##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  
 FORM 10-Q
 ü
 Commission File Number 1-5823
 
 CNA FINANCIAL CORPORATION
  Delaware
    
    36-6169860(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)333 S. WabashChicago, Illinois
    
    60604(Address of principal executive offices)
    
    (Zip Code)
 (312) 822-5000
 (Registrants telephone number, including area code)
 Ö
  Ö
 Ö
  Class
    
    
    
    Outstanding at July 26, 2006Common Stock, Par value $2.50
    
    
    
    256,007,095




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##### 



Item
    
    
    
    PageNumber
    
    
    
    NumberPART
I. Financial Information1.
    
    Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets at June 30, 2006 and at December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    72.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    553.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    924.
    
    Controls and Procedures
    
    
    96PART
II. Other Information1.
    
    Legal Proceedings
    
    
    971A.
    
    Risk Factors
    
    
    974.
    
    Matters Subject to a Vote of Security Holders
    
    
    975.
    
    Other Information
    
    
    976.
    
    Exhibits
    
    
    98Signatures
    
    
    99Certifications
    
    
    100302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




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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 31,2006
    
    
    2005(In millions, except share data)AssetsInvestments:Fixed maturity securities at fair value (amortized cost of $32,291 and $32,616)
    
    $
    32,089
    
    
    $
    33,234Equity securities at fair value (cost of $746 and $511)
    
    
    924
    
    
    
    681Limited partnership investments
    
    
    1,671
    
    
    
    1,509Other invested assets
    
    
    27
    
    
    
    33Short term investments at cost, which approximates fair value
    
    
    5,621
    
    
    
    4,238Total investments
    
    
    40,332
    
    
    
    39,695Cash
    
    
    98
    
    
    
    96Reinsurance receivables (less allowance for uncollectible receivables of $527 and $519)
    
    
    11,455
    
    
    
    11,917Insurance receivables (less allowance for doubtful accounts of $423 and $445)
    
    
    2,060
    
    
    
    1,866Accrued investment income
    
    
    296
    
    
    
    312Receivables for securities sold
    
    
    226
    
    
    
    565Deferred acquisition costs
    
    
    1,211
    
    
    
    1,197Prepaid reinsurance premiums
    
    
    388
    
    
    
    340Federal income taxes recoverable (includes $0 and $68 due from Loews Corporation)
    
    
    
    
    
    
    62Deferred income taxes
    
    
    1,351
    
    
    
    1,105Property and equipment at cost (less accumulated depreciation of $563 and $546)
    
    
    222
    
    
    
    197Goodwill and other intangible assets
    
    
    146
    
    
    
    146Other assets
    
    
    621
    
    
    
    737Separate account business
    
    
    506
    
    
    
    551Total assets
    
    $
    58,912
    
    
    $
    58,786Liabilities and Stockholders EquityLiabilities:Insurance reserves:Claim and claim adjustment expense
    
    $
    30,177
    
    
    $
    30,938Unearned premiums
    
    
    3,907
    
    
    
    3,706Future policy benefits
    
    
    6,461
    
    
    
    6,297Policyholders funds
    
    
    1,115
    
    
    
    1,495Collateral on loaned securities
    
    
    1,341
    
    
    
    767Payables for securities purchased
    
    
    448
    
    
    
    129Participating policyholders funds
    
    
    47
    
    
    
    53Short term debt
    
    
    250
    
    
    
    252Long term debt
    
    
    1,429
    
    
    
    1,438Federal income taxes payable (includes $56 and $0 due to Loews Corporation)
    
    
    56
    
    
    
    Reinsurance balances payable
    
    
    1,657
    
    
    
    1,636Other liabilities
    
    
    2,281
    
    
    
    2,283Separate account business
    
    
    506
    
    
    
    551Total liabilities
    
    
    49,675
    
    
    
    49,545Commitments and contingencies (Notes D, G, H, and K)Minority interest
    
    
    302
    
    
    
    291Stockholders 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
256,007,095 and 256,001,968 shares outstanding)
    
    
    645
    
    
    
    645Additional paid-in capital
    
    
    1,703
    
    
    
    1,701Retained earnings
    
    
    6,089
    
    
    
    5,621Accumulated other comprehensive income (loss)
    
    
    (127
    )
    
    
    359Treasury stock (2,170,190 and 2,175,317 shares), at cost
    
    
    (67
    )
    
    
    (67
    )8,993
    
    
    
    9,009Notes receivable for the issuance of common stock
    
    
    (58
    )
    
    
    (59
    )Total stockholders equity
    
    
    8,935
    
    
    
    8,950Total liabilities and stockholders equity
    
    $
    58,912
    
    
    $
    58,786
 3




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##### Table of Contents



CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months
    
    
    Six monthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions, except per share data)
    
    
    
    
    
    Restated
    
    
    
    
    
    
    RestatedSee Note S
    
    
    
    
    
    
    See Note SRevenuesNet earned premiums
    
    $
    1,892
    
    
    $
    1,912
    
    
    $
    3,761
    
    
    $
    3,811Net investment income
    
    
    552
    
    
    
    439
    
    
    
    1,122
    
    
    
    845Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    (98
    )
    
    
    26
    
    
    
    (89
    )
    
    
    7Other revenues
    
    
    66
    
    
    
    193
    
    
    
    119
    
    
    
    271Total revenues
    
    
    2,412
    
    
    
    2,570
    
    
    
    4,913
    
    
    
    4,934Claims, Benefits and ExpensesInsurance claims and policyholders benefits
    
    
    1,432
    
    
    
    1,581
    
    
    
    2,924
    
    
    
    3,015Amortization of deferred acquisition costs
    
    
    372
    
    
    
    374
    
    
    
    742
    
    
    
    752Other operating expenses
    
    
    242
    
    
    
    251
    
    
    
    499
    
    
    
    525Restructuring and other related charges
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )
    
    
    Interest
    
    
    28
    
    
    
    30
    
    
    
    58
    
    
    
    67Total claims, benefits and expenses
    
    
    2,061
    
    
    
    2,236
    
    
    
    4,210
    
    
    
    4,359Income before income tax and minority interest
    
    
    351
    
    
    
    334
    
    
    
    703
    
    
    
    575Income tax expense
    
    
    (100
    )
    
    
    (48
    )
    
    
    (208
    )
    
    
    (104
    )Minority interest
    
    
    (10
    )
    
    
    2
    
    
    
    (19
    )
    
    
    (5
    )Income from continuing operations
    
    
    241
    
    
    
    288
    
    
    
    476
    
    
    
    466Income (loss) from discontinued operations, net of tax of $0, $0, $0
and $0
    
    
    (2
    )
    
    
    2
    
    
    
    (8
    )
    
    
    9Net income
    
    $
    239
    
    
    $
    290
    
    
    $
    468
    
    
    $
    475Basic and Diluted Earnings Per ShareIncome from continuing operations
    
    $
    0.87
    
    
    $
    1.06
    
    
    $
    1.71
    
    
    $
    1.69Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.03
    )
    
    
    0.03Basic and diluted earnings per share available to common stockholders
    
    $
    0.86
    
    
    $
    1.06
    
    
    $
    1.68
    
    
    $
    1.72Weighted average outstanding common stock and common stock
equivalents
    
    
    256.0
    
    
    
    256.0
    
    
    
    256.0
    
    
    
    256.0
 4




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CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six months ended June 30
    
    2006
    
    
    2005(In millions)
    
    
    
    
    
    RestatedSee Note SCash Flows from Operating Activities:Net income
    
    $
    468
    
    
    $
    475Adjustments to reconcile net income to net cash flows provided
by operating activities:(Income) loss from discontinued operations
    
    
    8
    
    
    
    (9
    )Loss on disposal of property and equipment
    
    
    2
    
    
    
    Minority interest
    
    
    19
    
    
    
    5Deferred income tax provision
    
    
    39
    
    
    
    (120
    )Trading securities
    
    
    331
    
    
    
    4Realized investment (gains) losses, net of participating
policyholders and minority interests
    
    
    89
    
    
    
    (7
    )Undistributed earnings of equity method investees
    
    
    (44
    )
    
    
    (1
    )Amortization of bond (discount) premium
    
    
    (152
    )
    
    
    (55
    )Depreciation
    
    
    24
    
    
    
    28Changes in:Receivables, net
    
    
    268
    
    
    
    1,477Deferred acquisition costs
    
    
    (14
    )
    
    
    20Accrued investment income
    
    
    16
    
    
    
