    
    
    370
    
    
    
    54
    
    
    
    394
  51




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note Q. Restatement for Reinsurance and Equity Investee Accounting
      Three Months
    
    
    Six MonthsPeriod ended June 30, 2004
    
    As Previously
    
    
    As
    
    
    As Previously
    
    
    As(In millions, except per share data)
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    RestatedConsolidated statements of operations:Net investment income
    
    $
    380
    
    
    $
    381
    
    
    $
    853
    
    
    $
    856Insurance claims and policyholders benefits
    
    
    1,625
    
    
    
    1,620
    
    
    
    3,263
    
    
    
    3,258Income tax (expense) benefit
    
    
    (29
    )
    
    
    (31
    )
    
    
    25
    
    
    
    22Net income
    
    
    289
    
    
    
    293
    
    
    
    164
    
    
    
    169Basic and diluted earnings per share available
to common stockholders:
    
    $
    1.07
    
    
    $
    1.08
    
    
    $
    0.52
    
    
    $
    0.53
  52




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##### Table of Contents



CNA FINANCIAL CORPORATION  ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
   
 53




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 CONSOLIDATED OPERATIONS
 Results of Operations
  Three months
    
    
    Six monthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions, except per share data)RevenuesNet earned premiums
    
    $
    1,912
    
    
    $
    2,106
    
    
    $
    3,811
    
    
    $
    4,274Net investment income
    
    
    439
    
    
    
    381
    
    
    
    845
    
    
    
    856Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    26
    
    
    
    105
    
    
    
    7
    
    
    
    (353
    )Other revenues
    
    
    193
    
    
    
    72
    
    
    
    271
    
    
    
    154Total revenues
    
    
    2,570
    
    
    
    2,664
    
    
    
    4,934
    
    
    
    4,931Claims, Benefits and ExpensesInsurance claims and policyholders benefits
    
    
    1,581
    
    
    
    1,620
    
    
    
    3,015
    
    
    
    3,258Amortization of deferred acquisition costs
    
    
    374
    
    
    
    307
    
    
    
    752
    
    
    
    740Other operating expenses
    
    
    251
    
    
    
    375
    
    
    
    525
    
    
    
    707Interest
    
    
    30
    
    
    
    31
    
    
    
    67
    
    
    
    66Total claims, benefits and expenses
    
    
    2,236
    
    
    
    2,333
    
    
    
    4,359
    
    
    
    4,771Income before income tax and minority interest
    
    
    334
    
    
    
    331
    
    
    
    575
    
    
    
    160Income tax (expense) benefit
    
    
    (48
    )
    
    
    (31
    )
    
    
    (104
    )
    
    
    22Minority interest
    
    
    2
    
    
    
    (7
    )
    
    
    (5
    )
    
    
    (13
    )Net income
    
    $
    288
    
    
    $
    293
    
    
    $
    466
    
    
    $
    169Basic and Diluted Earnings Per ShareBasic and diluted earnings per share
available to common stockholders
    
    $
    1.06
    
    
    $
    1.08
    
    
    $
    1.69
    
    
    $
    0.53Weighted average outstanding common stock and
common stock equivalents
    
    
    256.0
    
    
    
    255.9
    
    
    
    256.0
    
    
    
    255.9
 Three Month Comparison
   54




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Six Month Comparison
    Net Prior Year Development
  55




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Net Prior Year Development  For the three months ended June 30, 2005
 CorporateStandard
    
    
    Specialty
    
    
    and OtherLines
    
    
    Lines
    
    
    Non-Core
    
    
    Total(In millions)Pretax unfavorable net prior year claim and allocated
claim adjustment expense development excluding the
impact of the corporate aggregate reinsurance treaties:Core (Non-APMT)
    
    $
    52
    
    
    $
    25
    
    
    $
    62
    
    
    $
    139APMT
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8Pretax unfavorable net prior year development before
impact of premium development
    
    
    52
    
    
    
    25
    
    
    
    70
    
    
    
    147Unfavorable (favorable) premium development,
excluding impact of corporate aggregate
reinsurance treaties
    
    
    (17
    )
    
    
    (12
    )
    
    
    (6
    )
    
    
    (35
    )Ceded premiums related to corporate aggregate
reinsurance treaties
    
    
    4
    
    
    
    (1
    )
    
    
    3
    
    
    
    6Total premium development
    
    
    (13
    )
    
    
    (13
    )
    
    
    (3
    )
    
    
    (29
    )Total unfavorable net prior year development (pretax)
    
    $
    39
    
    
    $
    12
    
    
    $
    67
    
    
    $
    118Total unfavorable net prior year development (after-tax)
    
    $
    25
    
    
    $
    8
    
    
    $
    44
    
    
    $
    77
 Net Prior Year Development  For the three months ended June 30, 2004
 CorporateStandard
    
    
    Specialty
    
    
    and OtherLines
    
    
    Lines
    
    
    Non-Core
    
    
    Total(In millions)Pretax unfavorable net prior year claim and allocated
claim adjustment expense development excluding the
impact of the corporate aggregate reinsurance treaties:Core (Non-APMT)
    
    $
    115
    
    
    $
    73
    
    
    $
    (2
    )
    
    $
    186APMT
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    31Pretax unfavorable net prior year development before
impact of premium development
    
    
    115
    
    
    
    73
    
    
    
    29
    
    
    
    217Unfavorable (favorable) premium development,
excluding impact of corporate aggregate
reinsurance treaties
    
    
    (92
    )
    
    
    (13
    )
    
    
    11
    
    
    