    6Federal income taxes recoverable/payable
    
    
    118
    
    
    
    216Prepaid reinsurance premiums
    
    
    (48
    )
    
    
    162Reinsurance balances payable
    
    
    21
    
    
    
    (198
    )Insurance reserves
    
    
    (370
    )
    
    
    (657
    )Other, net
    
    
    152
    
    
    
    (369
    )Total adjustments
    
    
    459
    
    
    
    502Net cash flows provided by operating activities-continuing
operations
    
    
    927
    
    
    
    977Net cash flows used by operating activities-discontinued
operations
    
    
    (4
    )
    
    
    (24
    )Net cash flows provided by operating activities-total
    
    
    923
    
    
    
    953Cash Flows from Investing Activities:Purchases of fixed maturity securities
    
    
    (22,683
    )
    
    
    (33,612
    )Proceeds from fixed maturity securities:Sales
    
    
    21,130
    
    
    
    30,337Maturities, calls and redemptions
    
    
    2,163
    
    
    
    2,081Purchases of equity securities
    
    
    (263
    )
    
    
    (180
    )Proceeds from sales of equity securities
    
    
    120
    
    
    
    133Change in short term investments
    
    
    (1,337
    )
    
    
    663Change in collateral on loaned securities
    
    
    574
    
    
    
    63Change in other investments
    
    
    (95
    )
    
    
    86Purchases of property and equipment
    
    
    (58
    )
    
    
    (17
    )Dispositions
    
    
    7
    
    
    
    12Other, net
    
    
    (85
    )
    
    
    (1
    )Net cash flows used by investing activities-continuing operations
    
    
    (527
    )
    
    
    (435
    )Net cash flows provided by investing activities-discontinued
operations
    
    
    24
    
    
    
    34Net cash flows used by investing activities-total
    
    
    (503
    )
    
    
    (401
    )
 5




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CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(UNAUDITED)
 Six months ended June 30
    
    2006
    
    
    2005(In millions)
    
    
    
    
    
    RestatedSee Note SCash Flows from Financing Activities:Proceeds from the issuance of long-term debt
    
    
    12
    
    
    
    Principal payments on debt
    
    
    (23
    )
    
    
    (507
    )Return of investment contract account balances
    
    
    (407
    )
    
    
    (64
    )Receipts of investment contract account balances
    
    
    1
    
    
    
    3Stock options exercised by officers
    
    
    2
    
    
    
    Other, net
    
    
    2
    
    
    
    2Net cash flows used by financing activities-continuing operations
    
    
    (413
    )
    
    
    (566
    )Net cash flows used by financing activities-discontinued
operations
    
    
    
    
    
    
    Net cash flows used by financing activities-total
    
    
    (413
    )
    
    
    (566
    )Net change in cash
    
    
    7
    
    
    
    (14
    )Net cash transactions from continuing operations to discontinued
operations
    
    
    15
    
    
    
    (1
    )Net cash transactions from discontinued operations to continuing
operations
    
    
    (15
    )
    
    
    1Cash, beginning of year
    
    
    125
    
    
    
    109Cash, end of period
    
    $
    132
    
    
    $
    95Cash-continuing operations
    
    $
    98
    
    
    $
    70Cash-discontinued operations
    
    
    34
    
    
    
    25Cash-total
    
    
    132
    
    
    
    95
 6




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Note A. Basis of Presentation
    Note B. Accounting Pronouncements
 Accounting Changes and Error Correction Accounting
Changes, Reporting Accounting Changes in Interim Financial
Statements
 The
Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments Accounting for Certain Investments in Debt and Equity Securities The Equity Method of Accounting for Investments in Common Stock The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments
 7




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to
Employees Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards
  Note C. Earnings Per Share
    8




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Earnings Per ShareThree Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions, except per share amounts)Income from continuing operations
    
    $
    241
    
    
    $
    288
    
    
    $
    476
    
    
    $
    466Less: undeclared preferred stock dividend
    
    
    (19
    )
    
    
    (18
    )
    
    
    (38
    )
    
    
    (35
    )Income from continuing operations available to common stockholders
    
    $
    222
    
    
    $
    270
    
    
    $
    438
    
    
    $
    431Weighted average outstanding common stock and common stock
equivalents
    
    
    256.0
    
    
    
    256.0
    
    
    
    256.0
    
    
    
    256.0Basic and diluted earnings per share from continuing operations
available to common stockholders
    
    $
    0.87
    
    
    $
    1.06
    
    
    $
    1.71
    
    
    $
    1.69
  Pro Forma Effect of SFAS 123 on ResultsThree Months
    
    
    Six MonthsPeriod ended June 30
    
    2005
    
    
    2005(In millions, except per share amounts)Income from continuing operations
    
    $
    288
    
    
    $
    466Less: undeclared preferred stock dividend
    
    
    (18
    )
    
    
    (35
    )Income from continuing operations available to
common stockholders
    
    
    270
    
    
    
    431Income from discontinued operations, net of tax
    
    
    2
    
    
    
    9Net income available to common stockholders
    
    
    272
    
    
    
    440Less: Total stock-based compensation cost determined
under the fair value method, net of tax
    
    
    
    
    
    
    (1
    )Pro forma net income available to common stockholders
    
    $
    272
    
    
    $
    439Basic and diluted earnings per share, as reported
    
    $
    1.06
    
    
    $
    1.72Basic and diluted earnings per share, pro forma
    
    $
    1.06
    
    
    $
    1.72
 9




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note D. Investments
  Net Investment IncomeThree Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Fixed maturity securities
    
    $
    480
    
    
    $
    410
    
    
    $
    895
    
    
    $
    774Short term investments
    
    
    58
    
    
    
    29
    
    
    
    123
    
    
    
    61Limited partnerships
    
    
    53
    
    
    
    38
    
    
    
    127
    
    
    
    117Equity securities
    
    
    8
    
    
    
    8
    
    
    
    14
    
    
    
    12Income (loss) from trading portfolio (a)
    
    
    (9
    )
    
    
    14
    
    
    
    33
    
    
    
    (16
    )Interest on funds withheld and other
deposits
    
    
    (30
    )
    
    
    (50
    )
    
    
    (55
    )
    
    
    (89
    )Other
    
    
    5
    
    
    
    4
    
    
    
    8
    
    
    
    11Gross investment income
    
    
    565
    
    
    
    453
    
    
    
    1,145
    
    
    
    870Investment expense
    
    
    (13
    )
    
    
    (14
    )
    
    
    (23
    )
    
    
    (25
    )Net investment income
    
    $
    552
    
    
    $
    439
    
    
    $
    1,122
    
    
    $
    845
 
 
 Realized Investment Gains (Losses)Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Fixed maturity securities:U.S. Government bonds
    
    $
    
    
    
    $
    14
    
    
    $
    4
    
    
    $
    (12
    )Corporate and other taxable bonds
    
    
    (76
    )
    
    
    (24
    )
    
    
    (96
    )
    
    
    (45
    )Tax-exempt bonds
    
    
    (14
    )
    
    
    27
    
    
    
    11
    
    
    
    34Asset-backed bonds
    
    
    (5
    )
    
    
    4
    
    
    
    (14
    )
    
    
    11Redeemable preferred stock
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    10Total fixed maturity securities
    
    
    (96
    )
    
    
    21
    
    
    
    (96
    )
    
    
    (2
    )Equity securities
    
    
    3
    
    
    
    25
    
    
    
    6
    
    
    
    39Derivative securities
    
    
    (2
    )
    
    
    (23
    )
    
    
    5
    
    
    
    (19
    )Short term investments
    
    
    (2
    )
    
    
    
    
    
    
    (4
    )
    
    
    Other, including disposition of businesses, net of
participating policyholders interest
    
    
    (2
    )
    
    
    4
    
    
    
    (2
    )
    
    
    (13
    )Realized investment gains (losses) before allocation to
participating policyholders and minority interests
    
    
    (99
    )
    
    
    27
    
    
    
    (91
    )
    
    
    5Allocated to participating policyholders and minority interests
    
    
    1
    
    
    
    (1
    )
    
    
    2
    
    
    
    2Realized investment gains (losses)
    
    $
    (98
    )
    
    $
    26
    
    
    $
    (89
    )
    
    $
    7
 
  10




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CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
   Summary of Fixed Maturity and Equity SecuritiesCost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    FairJune 30, 2006
    
    Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Value(In millions)Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations
of government agencies
    
    $
    1,652
    
    
    $
    67
    
    
    $
    9
    
    
    $
    2
    
    
    $
    1,708Asset-backed securities
    
    
    15,170
    
    
    
    14
    
    
    
    283
    
    
    
    123
    
    
    
    14,778States, municipalities and political
subdivisions  tax-exempt
    
    
    5,287
    
    
    
    80
    
    
    
    58
    
    
    
    18
    
    
    
    5,291Corporate securities
    
    
    6,478
    
    
    
    176
    
    
    
    101
    
    
    
    20
    
    
    
    6,533Other debt securities
    
    
    3,194
    
    
    
    130
    
    
    
    46
    
    
    
    2
    
    
    
    3,276Redeemable preferred stock
    
    
    313
    
    
    
    5
    
    
    
    11
    
    
    
    1
    
    
    
    306Options embedded in convertible debt
securities
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total fixed maturity securities
available-for-sale
    
    
    32,095
    
    
    
    472
    
    
    
    508
    
    
    
    166
    
    
    
    31,893Total fixed maturity securities trading
    
    
    196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Equity securities available-for-sale:Common stock
    
    
    185
    
    
    
    175
    
    
    
    2
    
    
    
    
    
    
    
    358Preferred stock
    
    
    500
    
    
    
    11
    
    
    
    6
    
    
    
    
    
    
    
    505Total equity securities available-for-sale
    
    
    685
    
    
    
    186
    
    
    
    8
    
    
    
    
    
    
    
    863Total equity securities trading
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Total
    
    $
    33,037
    
    
    $
    658
    
    
    $
    516
    
    
    $
    166
    
    
    $
    33,013
 11




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Summary of Fixed Maturity and Equity SecuritiesCost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Less than
    
    
    Greater than
    
    
    FairDecember 31, 2005
    
    Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Value(In millions)Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations
of government agencies
    
    $
    1,355
    
    
    $
    119
    
    
    $
    4
    
    
    $
    1
    
    
    $
    1,469Asset-backed securities
    
    
    12,986
    
    
    
    43
    
    
    
    137
    
    
    
    33
    
    
    
    12,859States, municipalities and political
subdivisions  tax-exempt
    
    
    9,054
    
    
    
    193
    
    
    
    31
    
    
    
    7
    
    
    
    9,209Corporate securities
    
    
    5,906
    
    
    
    322
    
    
    
    52
    
    
    
    11
    
    
    
    6,165Other debt securities
    
    
    2,830
    
    
    
    234
    
    
    
    18
    
    
    
    2
    
    
    
    3,044Redeemable preferred stock
    
    
    213
    
    
    
    4
    
    
    
    
    
    
    
    1
    
    
    
    216Options embedded in convertible debt
securities
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total fixed maturity securities
available-for-sale
    
    
    32,345
    
    
    
    915
    
    
    
    242
    
    
    
    55
    
    
    
    32,963Total fixed maturity securities trading
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271Equity securities available-for-sale:Common stock
    
    
    140
    
    
    
    150
    
    
    
    1
    
    
    
    
    
    
    
    289Preferred stock
    
    
    322
    
    
    
    22
    
    
    
    1
    
    
    
    
    
    
    
    343Total equity securities available-for-sale
    
    
    462
    
    
    
    172
    
    
    
    2
    
    
    
    
    
    
    
    632Total equity securities trading
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Total
    
    $
    33,127
    
    
    $
    1,087
    
    
    $
    244
    
    
    $
    55
    
    
    $
    33,915
 12




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Unrealized Loss AgingJune 30, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In millions)Fixed maturity securities:Investment grade:0-6 months
    
    $
    12,282
    
    
    $
    227
    
    
    $
    9,976
    
    
    $
    1427-12 months
    
    
    5,850
    
    
    
    243
    
    
    
    2,739
    
    
    
    6113-24 months
    
    
    2,640
    
    
    
    122
    
    
    
    1,400
    
    
    
    45Greater than 24 months
    
    
    592
    
    
    
    38
    
    
    
    219
    
    
    
    7Total investment grade
    
    
    21,364
    
    
    
    630
    
    
    
    14,334
    
    
    
    255Non-investment grade:0-6 months
    
    
    1,023
    
    
    
    24
    
    
    
    632
    
    
    
    297-12 months
    
    
    217
    
    
    
    14
    
    
    
    118
    
    
    
    1013-24 months
    
    
    54
    
    
    
    5
    
    
    
    122
    
    
    
    3Greater than 24 months
    
    
    11
    
    
    
    1
    
    
    
    2
    
    
    
    Total non-investment grade
    
    
    1,305
    
    
    
    44
    
    
    
    874
    
    
    
    42Total fixed maturity securities
    
    
    22,669
    
    
    
    674
    
    
    
    15,208
    
    
    
    297Equity securities:0-6 months
    
    
    266
    
    
    
    7
    
    
    
    49
    
    
    
    27-12 months
    
    
    27
    
    
    
    1
    
    
    
    1
    
    
    
    13-24 months
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Greater than 24 months
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Total equity securities
    
    
    297
    
    
    
    8
    
    
    
    53
    
    
    
    2Total fixed maturity and equity securities
    
    $
    22,966
    
    
    $
    682
    
    
    $
    15,261
    
    
    $
    299
 
   13
    Table of Contents   CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
      Asset-Backed Securities
  Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets
 14




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Corporate Securities
   States, Municipalities and Political Subdivisions  Tax-Exempt Securities
  Investment Commitments
   15




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note E. Derivative Financial Instruments
  Derivative Financial Instruments Recognized Gains (Losses)Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)General accountWithout hedge designationSwaps
    
    $
    
    
    
    $
    (23
    )
    
    $
    6
    
    
    $
    (20
    )Futures sold, not yet purchased
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Currency forwards
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )
    
    
    1Commitments to purchase government and municipal securities
(TBAs)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Options embedded in convertible bonds
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (27
    )Trading activitiesFutures purchased
    
    
    (18
    )
    
    
    7
    
    
    
    11
    
    
    
    (26
    )Futures sold, not yet purchased
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Currency forwards
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options purchased
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Options written
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total
    
    $
    (18
    )
    
    $
    (32
    )
    
    $
    19
    
    
    $
    (72
    )
 16




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Derivative Financial InstrumentsContractual/
    
    
    Estimated
    
    
    EstimatedJune 30, 2006
    
    Notional
    
    
    Fair Value
    
    
    Fair Value(In millions)
    
    Amount
    
    
    Asset
    
    
    (Liability)General accountWithout hedge designationSwaps
    
    $
    318
    
    
    $
    
    
    
    $
    (3
    )Currency forwards
    
    
    17
    
    
    
    
    
    
    
    Equity warrants
    
    
    6
    
    
    
    2
    
    
    
    Options embedded in convertible debt securities
    
    
    12
    
    
    
    1
    
    
    
    Trading activitiesFutures purchased
    
    
    691
    
    
    
    
    
    
    
    (2
    )Futures sold, not yet purchased
    
    
    103
    
    
    
    
    
    
    
    Currency forwards
    
    
    41
    
    
    
    
    
    
    
    Total general account
    
    $
    1,188
    
    
    $
    3
    
    
    $
    (5
    )Separate accountsOptions written
    
    $
    8
    
    
    $
    
    
    
    $
    Total separate accounts
    
    $
    8
    
    
    $
    
    
    
    $
    
 Derivative Financial InstrumentsContractual/
    
    
    Estimated
    
    
    EstimatedDecember 31, 2005
    
    Notional
    
    
    Fair Value
    
    
    Fair Value(In millions)
    
    Amount
    
    
    Asset
    
    
    (Liability)General accountWith hedge designationSwaps
    
    $
    265
    
    
    $
    
    
    
    $
    (1
    )Without hedge designationSwaps
    
    
    756
    
    
    
    
    
    
    
    (8
    )Currency forwards
    
    
    15
    
    
    
    
    
    
    
    Equity warrants
    
    
    6
    
    
    
    2
    
    
    
    Options embedded in convertible debt securities
    
    
    12
    
    
    
    1
    
    
    
    Trading activitiesFutures purchased
    
    
    1,058
    
    
    
    
    
    
    
    (4
    )Futures sold, not yet purchased
    
    
    166
    
    
    
    
    
    
    
    Currency forwards
    
    
    59
    
    
    
    
    
    
    
    (1
    )Commitments to purchase mortgage-backed securities
    
    
    21
    
    
    
    
    
    
    