    (94
    )Ceded premiums related to corporate aggregate
reinsurance treaties
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    3Total premium development
    
    
    (90
    )
    
    
    (13
    )
    
    
    12
    
    
    
    (91
    )Total unfavorable net prior year development (pretax)
    
    $
    25
    
    
    $
    60
    
    
    $
    41
    
    
    $
    126Total unfavorable net prior year development (after-tax)
    
    $
    16
    
    
    $
    39
    
    
    $
    27
    
    
    $
    82
 56




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Net Prior Year Development  For the six months ended June 30, 2005
 CorporateStandard
    
    
    Specialty
    
    
    and OtherLines
    
    
    Lines
    
    
    Non-Core
    
    
    Total(In millions)Pretax unfavorable net prior year claim and allocated claim
adjustment expense development excluding the impact of the
corporate aggregate reinsurance treaties:Core (Non-APMT)
    
    $
    165
    
    
    $
    63
    
    
    $
    58
    
    
    $
    286APMT
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Total
    
    
    165
    
    
    
    63
    
    
    
    68
    
    
    
    296Ceded losses related to corporate aggregate reinsurance treaties
    
    
    19
    
    
    
    (25
    )
    
    
    6
    
    
    
    Pretax unfavorable net prior year development before impact of
premium development
    
    
    184
    
    
    
    38
    
    
    
    74
    
    
    
    296Unfavorable (favorable) premium development, excluding
impact of corporate aggregate reinsurance treaties
    
    
    (107
    )
    
    
    (15
    )
    
    
    10
    
    
    
    (112
    )Ceded premiums related to corporate aggregate reinsurance
treaties
    
    
    (5
    )
    
    
    19
    
    
    
    4
    
    
    
    18Total premium development
    
    
    (112
    )
    
    
    4
    
    
    
    14
    
    
    
    (94
    )Total unfavorable net prior year development (pretax)
    
    $
    72
    
    
    $
    42
    
    
    $
    88
    
    
    $
    202Total unfavorable net prior year development (after-tax)
    
    $
    47
    
    
    $
    27
    
    
    $
    57
    
    
    $
    131
 Net Prior Year Development  For the six months ended June 30, 2004
 CorporateStandard
    
    
    Specialty
    
    
    and OtherLines
    
    
    Lines
    
    
    Non-Core
    
    
    Total(In millions)Pretax unfavorable net prior year claim and allocated
claim adjustment expense development excluding the
impact of the corporate aggregate reinsurance treaties:Core (Non-APMT)
    
    $
    113
    
    
    $
    74
    
    
    $
    9
    
    
    $
    196APMT
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    40Pretax unfavorable net prior year development before
impact of premium development
    
    
    113
    
    
    
    74
    
    
    
    49
    
    
    
    236Unfavorable (favorable) premium development,
excluding impact of corporate aggregate
reinsurance treaties
    
    
    (108
    )
    
    
    (14
    )
    
    
    10
    
    
    
    (112
    )Ceded premiums related to corporate aggregate
reinsurance treaties
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    3Total premium development
    
    
    (106
    )
    
    
    (14
    )
    
    
    11
    
    
    
    (109
    )Total unfavorable net prior year development (pretax)
    
    $
    7
    
    
    $
    60
    
    
    $
    60
    
    
    $
    127Total unfavorable net prior year development (after-tax)
    
    $
    4
    
    
    $
    39
    
    
    $
    39
    
    
    $
    82
 57




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Critical Accounting Estimates
    Insurance Reserves
  Reinsurance
   58




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Valuation of Investments and Impairment of Securities
   Long Term Care Products
  Pension and Postretirement Benefit Obligations
  Legal Proceedings
  Loans to National Contractor
  59




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
        60




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   Reserves  Estimates and Uncertainties
      
    
    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;
 61




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##### Table of Contents



CNA FINANCIAL CORPORATION  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.
   
    
    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.
   62




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
     Reinsurance
   63




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Components of reinsurance receivables
    
    June 30, 2005
    
    
    December 31, 2004(In millions)Reinsurance receivables related to insurance reserves:Ceded claim and claim adjustment expense
    
    $
    12,631
    
    
    $
    13,879Ceded future policy benefits
    
    
    1,224
    
    
    
    1,260Ceded policyholders funds
    
    
    61
    
    
    
    65Billed reinsurance receivables
    
    
    606
    
    
    
    684Reinsurance receivables
    
    
    14,522
    
    
    
    15,888Allowance for uncollectible reinsurance
    
    
    (551
    )
    
    
    (546
    )Reinsurance receivables, net of allowance for
uncollectible reinsurance
    
    $
    13,971
    
    
    $
    15,342
      Funds Withheld Reinsurance Arrangements
  64




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   Three months ended June 30
    
    Aggregate Cover
    
    
    CCC Cover
    
    
    All Other
    
    
    Total(In millions)2005Ceded earned premium
    
    $
    (6
    )
    
    $
    
    
    
    $
    3
    
    
    $
    (3
    )Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Ceding commissions
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Interest charges
    
    
    (18
    )
    
    
    (16
    )
    
    
    (12
    )
    
    
    (46
    )Pretax benefit (expense)
    
    $
    (24
    )
    
    $
    (16
    )
    
    $
    (4
    )
    
    $
    (44
    )2004Ceded earned premium
    
    $
    (3
    )
    
    $
    
    
    
    $
    6
    
    
    $
    3Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest charges
    
    
    (22
    )
    
    
    (11
    )
    
    
    (17
    )
    
    
    (50
    )Pretax benefit (expense)
    
    $
    (25
    )
    
    $
    (11
    )
    
    $
    (23
    )
    
    $
    (59
    )
 Six months ended June 30
    
    Aggregate Cover
    
    
    CCC Cover
    
    
    All Other
    
    
    Total(In millions)2005Ceded earned premium
    
    $
    (18
    )
    
    $
    
    
    
    $
    65
    
    
    $
    47Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    (67
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    (30
    )Interest charges
    
    
    (42
    )
    
    
    (32
    )
    
    
    (10
    )
    
    
    (84
    )Pretax benefit (expense)
    
    $
    (60
    )
    
    $
    (32
    )
    
    $
    (42
    )
    
    $
    (134
    )2004Ceded earned premium
    
    $
    (3
    )
    
    $
    
    
    
    $
    8
    
    
    $
    5Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Interest charges
    
    
    (42
    )
    
    
    (22
    )
    
    
    (33
    )
    
    
    (97
    )Pretax benefit (expense)
    
    $
    (45
    )
    
    $
    (22
    )
    
    $
    (39
    )
    
    $
    (106
    )
  65




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Standard Lines
    
    $
    (30
    )
    
    $
    (43
    )
    
    $
    (96
    )
    
    $
    (80
    )Specialty Lines
    
    
    
    
    
    
    (2
    )
    
    
    (7
    )
    
    
    (4
    )Corporate and Other
    
    
    (14
    )
    
    
    (14
    )
    
    
    (31
    )
    
    
    (22
    )Pretax benefit (expense)
    
    $
    (44
    )
    
    $
    (59
    )
    
    $
    (134
    )
    
    $
    (106
    )
   Corporate Aggregate Reinsurance Treaties
    66




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   Terrorism Insurance
       67




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Restructuring
  SEGMENT RESULTS
   68




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 STANDARD LINES
  Results of Operations
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Net written premiums
    
    $
    1,134
    
    
    $
    1,209
    
    
    $
    2,305
    
    
    $
    2,474Net earned premiums
    
    
    1,084
    
    
    
    1,315
    
    
    
    2,253
    
    
    
    2,573Net operating income
    
    
    100
    
    
    
    98
    
    
    
    201
    
    
    
    212Net realized investment gains
    
    
    17
    
    
    
    50
    
    
    
    9
    
    
    
    88Net income
    
    
    117
    
    
    
    148
    
    
    
    210
    
    
    
    300RatiosLoss and loss adjustment expense
    
    
    71.2
    %
    
    
    70.5
    %
    
    
    71.1
    %
    
    
    68.0
    %Expense
    
    
    31.4
    
    
    
    30.3
    
    
    
    31.8
    
    
    
    31.9Dividend
    
    
    0.8
    
    
    
    (1.1
    )
    
    
    0.6
    
    
    
    (0.2
    )Combined
    
    
    103.4
    %
    
    
    99.7
    %
    
    
    103.5
    %
    
    
    99.7
    %
 Three Month Comparison
      69




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
        Six Month Comparison
   70




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
         Gross and Net Carried  Claim and Claim Adjustment Expense Reserves
 June 30, 2005
    
    
    December 31, 2004(In millions)Gross Case Reserves
    
    $
    6,720
    
    
    $
    6,904Gross IBNR Reserves
    
    
    7,451
    
    
    
    7,398Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,171
    
    
    $
    14,302Net Case Reserves
    
    $
    4,406
    
    
    $
    4,761Net IBNR Reserves
    
    
    5,157
    
    
    
    4,547Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    9,563
    
    
    $
    9,308
 71




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   72




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 SPECIALTY LINES
  Results of Operations
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Net written premiums
    
    $
    595
    
    
    $
    592
    
    
    $
    1,189
    
    
    $
    1,173Net earned premiums
    
    
    630
    
    
    
    567
    
    
    
    1,203
    
    
    
    1,096Net operating income
    
    
    81
    
    
    
    81
    
    
    
    160
    
    
    
    156Net realized investment gains
    
    
    5
    
    
    
    18
    
    
    
    8
    
    
    
    31Net income
    
    
    86
    
    
    
    99
    
    
    
    168
    
    
    
    187RatiosLoss and loss adjustment expense
    
    
    69.0
    %
    
    
    64.2
    %
    
    
    65.8
    %
    
    
    63.6
    %Expense
    
    
    24.8
    
    
    
    25.6
    
    
    
    25.8
    
    
    
    26.1Dividend
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3Combined
    
    
    94.0
    %
    
    
    90.0
    %
    
    
    91.8
    %
    
    
    90.0
    %
 Three Month Comparison
      73




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
        Six Month Comparison
    74




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
         Gross and Net Carried  Claim and Claim Adjustment Expense Reserves
 June 30, 2005
    
    
    December 31, 2004(In millions)Gross Case Reserves
    
    $
    1,765
    
    
    $
    1,659Gross IBNR Reserves
    
    
    3,231
    
    
    
    3,201Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    4,996
    
    
    $
    4,860Net Case Reserves
    
    $
    1,178
    
    
    $
    1,191Net IBNR Reserves
    
    
    2,268
    
    
    
    2,042Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    3,446
    
    
    $
    3,233
 75




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  76




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 LIFE AND GROUP NON-CORE
  Results of Operations
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Net earned premiums
    
    $
    204
    
    
    $
    202
    
    
    $
    370
    
    
    $
    528Net operating income (loss)
    
    
    5
    
    
    
    (26
    )
    
    
    6
    
    
    
    (7
    )Net realized investment gains (losses)
    