    Options purchased
    
    
    20
    
    
    
    
    
    
    
    Options written
    
    
    21
    
    
    
    
    
    
    
    Total general account
    
    $
    2,399
    
    
    $
    3
    
    
    $
    (14
    )Separate accountsOptions written
    
    $
    7
    
    
    $
    
    
    
    $
    Total separate accounts
    
    $
    7
    
    
    $
    
    
    
    $
    
 17




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Note F. Income Taxes
      Note G. Legal Proceedings and Contingent Liabilities
 Insurance Brokerage Antitrust Litigation
 In re Insurance Brokerage Antitrust Litigation, Civil No.
04-5184 (FSH)
  Global Crossing Limited Litigation
   18




---



##### 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
 19




---



##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  New Jersey Wage and Hour Litigation
   Voluntary Market Premium Litigation
  Asbestos, Environmental Pollution and Mass Tort (APMT) Reserves
  Other Litigation
  Note H. Claim and Claim Adjustment Expense Reserves
  20




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##### Table of Contents



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
     21




---



##### Table of Contents



CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
  June 30, 2006Gross 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
    
    $
    6,967
    
    
    $
    $1,801
    
    
    $
    2,499
    
    
    $
    2,867
    
    
    $
    14,134Gross IBNR Reserves
    
    
    7,856
    
    
    
    3,594
    
    
    
    686
    
    
    
    3,907
    
    
    
    16,043Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,823
    
    
    $
    5,395
    
    
    $
    3,185
    
    
    $
    6,774
    
    
    $
    30,177Net Case Reserves
    
    $
    4,761
    
    
    $
    1,335
    
    
    $
    1,472
    
    
    $
    1,312
    
    
    $
    8,880Net IBNR Reserves
    
    
    6,364
    
    
    
    2,649
    
    
    
    380
    
    
    
    1,908
    
    
    
    11,301Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    11,125
    
    
    $
    3,984
    
    
    $
    1,852
    
    
    $
    3,220
    
    
    $
    20,181
 December 31, 2005Gross 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
    
    $
    7,033
    
    
    $
    1,907
    
    
    $
    2,542
    
    
    $
    3,297
    
    
    $
    14,779Gross IBNR Reserves
    
    
    8,051
    
    
    
    3,298
    
    
    
    735
    
    
    
    4,075
    
    
    
    16,159Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    15,084
    
    
    $
    5,205
    
    
    $
    3,277
    
    
    $
    7,372
    
    
    $
    30,938Net Case Reserves
    
    $
    5,165
    
    
    $
    1,442
    
    
    $
    1,456
    
    
    $
    1,554
    
    
    $
    9,617Net IBNR Reserves
    
    
    6,081
    
    
    
    2,352
    
    
    
    381
    
    
    
    1,902
    
    
    
    10,716Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    11,246
    
    
    $
    3,794
    
    
    $
    1,837
    
    
    $
    3,456
    
    
    $
    20,333
 
 APMT Reserves
  22
    Table of Contents  CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
     APMT Reserves
 June 30, 2006
    
    
    December 31, 2005Environmental
    
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    
    Pollution andAsbestos
    
    

Mass Tort
    
    
    Asbestos
    
    

Mass Tort(In millions)Gross reserves
    
    $
    2,799
    
    
    $
    603
    
    
    $
    2,992
    
    
    $
    680Ceded reserves
    
    
    (1,294
    )
    
    
    (229
    )
    
    
    (1,438
    )
    
    
    (257
    )Net reserves
    
    $
    1,505
    
    
    $
    374
    
    
    $
    1,554
    
    
    $
    423
 Asbestos
   23
    Table of Contents  CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
    Continental Casualty Co. v. Employers Ins. of Wausau et
al.
  24
    Table of Contents  CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
  Bugg v. Am. Std., Inc., No. 84829 Peplowski
 Boson v. Union Carbide Corp.,
 25
    Table of Contents  CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
  Adams v. Aetna, Inc., et al. Adams v. Ins. Co. of North America
(INA) et al.
 Pennock, et al. v. Maryland Casualty,
et al.
 26
    Table of Contents  CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
   Environmental Pollution and Mass Tort
  Net Prior Year Development
      27
    Table of Contents  CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
   Net Prior Year Development
For the three months ended June 30, 2006
 CorporateStandard
    
    
    Specialty
    
    
    and OtherLines
    
    
    Lines
    
    
    Non-Core
    
    
    Total(In millions)Pretax unfavorable (favorable) net prior year claim and
allocated claim adjustment expense development excluding the
impact of the corporate aggregate reinsurance treaty:Core (Non-APMT)
    
    $
    5
    
    
    $
    (2
    )
    
    $
    5
    
    
    $
    8APMT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5
    
    
    
    (2
    )
    
    
    5
    
    
    
    8Ceded losses related to corporate aggregate reinsurance treaty
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pretax unfavorable (favorable) net prior year development
before impact of premium development
    
    
    5
    
    
    
    (2
    )
    
    
    5
    
    
    
    8Unfavorable (favorable) premium development, excluding
impact of corporate aggregate reinsurance treaty
    
    
    (24
    )
    
    
    2
    
    
    
    (3
    )
    
    
    (25
    )Ceded premiums related to corporate aggregate
reinsurance treaty
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total premium development
    
    
    (24
    )
    
    
    2
    
    
    
    (3
    )
    
    
    (25
    )Total unfavorable (favorable) net prior year development
(pretax)
    
    $
    (19
    )
    
    $
    
    
    
    $
    2
    
    
    $
    (17
    )
 28
    Table of Contents  CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
 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
    
    
    
    8Total
    
    
    52
    
    
    
    25
    
    
    
    70
    
    
    
    147Ceded losses related to corporate aggregate reinsurance treaties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pretax unfavorable net prior year development before impact of
premium development
    
    
    52
    
    
    
    25
    
    
    
    70
    
    
    
    147Favorable 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
    
    
    $
    118
 Net Prior Year Development
For the six months ended June 30, 2006
 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 treaty:Core (Non-APMT)
    
    $
    64
    
    
    $
    3
    
    
    $
    11
    
    
    $
    78APMT
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Total
    
    
    64
    
    
    
    3
    
    
    
    12
    
    
    
    79Ceded losses related to corporate aggregate reinsurance treaty
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pretax unfavorable net prior year development before impact
of premium development
    
    
    64
    
    
    
    3
    
    
    
    12
    
    
    
    79Unfavorable (favorable) premium development, excluding
impact of corporate aggregate reinsurance treaty
    
    
    (73
    )
    
    
    (6
    )
    
    
    4
    
    
    
    (75
    )Ceded premiums related to corporate aggregate
reinsurance treaty
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total premium development
    
    
    (73
    )
    
    
    (6
    )
    
    
    4
    
    
    
    (75
    )Total unfavorable (favorable) net prior year development
(pretax)
    
    $
    (9
    )
    
    $
    (3
    )
    
    $
    16
    
    
    $
    4
 29
    Table of Contents  CNA FINANCIAL CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued  (UNDAUDITED)
 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
    
    
    $
    202
  Three Month Comparison
 2006 Net Prior Year Development
 Standard Lines
      30
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
    Specialty Lines
    Corporate and Other Non-Core
  
 2005 Net Prior Year Development
 Standard Lines
   31
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
   Specialty Lines
    Corporate and Other Non-Core
   
 Six Month Comparison
 2006 Net Prior Year Development
 Standard Lines
   32
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
        Specialty Lines
    33
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
   Corporate and Other Non-Core
   
 2005 Net Prior Year Development
 Standard Lines
    34
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Specialty Lines
      Corporate and Other Non-Core
   Note I. Reinsurance
  35
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
   Components of reinsurance receivables
    
    June 30, 2006
    
    
    December 31, 2005(In millions)Reinsurance receivables related to insurance reserves:Ceded claim and claim adjustment expense
    
    $
    9,996
    
    
    $
    10,605Ceded future policy benefits
    
    
    1,129
    
    
    
    1,193Ceded policyholders funds
    
    
    54
    
    
    
    56Billed reinsurance receivables
    
    
    803
    
    
    
    582Reinsurance receivables
    
    
    11,982
    
    
    
    12,436Allowance for uncollectible reinsurance
    
    
    (527
    )
    
    
    (519
    )Reinsurance receivables, net of allowance
for uncollectible reinsurance
    