    
    (1
    )
    
    
    14
    
    
    
    (4
    )
    
    
    (387
    )Net income (loss)
    
    
    4
    
    
    
    (12
    )
    
    
    2
    
    
    
    (394
    )
 Three Month Comparison
   Six Month Comparison
   77




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 CORPORATE AND OTHER NON-CORE
  Results of Operations
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Net investment income
    
    $
    55
    
    
    $
    61
    
    
    $
    116
    
    
    $
    130Revenues
    
    
    155
    
    
    
    121
    
    
    
    190
    
    
    
    255Net operating income
    
    
    86
    
    
    
    22
    
    
    
    97
    
    
    
    23Net realized investment gains (losses)
    
    
    (5
    )
    
    
    36
    
    
    
    (11
    )
    
    
    53Net income (loss)
    
    
    81
    
    
    
    58
    
    
    
    86
    
    
    
    76
 Three Month Comparison
      Six Month Comparison
  78




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
        Gross and Net Carried  Claim and Claim Adjustment Expense Reserves
 June 30, 2005
    
    
    December 31, 2004(In millions)Gross Case Reserves
    
    $
    3,562
    
    
    $
    3,806Gross IBNR Reserves
    
    
    4,477
    
    
    
    4,875Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    8,039
    
    
    $
    8,681Net Case Reserves
    
    $
    1,537
    
    
    $
    1,588Net IBNR Reserves
    
    
    1,786
    
    
    
    1,691Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    3,323
    
    
    $
    3,279
 79




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 APMT Reserves
        80




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
    Asbestos and Environmental Pollution and Mass Tort Reserves
 June 30, 2005
    
    
    December 31, 2004Environmental
    
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    
    Pollution andAsbestos
    
    
    Mass Tort
    
    
    Asbestos
    
    
    Mass Tort(In millions)Gross reserves
    
    $
    3,132
    
    
    $
    663
    
    
    $
    3,218
    
    
    $
    755Ceded reserves
    
    
    (1,512
    )
    
    
    (234
    )
    
    
    (1,532
    )
    
    
    (258
    )Net reserves
    
    $
    1,620
    
    
    $
    429
    
    
    $
    1,686
    
    
    $
    497
 Asbestos
    81




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
        82




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
    83




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Pending Asbestos Accounts and Associated Reserves
 June 30, 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
    
    
    $
    159
    
    
    
    10
    %Wellington
    
    
    4
    
    
    
    2
    
    
    
    16
    
    
    
    1Coverage in place
    
    
    34
    
    
    
    7
    
    
    
    70
    
    
    
    4Fibreboard
    
    
    1
    
    
    
    
    
    
    
    54
    
    
    
    3Total with settlement agreements
    
    
    52
    
    
    
    27
    
    
    
    299
    
    
    
    18Other policyholders with active accountsLarge asbestos accounts
    
    
    187
    
    
    
    29
    
    
    
    304
    
    
    
    19Small asbestos accounts
    
    
    1,060
    
    
    
    14
    
    
    
    120
    
    
    
    8Total other policyholders
    
    
    1,247
    
    
    
    43
    
    
    
    424
    
    
    
    27Assumed reinsurance and pools
    
    
    
    
    
    
    3
    
    
    
    146
    
    
    
    9Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    751
    
    
    
    46Total
    
    
    1,299
    
    
    $
    73
    
    
    $
    1,620
    
    
    
    100
    %
 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
    %
  84




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
     Continental Casualty Co. v. Employers Ins. of Wausau et
al. Keasbey
 In re: Burns & Roe Enterprises, Inc.
 85




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Continental Insurance Co., et al. v. Honeywell
International Inc.
 Varner v. Ford Motor Co., et al. Peplowski v. ACE American Ins. Co., et al. Cross v. Garlock
 86




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Boson v. Union Carbide Corp., et al.
 Adams v. Aetna, Inc., et al. Adams v. Ins. Co. of North America (INA), et al. Adams
 87




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Pennock, et al. v. Maryland Casualty,
et al.
   
    
    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
 88




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 
    
    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.
  Environmental Pollution and Mass Tort
     89




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
       90




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  At June 30, 2005
 NetEnvironmental
    
    
    Percent ofNet Paid Losses
    
    
    Pollution
    
    
    EnvironmentalNumber of
    
    
    in 2005
    
    
    Reserves
    
    
    Pollution NetPolicyholders
    
    
    (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
    
    
    132
    
    
    
    17
    
    
    
    72
    
    
    
    24Small pollution accounts
    
    
    386
    
    
    
    10
    
    
    
    44
    
    
    
    14Total Other Policyholders
    
    
    518
    
    
    
    27
    
    
    
    116
    
    
    
    38Assumed Reinsurance & Pools
    
    
    
    
    
    
    2
    
    
    
    34
    
    
    
    11Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    43Total
    
    
    538
    
    
    $
    36
    
    
    $
    305
    
    
    
    100
    %
 At December 31, 2004
 NetEnvironmental
    
    
    Percent ofNet Paid Losses
    
    
    Pollution
    
    
    EnvironmentalNumber of
    
    
    in 2004
    
    
    Reserves
    
    
    Pollution NetPolicyholders
    
    
    (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
    %
 91




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 INVESTMENTS
 Net Investment Income
  Net Investment Income
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Fixed maturity securities
    
    $
    410
    
    
    $
    386
    
    
    $
    774
    
    
    $
    793Short term investments
    
    
    29
    
    
    
    9
    
    
    
    61
    
    
    
    25Limited partnerships
    
    
    38
    
    
    
    30
    
    
    
    117
    
    
    
    105Equity securities
    
    
    8
    
    
    
    4
    
    
    
    12
    
    
    
    8Income (loss) from trading portfolio (a)
    
    
    14
    
    
    
    14
    
    
    
    (16
    )
    
    
    34Interest on funds withheld and other deposits
    
    
    (50
    )
    
    
    (55
    )
    
    
    (89
    )
    
    
    (103
    )Other
    
    
    4
    
    
    
    1
    
    
    
    11
    
    
    
    11Gross investment income
    
    
    453
    
    
    
    389
    
    
    
    870
    
    
    
    873Investment expense
    
    
    (14
    )
    
    
    (8
    )
    
    
    (25
    )
    
    
    (17
    )Net investment income
    
    $
    439
    
    
    $
    381
    
    
    $
    845
    
    
    $
    856
    92




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Net Realized Investment Gains (Losses)
  Net Realized Investment Gains (Losses)
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Realized investment gains (losses):Fixed maturity securities:U.S. Government bonds
    
    $
    14
    
    
    $
    (1
    )
    
    $
    (12
    )
    
    $
    9Corporate and other taxable bonds
    
    
    (24
    )
    
    
    27
    
    
    
    (45
    )
    
    
    33Tax-exempt bonds
    
    
    27
    
    
    
    (92
    )
    
    
    34
    
    
    
    (19
    )Asset-backed bonds
    
    
    4
    
    
    
    (4
    )
    
    
    11
    
    
    
    35Redeemable preferred stock
    
    
    
    
    
    
    3
    
    
    
    10
    
    
    
    5Total fixed maturity securities
    
    
    21
    
    
    
    (67
    )
    
    
    (2
    )
    
    
    63Equity securities
    
    
    25
    
    
    
    166
    
    
    
    39
    
    
    
    177Derivative securities
    
    
    (23
    )
    
    
    49
    
    
    
    (19
    )
    
    
    17Other, including disposition of businesses net of
participating policyholders interest
    
    
    4
    
    
    
    (39
    )
    
    
    (13
    )
    
    
    (604
    )Realized investment gains (losses) before allocation to
participating policyholders and minority interests
    
    
    27
    
    
    
    109
    
    
    
    5
    
    
    
    (347
    )Allocated to participating policyholders and minority interest
    
    
    (1
    )
    
    
    (4
    )
    
    
    2
    
    
    
    (6
    )Income tax benefit (expense)
    
    
    (10
    )
    
    
    13
    
    
    
    (5
    )
    
    
    138Net realized investment gains (losses), net of participating
policyholders and minority interests
    
    $
    16
    
    
    $
    118
    
    
    $
    2
    
    
    $
    (215
    )
    93




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
      Realized Gains and Losses
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Net realized gains (losses) on fixed maturity securities
and equity securities:Fixed maturity securities:Gross realized gains
    
    $
    89
    
    
    $
    88
    
    
    $
    265
    
    
    $
    313Gross realized losses
    
    
    (68
    )
    
    
    (155
    )
    
    
    (267
    )
    
    
    (250
    )Net realized gains (losses) on fixed maturity securities
    
    
    21
    
    
    
    (67
    )
    
    
    (2
    )
    
    
    63Equity securities:Gross realized gains
    
    
    34
    
    
    
    169
    
    
    
    54
    
    
    
    182Gross realized losses
    
    
    (9
    )
    
    
    (3
    )
    
    
    (15
    )
    
    
    (5
    )Net realized gains on equity securities
    
    
    25
    
    
    
    166
    
    
    
    39
    
    
    
    177Net realized gains on fixed maturity and equity securities
    
    $
    46
    
    
    $
    99
    
    
    $
    37
    
    
    $
    240
 94




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Largest Realized Losses from Securities Sold at a Loss Six Months Ended June 30, 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.
    
    $
    10,932
    
    
    $
    44
    
    
    
    0-12+Manufactures and sells vehicles worldwide under various
brand names. The company also has financing and
insurance operations. The company is experiencing
inventory capacity issues. Losses relate to trades that
took place to reduce issuer exposure.
    
    
    324
    
    
    
    43
    
    
    
    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
    
    $
    11,483
    
    
    $
    92
 95




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Valuation and Impairment of Investments
  Carrying Value of Investments
 June 30,
    
    
    
    
    
    
    December 31,2005
    
    
    %
    
    
    2004
    
    
    %(In millions)General account investments:Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations of government agencies
    
    $
    1,810
    
    
    
    5
    %
    
    $
    4,346
    
    
    
    11
    %Asset-backed securities
    
    
    10,099
    
    
    
    25
    
    
    
    7,788
    
    
    
    20States, municipalities and political subdivisions  tax-exempt
    
    
    11,048
    
    
    
    28
    
    
    
    8,857
    
    
    
    22Corporate securities
    
    
    6,025
    
    
    
    15
    
    
    
    6,513
    
    
    
    17Other debt securities
    
    
    2,754
    
    
    
    7
    
    
    
    3,053
    
    
    
    8Redeemable preferred stock
    
    
    228
    
    
    
    1
    
    
    
    146
    
    
    
    Options embedded in convertible debt securities
    
    
    118
    
    
    
    
    
    
    
    234
    
    
    
    1Total fixed maturity securities available-for-sale
    
    
    32,082
    
    
    
    81
    
    
    
    30,937
    
    
    
    79Fixed maturity securities trading:U.S. Treasury securities and obligations of government agencies
    
    
    53
    
    
    
    
    
    
    