    $
    11,455
    
    
    $
    11,917
   Components of Earned Premiums
 Three months ended June 30
    
    Direct
    
    
    Assumed
    
    
    Ceded
    
    
    Net(In millions)2006Property and casualty
    
    $
    2,259
    
    
    $
    7
    
    
    $
    534
    
    
    $
    1,732Accident and health
    
    
    172
    
    
    
    13
    
    
    
    27
    
    
    
    158Life
    
    
    22
    
    
    
    
    
    
    
    20
    
    
    
    2Total earned premiums
    
    $
    2,453
    
    
    $
    20
    
    
    $
    581
    
    
    $
    1,8922005Property and casualty
    
    $
    2,530
    
    
    $
    1
    
    
    $
    824
    
    
    $
    1,707Accident and health
    
    
    252
    
    
    
    10
    
    
    
    57
    
    
    
    205Life
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    Total earned premiums
    
    $
    2,819
    
    
    $
    11
    
    
    $
    918
    
    
    $
    1,912
 36
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Components of Earned Premiums
 Six months ended June 30
    
    Direct
    
    
    Assumed
    
    
    Ceded
    
    
    Net(In millions)2006Property and casualty
    
    $
    4,453
    
    
    $
    28
    
    
    $
    1,043
    
    
    $
    3,438Accident and health
    
    
    364
    
    
    
    29
    
    
    
    72
    
    
    
    321Life
    
    
    58
    
    
    
    
    
    
    
    56
    
    
    
    2Total earned premiums
    
    $
    4,875
    
    
    $
    57
    
    
    $
    1,171
    
    
    $
    3,7612005Property 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
    
    
    $
    3,811
     Funds Withheld Reinsurance Arrangements
  37
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
    Three months ended June 30
    
    Aggregate Cover
    
    
    CCC Cover
    
    
    All Other
    
    
    Total(In millions)2006Ceded earned premium
    
    $
    
    
    
    $
    
    
    
    $
    (10
    )
    
    $
    (10
    )Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17Ceding commissions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest charges
    
    
    
    
    
    
    (18
    )
    
    
    (9
    )
    
    
    (27
    )Pretax expense
    
    $
    
    
    
    $
    (18
    )
    
    $
    (2
    )
    
    $
    (20
    )2005Ceded earned premium
    
    $
    (6
    )
    
    $
    
    
    
    $
    3
    
    
    $
    (3
    )Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Ceding commissions
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Interest charges
    
    
    (18
    )
    
    
    (16
    )
    
    
    (12
    )
    
    
    (46
    )Pretax expense
    
    $
    (24
    )
    
    $
    (16
    )
    
    $
    (4
    )
    
    $
    (44
    )
 Six months ended June 30
    
    Aggregate Cover
    
    
    CCC Cover
    
    
    All Other
    
    
    Total(In millions)2006Ceded earned premium
    
    $
    
    
    
    $
    
    
    
    $
    (12
    )
    
    $
    (12
    )Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17Ceding commissions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest charges
    
    
    
    
    
    
    (35
    )
    
    
    (16
    )
    
    
    (51
    )Pretax expense
    
    $
    
    
    
    $
    (35
    )
    
    $
    (11
    )
    
    $
    (46
    )2005Ceded earned premium
    
    $
    (18
    )
    
    $
    
    
    
    $
    65
    
    
    $
    47Ceded claim and claim adjustment expense
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    (67
    )Ceding commissions
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    (30
    )Interest charges
    
    
    (42
    )
    
    
    (32
    )
    
    
    (10
    )
    
    
    (84
    )Pretax expense
    
    $
    (60
    )
    
    $
    (32
    )
    
    $
    (42
    )
    
    $
    (134
    )
 38
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
   Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Standard Lines
    
    $
    (11
    )
    
    $
    (30
    )
    
    $
    (24
    )
    
    $
    (96
    )Specialty Lines
    
    
    (2
    )
    
    
    
    
    
    
    (4
    )
    
    
    (7
    )Corporate and Other
    
    
    (7
    )
    
    
    (14
    )
    
    
    (18
    )
    
    
    (31
    )Pretax benefit (expense)
    
    $
    (20
    )
    
    $
    (44
    )
    
    $
    (46
    )
    
    $
    (134
    )
 Corporate Aggregate Reinsurance Treaty
   Note J. Benefit Plans
 Pension and Postretirement Healthcare and Life Insurance Benefit Plans
    39
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Net Periodic Benefit Costs
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Pension BenefitsService cost
    
    $
    5
    
    
    $
    6
    
    
    $
    13
    
    
    $
    14Interest cost on projected benefit obligation
    
    
    35
    
    
    
    36
    
    
    
    72
    
    
    
    72Expected return on plan assets
    
    
    (40
    )
    
    
    (40
    )
    
    
    (80
    )
    
    
    (78
    )Prior service cost amortization
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Actuarial loss
    
    
    7
    
    
    
    4
    
    
    
    17
    
    
    
    11Net periodic pension cost
    
    $
    7
    
    
    $
    6
    
    
    $
    23
    
    
    $
    20Postretirement benefitsService cost
    
    $
    
    
    
    $
    1
    
    
    $
    1
    
    
    $
    1Interest cost on projected benefit obligation
    
    
    1
    
    
    
    2
    
    
    
    4
    
    
    
    5Prior service cost amortization
    
    
    (6
    )
    
    
    (7
    )
    
    
    (13
    )
    
    
    (14
    )Actuarial loss
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    2Net periodic postretirement cost (benefit)
    
    $
    (4
    )
    
    $
    (3
    )
    
    $
    (6
    )
    
    $
    (6
    )
  Stock-Based Compensation
   Options and SARs Plan Activity
 WeightedAverage OptionNumber
    
    
    Price perof Awards
    
    
    AwardBalance at January 1, 2006
    
    
    1,628,600
    
    
    $
    28.71Awards granted
    
    
    327,000
    
    
    
    30.98Awards exercised
    
    
    (1,600
    )
    
    
    25.73Awards forfeited
    
    
    (15,500
    )
    
    
    28.11Balance at June 30, 2006
    
    
    1,938,500
    
    
    $
    29.09Awards exercisable at June 30, 2006
    
    
    1,188,050
    
    
    $
    29.51
   40
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
     Note K. Commitments, Contingencies and Guarantees
 Commitments and Contingencies
    Guarantees
  41
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
         42
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Note L. Comprehensive Income (Loss)
  Comprehensive Income (Loss)
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Net income
    
    $
    239
    
    
    $
    290
    
    
    $
    468
    
    
    $
    475Other comprehensive income (loss):Change in unrealized gains/losses on general account investments:Holding gains/losses arising during the period, net of tax
benefit (expense) of $148, $(250), $280 and $(119)
    
    
    (276
    )
    
    
    464
    
    
    
    (520
    )
    
    
    222Net unrealized gains/losses at beginning of period included in
realized gains/losses during the period, net of tax benefit of
$1, $29, $4 and $60
    
    
    (1
    )
    
    
    (53
    )
    
    
    (8
    )
    
    
    (111
    )Net change in unrealized gains/losses on general account
investments, net of tax benefit (expense) of $149, $(221), $284
and $(59)
    
    
    (277
    )
    
    
    411
    
    
    
    (528
    )
    
    
    111Net change in unrealized gains/losses on discontinued operations
and other, net of tax benefit of $0, $3, $2 and $0
    
    
    
    
    
    
    9
    
    
    
    1
    
    
    
    Foreign currency translation adjustment
    
    
    24
    
    
    
    (18
    )
    
    
    27
    
    
    
    (24
    )Net change in minimum pension liability, net of tax benefit of
$0, $0, $0 and $0
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Allocation to participating policyholders and minority interests
    
    
    6
    
    
    
    (10
    )
    
    
    15
    
    
    
    Other comprehensive income (loss), net of tax benefit (expense)
of $149, $(218), $286 and $(59)
    
    
    (247
    )
    
    
    392
    
    
    
    (486
    )
    
    
    87Total comprehensive income (loss)
    
    $
    (8
    )
    
    $
    682
    
    
    $
    (18
    )
    
    $
    562
 Note M. Business Segments
    43
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
    44
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 CorporateStandard
    
    
    Specialty
    
    
    Life and Group
    
    
    and OtherFor the three months ended
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalJune 30, 2006(In millions)Net earned premiums
    
    $
    1,096
    
    
    $
    633
    
    
    $
    159
    
    
    $
    5
    
    
    $
    (1
    )
    
    $
    1,892Net investment income
    
    
    238
    
    
    
    99
    
    
    