    27
    
    
    
    Asset-backed securities
    
    
    125
    
    
    
    
    
    
    
    125
    
    
    
    Corporate securities
    
    
    231
    
    
    
    1
    
    
    
    199
    
    
    
    1Other debt securities
    
    
    46
    
    
    
    
    
    
    
    35
    
    
    
    Redeemable preferred stock
    
    
    5
    
    
    
    
    
    
    
    4
    
    
    
    Total fixed maturity securities trading
    
    
    460
    
    
    
    1
    
    
    
    390
    
    
    
    1Equity securities available-for-sale:Common stock
    
    
    299
    
    
    
    1
    
    
    
    260
    
    
    
    1Non-redeemable preferred stock
    
    
    158
    
    
    
    
    
    
    
    150
    
    
    
    Total equity securities available-for-sale
    
    
    457
    
    
    
    1
    
    
    
    410
    
    
    
    1Total equity securities trading
    
    
    35
    
    
    
    
    
    
    
    46
    
    
    
    Short term investments available-for-sale
    
    
    4,859
    
    
    
    12
    
    
    
    5,404
    
    
    
    14Short term investments trading
    
    
    441
    
    
    
    1
    
    
    
    459
    
    
    
    1Limited partnerships
    
    
    1,562
    
    
    
    4
    
    
    
    1,549
    
    
    
    4Other investments
    
    
    44
    
    
    
    
    
    
    
    36
    
    
    
    Total general account investments
    
    $
    39,940
    
    
    
    100
    %
    
    $
    39,231
    
    
    
    100
    %
   96




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Unrealized Gains (Losses) on Fixed Maturity and Equity Securities
 Cost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    NetAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    UnrealizedJune 30, 2005
    
    Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Gain(In millions)Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations
of government agencies
    
    $
    1,629
    
    
    $
    183
    
    
    $
    2
    
    
    $
    
    
    
    $
    181Asset-backed securities
    
    
    10,034
    
    
    
    101
    
    
    
    28
    
    
    
    8
    
    
    
    65States, municipalities and political
subdivisions  tax-exempt
    
    
    10,738
    
    
    
    316
    
    
    
    3
    
    
    
    3
    
    
    
    310Corporate securities
    
    
    5,630
    
    
    
    463
    
    
    
    53
    
    
    
    15
    
    
    
    395Other debt securities
    
    
    2,453
    
    
    
    313
    
    
    
    8
    
    
    
    4
    
    
    
    301Redeemable preferred stock
    
    
    228
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    Options embedded in convertible debt
securities
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities
available-for-sale
    
    
    30,830
    
    
    
    1,378
    
    
    
    96
    
    
    
    30
    
    
    
    1,252Total fixed maturity securities trading
    
    
    460
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securities available-for-sale:Common stock
    
    
    203
    
    
    
    98
    
    
    
    2
    
    
    
    
    
    
    
    96Non-redeemable preferred stock
    
    
    139
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Total equity securities available-for-sale
    
    
    342
    
    
    
    117
    
    
    
    2
    
    
    
    
    
    
    
    115Total equity securities trading
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity and equity securities
    
    $
    31,667
    
    
    $
    1,495
    
    
    $
    98
    
    
    $
    30
    
    
    $
    1,367
 Cost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    NetAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    UnrealizedDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Gain(In millions)Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations
of government agencies
    
    $
    4,233
    
    
    $
    126
    
    
    $
    13
    
    
    $
    
    
    
    $
    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
  97




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   Contractual Maturity
 Percent of
    
    
    Percent ofMarket
    
    
    UnrealizedValue
    
    
    LossDue in one year or less
    
    
    1
    %
    
    
    1
    %Due after one year through five years
    
    
    7
    
    
    
    14Due after five years through ten years
    
    
    10
    
    
    
    27Due after ten years
    
    
    19
    
    
    
    29Asset-backed securities
    
    
    63
    
    
    
    29Total
    
    
    100
    %
    
    
    100
    %
 98




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Unrealized Loss Aging
 June 30, 2005
    
    
    December 31, 2004Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In millions)Fixed maturity securities:Investment grade:0-6 months
    
    $
    5,312
    
    
    $
    34
    
    
    $
    7,742
    
    
    $
    537-12 months
    
    
    1,115
    
    
    
    13
    
    
    
    2,448
    
    
    
    5913-24 months
    
    
    882
    
    
    
    17
    
    
    
    368
    
    
    
    12Greater than 24 months
    
    
    102
    
    
    
    2
    
    
    
    2
    
    
    
    Total investment grade
    
    
    7,411
    
    
    
    66
    
    
    
    10,560
    
    
    
    124Non-investment grade:0-6 months
    
    
    686
    
    
    
    42
    
    
    
    188
    
    
    
    77-12 months
    
    
    76
    
    
    
    7
    
    
    
    69
    
    
    
    413-24 months
    
    
    130
    
    
    
    11
    
    
    
    20
    
    
    
    2Greater than 24 months
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    
    897
    
    
    
    60
    
    
    
    277
    
    
    
    13Total fixed maturity securities
    
    
    8,308
    
    
    
    126
    
    
    
    10,837
    
    
    
    137Equity securities:0-6 months
    
    
    79
    
    
    
    2
    
    
    
    4
    
    
    
    7-12 months
    
    
    3
    
    
    
    
    
    
    
    1
    
    
    
    13-24 months
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Greater than 24 months
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Total equity securities
    
    
    87
    
    
    
    2
    
    
    
    9
    
    
    