    138
    
    
    
    77
    
    
    
    
    
    
    
    552Other revenues
    
    
    13
    
    
    
    41
    
    
    
    24
    
    
    
    1
    
    
    
    (13
    )
    
    
    66Total operating revenues
    
    
    1,347
    
    
    
    773
    
    
    
    321
    
    
    
    83
    
    
    
    (14
    )
    
    
    2,510Claims, benefits and expenses:Net incurred claims and benefits
    
    
    741
    
    
    
    388
    
    
    
    266
    
    
    
    31
    
    
    
    
    
    
    
    1,426Policyholders dividends
    
    
    4
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    6Amortization of deferred acquisition costs
    
    
    238
    
    
    
    131
    
    
    
    4
    
    
    
    (1
    )
    
    
    
    
    
    
    372Other insurance related expenses
    
    
    103
    
    
    
    41
    
    
    
    40
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    182Restructuring and other related charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )Other expenses
    
    
    19
    
    
    
    36
    
    
    
    13
    
    
    
    33
    
    
    
    (13
    )
    
    
    88Total claims, benefits and expenses
    
    
    1,105
    
    
    
    597
    
    
    
    324
    
    
    
    49
    
    
    
    (14
    )
    
    
    2,061Operating income (loss) from continuing operations
before income tax and minority interest
    
    
    242
    
    
    
    176
    
    
    
    (3
    )
    
    
    34
    
    
    
    
    
    
    
    449Income tax (expense) benefit on operating income (loss)
    
    
    (73
    )
    
    
    (58
    )
    
    
    8
    
    
    
    (11
    )
    
    
    
    
    
    
    (134
    )Minority interest
    
    
    (2
    )
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Net operating income from continuing operations
    
    
    167
    
    
    
    110
    
    
    
    5
    
    
    
    23
    
    
    
    
    
    
    
    305Realized investment losses, net of participating
policyholders and minority interests
    
    
    (37
    )
    
    
    (13
    )
    
    
    (34
    )
    
    
    (14
    )
    
    
    
    
    
    
    (98
    )Income tax benefit on realized investment losses
    
    
    13
    
    
    
    4
    
    
    
    11
    
    
    
    6
    
    
    
    
    
    
    
    34Income (loss) from continuing operations
    
    $
    143
    
    
    $
    101
    
    
    $
    (18
    )
    
    $
    15
    
    
    $
    
    
    
    $
    241
 45
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 CorporateStandard
    
    
    Specialty
    
    
    Life and Group
    
    
    and OtherFor the three months ended
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalJune 30, 2005(In millions)Net 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 expenses
    
    
    33
    
    
    
    25
    
    
    
    16
    
    
    
    28
    
    
    
    (16
    )
    
    
    86Total claims, benefits and expenses
    
    
    1,153
    
    
    
    617
    
    
    
    377
    
    
    
    108
    
    
    
    (19
    )
    
    
    2,236Operating income (loss) from continuing operations
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 from continuing operations
    
    
    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
    )Income from continuing operations
    
    $
    117
    
    
    $
    86
    
    
    $
    4
    
    
    $
    81
    
    
    $
    
    
    
    $
    288
 46
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 CorporateStandard
    
    
    Specialty
    
    
    Life and Group
    
    
    and OtherFor the six months ended
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalJune 30, 2006(In millions)Net earned premiums
    
    $
    2,182
    
    
    $
    1,261
    
    
    $
    322
    
    
    $
    (2
    )
    
    $
    (2
    )
    
    $
    3,761Net investment income
    
    
    466
    
    
    
    186
    
    
    
    325
    
    
    
    145
    
    
    
    
    
    
    
    1,122Other revenues
    
    
    33
    
    
    
    74
    
    
    
    36
    
    
    
    2
    
    
    
    (26
    )
    
    
    119Total operating revenues
    
    
    2,681
    
    
    
    1,521
    
    
    
    683
    
    
    
    145
    
    
    
    (28
    )
    
    
    5,002Claims, benefits and expenses:Net incurred claims and benefits
    
    
    1,521
    
    
    
    760
    
    
    
    572
    
    
    
    59
    
    
    
    1
    
    
    
    2,913Policyholders dividends
    
    
    8
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    11Amortization of deferred acquisition costs
    
    
    476
    
    
    
    258
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    742Other insurance related expenses
    
    
    204
    
    
    
    78
    
    
    
    93
    
    
    
    16
    
    
    
    (3
    )
    
    
    388Restructuring and other related charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )Other expenses
    
    
    38
    
    
    
    68
    
    
    
    26
    
    
    
    63
    
    
    
    (26
    )
    
    
    169Total claims, benefits and expenses
    
    
    2,247
    
    
    
    1,166
    
    
    
    700
    
    
    
    125
    
    
    
    (28
    )
    
    
    4,210Operating income (loss) from continuing operations
before income
tax and minority interest
    
    
    434
    
    
    
    355
    
    
    
    (17
    )
    
    
    20
    
    
    
    
    
    
    
    792Income tax (expense) benefit on operating income (loss)
    
    
    (129
    )
    
    
    (117
    )
    
    
    19
    
    
    
    (7
    )
    
    
    
    
    
    
    (234
    )Minority interest
    
    
    (5
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )Net operating income from continuing operations
    
    
    300
    
    
    
    224
    
    
    
    2
    
    
    
    13
    
    
    
    
    
    
    
    539Realized investment losses, net of participating
policyholders and minority interests
    
    
    (24
    )
    
    
    (10
    )
    
    
    (46
    )
    
    
    (9
    )
    
    
    
    
    
    
    (89
    )Income tax (expense) benefit on realized investment
gains (losses)
    
    
    9
    
    
    
    3
    
    
    
    16
    
    
    
    (2
    )
    
    
    
    
    
    
    26Income (loss) from continuing operations
    
    $
    285
    
    
    $
    217
    
    
    $
    (28
    )
    
    $
    2
    
    
    $
    
    
    
    $
    476As of June 30, 2006
(In millions)Reinsurance receivables
    
    $
    3,929
    
    
    $
    1,509
    
    
    $
    2,533
    
    
    $
    4,011
    
    
    $
    
    
    
    $
    11,982Insurance receivables
    
    $
    1,955
    
    
    $
    462
    
    
    $
    58
    
    
    $
    8
    
    
    $
    
    
    
    $
    2,483Insurance reserves:Claim and claim adjustment expense
    
    $
    14,823
    
    
    $
    5,395
    
    
    $
    3,185
    
    
    $
    6,774
    
    
    $
    
    
    
    $
    30,177Unearned premiums
    
    
    2,089
    
    
    
    1,613
    
    
    
    202
    
    
    
    5
    
    
    
    (2
    )
    
    
    3,907Future policy benefits
    
    
    
    
    
    
    
    
    
    
    6,461
    
    
    
    
    
    
    
    
    
    
    
    6,461Policyholders funds
    
    
    31
    
    
    
    
    
    
    
    1,084
    
    
    
    
    
    
    
    
    
    
    
    1,115Deferred acquisition costs
    
    $
    428
    
    
    $
    277
    
    
    $
    506
    
    
    $
    
    
    
    $
    
    
    
    $
    1,211
 47
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 CorporateStandard
    
    
    Specialty
    
    
    Life and Group
    
    
    and OtherFor the six months ended
    
    Lines
    
    
    Lines
    
    
    Non-Core
    
    
    Non-Core
    
    
    Eliminations
    
    
    TotalJune 30, 2005(In millions)Net 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 expenses
    
    
    59
    
    
    
    53
    
    
    
    30
    
    
    
    64
    
    
    
    (35
    )
    
    
    171Total claims, benefits and expenses
    
    
    2,391
    
    
    
    1,157
    
    
    
    686
    
    
    
    166
    
    
    
    (41
    )
    
    
    4,359Operating income (loss) from continuing operations
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 from continuing operations
    
    
    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
    )Income from continuing operations
    
    $
    210
    
    
    $
    168
    
    
    $
    2
    
    
    $
    86
    
    
    $
    
    
    
    $
    466As of December 31, 2005
(In millions)Reinsurance receivables
    
    $
    3,968
    
    
    $
    1,493
    
    
    $
    2,707
    
    
    $
    4,268
    
    
    $
    
    
    
    $
    12,436Insurance receivables
    
    $
    1,826
    
    
    $
    375
    
    
    $
    105
    
    
    $
    5
    
    
    $
    
    
    