    Total fixed maturity and equity securities
    
    $
    8,395
    
    
    $
    128
    
    
    $
    10,846
    
    
    $
    137
    99




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
   Unrealized Loss Aging for Non-investment Grade Securities
 Fair Value as a Percentage of Book Value
    
    
    GrossEstimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedJune 30, 2005
    
    Fair Value
    
    
    90-99%
    
    
    80-89%
    
    
    70-79%
    
    
    <70%
    
    
    Loss(In millions)Fixed maturity securities:Non-investment grade:0-6 months
    
    $
    686
    
    
    $
    17
    
    
    $
    13
    
    
    $
    11
    
    
    $
    1
    
    
    $
    427-12 months
    
    
    76
    
    
    
    4
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    713-24 months
    
    
    130
    
    
    
    5
    
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    11Greater than 24 months
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    $
    897
    
    
    $
    26
    
    
    $
    21
    
    
    $
    12
    
    
    $
    1
    
    
    $
    60
 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
    
    
    
    
    
    
    
    
    
    
    
    2Total non-investment grade
    
    $
    277
    
    
    $
    10
    
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    13
   100




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
    General Account Bond Ratings
 June 30,
    
    
    
    
    
    
    December 31,2005
    
    
    %
    
    
    2004
    
    
    %(In millions)U.S. Government and affiliated agency securities
    
    $
    2,086
    
    
    
    6
    %
    
    $
    4,640
    
    
    
    15
    %Other AAA rated
    
    
    17,966
    
    
    
    56
    
    
    
    14,628
    
    
    
    47AA and A rated
    
    
    5,520
    
    
    
    17
    
    
    
    5,597
    
    
    
    18BBB rated
    
    
    3,912
    
    
    
    12
    
    
    
    4,072
    
    
    
    13Below investment-grade
    
    
    2,825
    
    
    
    9
    
    
    
    2,240
    
    
    
    7Total
    
    $
    32,309
    
    
    
    100
    %
    
    $
    31,177
    
    
    
    100
    %
     101




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Short-term Investments
 June 30,
    
    
    December 31,2005
    
    
    2004(In millions)Short-term investments available-for-sale:Commercial paper
    
    $
    2,371
    
    
    $
    1,655U.S. Treasury securities
    
    
    681
    
    
    
    2,382Money market funds
    
    
    222
    
    
    
    174Other
    
    
    1,585
    
    
    
    1,193Total short-term investments available-for-sale
    
    
    4,859
    
    
    
    5,404Short-term investments trading:Commercial paper
    
    
    45
    
    
    
    46U.S. Treasury securities
    
    
    65
    
    
    
    300Money market funds
    
    
    326
    
    
    
    99Other
    
    
    5
    
    
    
    14Total short-term investments trading
    
    
    441
    
    
    
    459Total short-term investments
    
    $
    5,300
    
    
    $
    5,863
 â
 LIQUIDITY AND CAPITAL RESOURCES
 Cash Flow
      102




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Debt and Other Commitments
     Commitments
 2010 andJune 30, 2005
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Beyond
    
    
    Total(In millions)Debt (a)
    
    $
    89
    
    
    $
    414
    
    
    $
    104
    
    
    $
    440
    
    
    $
    72
    
    
    $
    1,617
    
    
    $
    2,736Lease obligations
    
    
    33
    
    
    
    55
    
    
    
    47
    
    
    
    39
    
    
    
    29
    
    
    
    65
    
    
    
    268Claim and claim expense reserves (b)
    
    
    4,239
    
    
    
    6,457
    
    
    
    4,751
    
    
    
    3,315
    
    
    
    2,389
    
    
    
    11,557
    
    
    
    32,708Future policy benefits reserves (c)
    
    
    110
    
    
    
    178
    
    
    
    172
    
    
    
    174
    
    
    
    170
    
    
    
    8,744
    
    
    
    9,548Policyholder funds reserves (c)
    
    
    381
    
    
    
    895
    
    
    
    152
    
    
    
    35
    
    
    
    10
    
    
    
    160
    
    
    
    1,633Guaranteed payment contracts (d)
    
    
    8
    
    
    
    15
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29Total
    
    $
    4,860
    
    
    $
    8,014
    
    
    $
    5,232
    
    
    $
    4,003
    
    
    $
    2,670
    
    
    $
    22,143
    
    
    $
    46,922
 (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 June 30, 2005.
See the Reserves  Estimates and Uncertainties section of this MD&A for further
information. Claim and claim adjustment expense reserves of $27 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 June 30, 2005. Future
policy benefit reserves of $993 million and policyholder fund reserves of $56 million
related to business which has been 100% ceded to unaffiliated parties in connection with
the individual life sale are not included.(d)
    
    Primarily relating to telecommunications and software services.
 103




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Regulatory Matters
      104




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Dividends from Subsidiaries
     Loews
   Ratings
   105




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  106




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
  Insurance Financial Strength Ratings
    
    
    Debt RatingsProperty & Casualty (a)
    
    
    Life (b)
    
    
    CNAF
    
    
    ContinentalCCC
    
    
    CIC
    
    
    
    
    
    
    Senior
    
    
    SeniorGroup
    
    
    Group
    
    
    CAC
    
    
    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.
     107




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 Accounting Pronouncements
   108




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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 FORWARD-LOOKING STATEMENTS
  
    
    general economic and business conditions, including inflationary pressures on
medical care costs, construction costs and other economic sectors that increase the severity
of claims;
    
    changes in financial markets such as fluctuations in interest rates, long-term
periods of low interest rates, credit conditions and currency, commodity and stock prices;
    
    the effects of corporate bankruptcies, such as Enron and WorldCom, on capital
markets, and on the markets for directors and officers and errors and omissions coverages;
    
    changes in foreign or domestic political, social and economic conditions;
    
    regulatory initiatives and compliance with governmental regulations, judicial
decisions, including interpretation of policy provisions, decisions regarding coverage and
theories of liability, trends in litigation and the outcome of any litigation involving 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 in relation to such products, including the Companys
restatement of financial results in May of 2005 and its relationship
with Accord Re Ltd. as disclosed in connection with that
restatement;
    
    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;
 109




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
 
    
    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;
    
    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.
  110




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CNA FINANCIAL CORPORATION  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk
   Sensitivity Analysis
      111




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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
    
    
    EquityJune 30, 2005
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    32,082
    
    
    $
    (2,043
    )
    
    $
    (64
    )
    
    $
    (23
    )Fixed maturity securities trading
    
    
    460
    
    
    
    (5
    )
    
    
    
    
    
    
    (3
    )Equity securities available-for-sale
    
    
    457
    
    
    
    
    
    
    
    (7
    )
    
    
    (45
    )Equity securities trading
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Short term investments available-for-sale
    
    
    4,859
    
    
    
    (5
    )
    
    
    (39
    )
    
    
    Short term investments trading
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,562
    
    
    
    7
    
    
    
    
    
    
    
    (19
    )Other invested assets
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    Equity indexed futures for trading securities
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (115
    )Other derivative securities
    
    
    3
    
    
    
    7
    
    
    
    (3
    )
    
    
    Total general account
    
    
    39,940
    
    
    
    (1,913
    )
    
    
    (113
    )
    
    
    (208
    )Separate accounts:Fixed maturity securities
    
    
    490
    
    
    
    (24
    )
    
    
    
    
    
    
    Equity securities
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Short term investments
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    563
    
    
    
    (24
    )
    
    
    
    
    
    
    (6
    )Total securities
    
    $
    40,503
    
    
    $
    (1,937
    )
    
    $
    (113
    )
    
    $
    (214
    )Debt (carrying value)
    
    $
    1,751
    
    
    $
    (97
    )
    
    $
    
    
    
    $
    
 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
    )
    
    $
    
    
    
    $
    
 112




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##### Table of Contents



CNA FINANCIAL CORPORATION  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
  Market Risk Scenario 2
 Increase (Decrease)Market
    
    
    Interest
    
    
    Currency
    
    
    EquityJune 30, 2005
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    32,082
    
    
    $
    (3,052
    )
    
    $
    (127
    )
    
    $
    (57
    )Fixed maturity securities trading
    
    
    460
    
    
    
    (7
    )
    
    
    
    
    
    
    (6
    )Equity securities available-for-sale
    
    
    457
    
    
    
    
    
    
    
    (13
    )
    
    
    (113
    )Equity securities trading
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Short term investments available-for-sale
    
    
    4,859
    
    
    
    (8
    )
    
    
    (79
    )
    
    
    Short term securities trading
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,562
    
    
    
    10
    
    
    
    
    
    
    
    (47
    )Other invested assets
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    181
    
    
    
    
    
    
    
    Equity indexed futures for trading
    
    
    
    
    
    
    4
    
    
    
    (1
    )
    
    
    (288
    )Other derivative securities
    
    
    3
    
    
    
    11
    
    
    
    (6
    )
    
    
    (1
    )Total general account
    
    
    39,940
    
    
    
    (2,861
    )
    
    
    (226
    )
    
    
    (521
    )Separate accounts:Fixed maturity securities
    
    
    490
    
    
    
    (36
    )
    
    
    
    
    
    
    Equity securities
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    (13
    )Short term investments
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    563
    
    
    
    (36
    )
    
    
    
    
    
    
    (13
    )Total securities
    
    $
    40,503
    
    
    $
    (2,897
    )
    
    $
    (226
    )
    
    $
    (534
    )Debt (carrying value)
    
    $
    1,751
    
    
    $
    (143
    )
    
    $
    
    
    
    $
    
 113




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##### Table of Contents



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
    )
    
    $
    
    
    
    $
    
 114




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##### Table of Contents



CNA FINANCIAL CORPORATION  ITEM 4. CONTROLS AND PROCEDURES
   
 115




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##### Table of Contents



CNA FINANCIAL CORPORATION  PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Item 4. Matters Subject to a Vote of Security Holders
      Votes For
    
    
    Votes WithheldBrenda J. Gaines
    
    
    249,410,698
    
    
    
    940,867Stephen W. Lilienthal
    
    
    245,236,657
    
    
    
    5,114,908Paul J. Liska
    
    
    245,088,763
    
    
    
    5,262,802Don M. Randel
    
    
    249,263,428
    
    
    
    1,088,137Joseph Rosenberg
    
    
    245,077,942
    
    
    
    5,273,623James S. Tisch
    
    
    245,134,369
    
    
    
    5,217,196Preston R. Tisch
    
    
    245,122,260
    
    
    
    5,229,305Marvin Zonis
    
    
    249,041,042
    
    
    
    1,310,523
     
 Item 6. Exhibits
  116




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CNA FINANCIAL CORPORATION  PART II. OTHER INFORMATION
 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.
 
 117




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CNA FINANCIAL CORPORATION  PART II. OTHER INFORMATION
 
 SIGNATURES
  CNA Financial CorporationDated:  July 29, 2005
    By
    /s/ D. Craig MenseD. Craig MenseChief Financial Officer 118