    $
    2,311Insurance reserves:Claim and claim adjustment expense
    
    $
    15,084
    
    
    $
    5,205
    
    
    $
    3,277
    
    
    $
    7,372
    
    
    $
    
    
    
    $
    30,938Unearned premiums
    
    
    1,952
    
    
    
    1,577
    
    
    
    168
    
    
    
    9
    
    
    
    
    
    
    
    3,706Future policy benefits
    
    
    
    
    
    
    
    
    
    
    6,297
    
    
    
    
    
    
    
    
    
    
    
    6,297Policyholders funds
    
    
    30
    
    
    
    
    
    
    
    1,465
    
    
    
    
    
    
    
    
    
    
    
    1,495Deferred acquisition costs
    
    $
    408
    
    
    $
    274
    
    
    $
    515
    
    
    $
    
    
    
    $
    
    
    
    $
    1,197
 48
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Revenue by Line of Business
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Standard LinesProperty
    
    $
    244
    
    
    $
    218
    
    
    $
    472
    
    
    $
    432Casualty
    
    
    821
    
    
    
    854
    
    
    
    1,708
    
    
    
    1,805CNA Global
    
    
    245
    
    
    
    235
    
    
    
    477
    
    
    
    438Standard Lines revenue
    
    
    1,310
    
    
    
    1,307
    
    
    
    2,657
    
    
    
    2,675Specialty LinesProfessional Liability Insurance (CNA Pro)
    
    
    579
    
    
    
    564
    
    
    
    1,160
    
    
    
    1,059Surety
    
    
    108
    
    
    
    95
    
    
    
    210
    
    
    
    189Warranty
    
    
    73
    
    
    
    75
    
    
    
    141
    
    
    
    147Specialty Lines revenue
    
    
    760
    
    
    
    734
    
    
    
    1,511
    
    
    
    1,395Life and Group Non-CoreLife & Annuity
    
    
    58
    
    
    
    88
    
    
    
    166
    
    
    
    126Health
    
    
    207
    
    
    
    220
    
    
    
    431
    
    
    
    449Other
    
    
    22
    
    
    
    66
    
    
    
    40
    
    
    
    99Life and Group Non-Core revenue
    
    
    287
    
    
    
    374
    
    
    
    637
    
    
    
    674Corporate and Other Non-CoreCNA Re
    
    
    26
    
    
    
    10
    
    
    
    43
    
    
    
    26Other
    
    
    43
    
    
    
    164
    
    
    
    93
    
    
    
    205Corporate and Other Non-Core revenue
    
    
    69
    
    
    
    174
    
    
    
    136
    
    
    
    231Eliminations
    
    
    (14
    )
    
    
    (19
    )
    
    
    (28
    )
    
    
    (41
    )Total revenue
    
    $
    2,412
    
    
    $
    2,570
    
    
    $
    4,913
    
    
    $
    4,934
 Note N. Restructuring and Other Related Charges
  Note O. Significant Transactions
 Managed Care Holdings Corporation
  49
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Specialty Medical Business
  Note P. Related Party Transactions
   CNA Surety Corporation
 Loans to National Contractor
     50
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
    Note Q. Statutory Accounting Practices
      51
    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 30June 30, 2006
    
    
    December 31, 2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Property and casualty companies (a)
    
    $
    7,374
    
    
    $
    6,940
    
    
    $
    97
    
    
    $
    288
    
    
    $
    263
    
    
    $
    868Life and group insurance companies
    
    
    669
    
    
    
    627
    
    
    
    32
    
    
    
    32
    
    
    
    42
    
    
    
    54
 (a)
    
    Surplus includes the property and casualty companies equity ownership of the life and
group companys capital and surplus.
 Note R. Discontinued Operations
   Discontinued Operations
 Three Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Revenues:Net investment income
    
    $
    4
    
    
    $
    4
    
    
    $
    8
    
    
    $
    8Other
    
    
    (3
    )
    
    
    1
    
    
    
    (3
    )
    
    
    (5
    )Total revenues
    
    
    1
    
    
    
    5
    
    
    
    5
    
    
    
    3Insurance related (expenses) benefits
    
    
    (3
    )
    
    
    (3
    )
    
    
    (13
    )
    
    
    6Income (loss) before income taxes
    
    
    (2
    )
    
    
    2
    
    
    
    (8
    )
    
    
    9Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from discontinued operations, net of tax
    
    $
    (2
    )
    
    $
    2
    
    
    $
    (8
    )
    
    $
    9
  Discontinued Operations(In millions)
    
    June 30, 2006
    
    
    December 31, 2005Assets:Investments
    
    $
    316
    
    
    $
    358Reinsurance receivables
    
    
    55
    
    
    
    78Cash
    
    
    34
    
    
    
    29Other assets
    
    
    27
    
    
    
    5Total assets
    
    
    432
    
    
    
    470Liabilities:Insurance reserves
    
    
    (322
    )
    
    
    (338
    )Other liabilities
    
    
    (15
    )
    
    
    (19
    )Total liabilities
    
    
    (337
    )
    
    
    (357
    )Net assets of discontinued operations
    
    $
    95
    
    
    $
    113
 52
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
  Reporting the Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions
 Note S. Restatements
  Discontinued Operations
   (In millions, except per share data)
    
    Three Months
    
    
    Six MonthsAs Previously
    
    
    As
    
    
    As Previously
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    RestatedPeriod ended June 30, 2005Income from discontinued operations, net of tax
expense of $0 and $0
    
    $
    
    
    
    $
    2
    
    
    $
    
    
    
    $
    9Net income
    
    
    288
    
    
    
    290
    
    
    
    466
    
    
    
    475Earnings per share:Income from discontinued operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.03Basic and diluted earnings per share available to
common stockholders
    
    
    1.06
    
    
    
    1.06
    
    
    
    1.69
    
    
    
    1.72
 53
    Table of Contents  CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
 Condensed Consolidated Statement of Cash Flows
  
    
    Net purchases and sales of trading securities and changes
in the net receivable/payable from unsettled investment
purchases and sales related to trading securities, previously
classified within investing activities, have been reclassified
to cash flows from operating activities.
    
    Cash flows from equity method investees were reclassified
to distinguish between return on investments, which are
reflected within operating cash flows, and return of
investments, which are reflected within investing cash flows.
Previously, all amounts were reflected within investing cash flows.
    
    Deposits and withdrawals related to investment contract
products issued by the Company have been reflected within
financing cash flows. Previously, amounts related to certain
investment contracts were reflected within operating cash flows.
    
    The impact of cumulative translation adjustment,
previously reflected within investing activities, is now
classified within operating activities.
  For the six months ended June 30
    
    2005(In millions)Cash flows provided by operating activities-continuing operationsAs previously reported
    
    $
    844Impact of restatements
    
    
    133As restated
    
    $
    977Cash flows used by investing activities-continuing operationsAs previously reported
    
    $
    (364
    )Impact of restatements
    
    
    (71
    )As restated
    
    $
    (435
    )Cash flows used by financing activities-continuing operationsAs previously reported
    
    $
    (505
    )Impact of restatements
    
    
    (61
    )As restated
    
    $
    (566
    )
   54
    Table of Contents  CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 Overview
     55
    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
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions, except per share data)RevenuesNet earned premiums
    
    $
    1,892
    
    
    $
    1,912
    
    
    $
    3,761
    
    
    $
    3,811Net investment income
    
    
    552
    
    
    
    439
    
    
    
    1,122
    
    
    
    845Other revenues
    
    
    66
    
    
    
    193
    
    
    
    119
    
    
    
    271Total operating revenues
    
    
    2,510
    
    
    
    2,544
    
    
    
    5,002
    
    
    
    4,927Claims, Benefits and ExpensesNet incurred claims and benefits
    
    
    1,426
    
    
    
    1,571
    
    
    
    2,913
    
    
    
    3,000Policyholders dividends
    
    
    6
    
    
    
    10
    
    
    
    11
    
    
    
    15Amortization of deferred acquisition costs
    
    
    372
    
    
    
    374
    
    
    
    742
    
    
    
    752Other insurance related expenses
    
    
    182
    
    
    
    195
    
    
    
    388
    
    
    
    421Restructuring and other related charges
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )
    
    
    Other expenses
    
    
    88
    
    
    
    86
    
    
    
    169
    
    
    
    171Total claims, benefits and expenses
    
    
    2,061
    
    
    
    2,236
    
    
    
    4,210
    
    
    
    4,359Operating income from continuing operations
before income tax and minority interest
    
    
    449
    
    
    
    308
    
    
    
    792
    
    
    
    568Income tax expense on operating income
    
    
    (134
    )
    
    
    (38
    )
    
    
    (234
    )
    
    
    (99
    )Minority interest
    
    
    (10
    )
    
    
    2
    
    
    
    (19
    )
    
    
    (5
    )Net operating income from continuing operations
    
    
    305
    
    
    
    272
    
    
    
    539
    
    
    
    464Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    (98
    )
    
    
    26
    
    
    
    (89
    )
    
    
    7Income tax (expense) benefit on realized
investment gains (losses)
    
    
    34
    
    
    
    (10
    )
    
    
    26
    
    
    
    (5
    )Income from continuing operations
    
    
    241
    
    
    
    288
    
    
    
    476
    
    
    
    466Income (loss) from discontinued operations,
net of tax of $0, $0, $0 and $0
    
    
    (2
    )
    
    
    2
    
    
    
    (8
    )
    
    
    9Net income
    
    $
    239
    
    
    $
    290
    
    
    $
    468
    
    
    $
    475Basic and Diluted Earnings Per ShareIncome from continuing operations
    
    $
    0.87
    
    
    $
    1.06
    
    
    $
    1.71
    
    
    $
    1.69Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.03
    )
    
    
    0.03Basic and diluted earnings per share available
to common stockholders
    
    $
    0.86
    
    
    $
    1.06
    
    
    $
    1.68
    
    
    $
    1.72Weighted average outstanding common stock and
common stock equivalents
    
    
    256.0
    
    
    
    256.0
    
    
    
    256.0
    
    
    
    256.0
 Three Month Comparison
  56
    Table of Contents  CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, Continued
      Six Month Comparison
       57
    Table of Contents  CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, Continued
 Critical Accounting Estimates
    
    
    Insurance Reserves
 
    
    Reinsurance
 
    
    Valuation of Investments and Impairment of Securities
 
    
    Long Term Care Products
 
    
    Pension and Postretirement Benefit Obligations
 
    
    Legal Proceedings
  Reserves  Estimates and Uncertainties
    
    
    coverage issues, including whether certain costs are covered under the policies and whether policy limits apply;
 
    
    inconsistent court decisions and developing legal theories;
 
    
    continuing aggressive tactics of plaintiffs lawyers;
 
    
    the risks and lack of predictability inherent in major litigation;
 58
    Table of Contents  CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, Continued
 
    
    changes in the volume of APMT claims which cannot now be anticipated;
 
    
    the impact of the exhaustion of primary limits and the resulting increase in claims on any umbrella or excess policies
we have issued;
 
    
    the number and outcome of direct actions against us; and
 
    
    our ability to recover reinsurance for APMT claims.
    
    
    increases in the number and size of claims relating to injuries from medical products, and exposure for alleged bodily
injury and property damage due to lead pigment;
 
    
    the effects of accounting and financial reporting scandals and other major corporate governance failures, which have
resulted in an increase in the number and size of claims, including director and officer and errors and omissions
insurance claims;
 
    
    class action litigation relating to claims handling and other practices;
 
    
    construction defect claims, including claims for a broad range of additional insured endorsements on policies; and
 
    
    increases in the number of claims alleging abuse by members of the clergy, including passage of legislation to reopen
or extend various statutes of limitations.
 59
    Table of Contents   CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, Continued
  Establishing Reserve Estimates
     
    
    Paid Development,
 
    
    Incurred Development,
 
    
    Loss Ratio,
 
    
    Bornhuetter-Ferguson Using Premiums and Paid Loss,
 
    
    Bornhuetter-Ferguson Using Premiums and Incurred Loss, and
 
    
    Average Loss.
   60
    Table of Contents   CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, Continued
         61




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, Continued
  Periodic Reserve Reviews
        62




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##### Table of Contents



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




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##### Table of Contents



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, Continued
 Reinsurance
       Terrorism Insurance
    64




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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
  STANDARD LINES
  Results of OperationsThree Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Net written premiums
    
    $
    1,163
    
    
    $
    1,134
    
    
    $
    2,273
    
    
    $
    2,305Net earned premiums
    
    
    1,096
    
    
    
    1,084
    
    
    
    2,182
    
    
    
    2,253Net investment income
    
    
    238
    
    
    
    171
    
    
    
    466
    
    
    
    354Net operating income
    
    
    167
    
    
    
    100
    
    
    
    300
    
    
    
    201Net realized investment gains (losses)
    
    
    (24
    )
    
    
    17
    
    
    
    (15
    )
    
    
    9Net income
    
    
    143
    
    
    
    117
    
    
    
    285
    
    
    
    210RatiosLoss and loss adjustment expense
    
    
    67.6
    %
    
    
    71.2
    %
    
    
    69.7
    %
    
    
    71.1
    %Expense
    
    
    31.1
    
    
    
    31.4
    
    
    
    31.1
    
    
    
    31.8Dividend
    
    
    0.4
    
    
    
    0.8
    
    
    
    0.4
    
    
    
    0.6Combined
    
    
    99.1
    %
    
    
    103.4
    %
    
    
    101.2
    %
    
    
    103.5
    %
 Three Month Comparison
  65




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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
     66




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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 CarriedClaim and Claim Adjustment Expense ReservesJune 30, 2006
    
    
    December 31, 2005(In millions)Gross Case Reserves
    
    $
    6,967
    
    
    $
    7,033Gross IBNR Reserves
    
    
    7,856
    
    
    
    8,051Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,823
    
    
    $
    15,084Net Case Reserves
    
    $
    4,761
    
    
    $
    5,165Net IBNR Reserves
    
    
    6,364
    
    
    
    6,081Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    11,125
    
    
    $
    11,246
 67




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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 OperationsThree Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Net written premiums
    
    $
    625
    
    
    $
    595
    
    
    $
    1,273
    
    
    $
    1,189Net earned premiums
    
    
    633
    
    
    
    630
    
    
    
    1,261
    
    
    
    1,203Net investment income
    
    
    99
    
    
    
    67
    
    
    
    186
    
    
    
    123Net operating income
    
    
    110
    
    
    
    81
    
    
    
    224
    
    
    
    160Net realized investment gains (losses)
    
    
    (9
    )
    
    
    5
    
    
    
    (7
    )
    
    
    8Net income
    
    
    101
    
    
    
    86
    
    
    
    217
    
    
    
    168RatiosLoss and loss adjustment expense
    
    
    61.2
    %
    
    
    69.0
    %
    
    
    60.2
    %
    
    
    65.8
    %Expense
    
    
    27.2
    
    
    
    24.8
    
    
    
    26.8
    
    
    
    25.8Dividend
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2Combined
    
    
    88.5
    %
    
    
    94.0
    %
    
    
    87.1
    %
    
    
    91.8
    %
 Three Month Comparison
        68




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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
        Gross and Net CarriedClaim and Claim Adjustment Expense ReservesJune 30, 2006
    
    
    December 31, 2005(In millions)Gross Case Reserves
    
    $
    1,801
    
    
    $
    1,907Gross IBNR Reserves
    
    
    3,594
    
    
    
    3,298Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    5,395
    
    
    $
    5,205Net Case Reserves
    
    $
    1,335
    
    
    $
    1,442Net IBNR Reserves
    
    
    2,649
    
    
    
    2,352Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    3,984
    
    
    $
    3,794
 69




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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 OperationsThree Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Net earned premiums
    
    $
    159
    
    
    $
    204
    
    
    $
    322
    
    
    $
    370Net investment income
    
    
    138
    
    
    
    146
    
    
    
    325
    
    
    
    252Net operating income
    
    
    5
    
    
    
    5
    
    
    
    2
    
    
    
    6Net realized investment losses
    
    
    (23
    )
    
    
    (1
    )
    
    
    (30
    )
    
    
    (4
    )Net income (loss)
    
    
    (18
    )
    
    
    4
    
    
    
    (28
    )
    
    
    2
 Three Month Comparison
   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
 CORPORATE AND OTHER NON-CORE
  Results of OperationsThree Months
    
    Six MonthsPeriod ended June 30
    
    2006
    
    2005
    
    2006
    
    2005(In millions)Net investment income
    
    $
    77
    
    
    $
    55
    
    
    $
    145
    
    
    $
    116Revenues
    
    
    55
    
    
    
    155
    
    
    
    108
    
    
    
    190Net operating income
    
    
    23
    
    
    
    86
    
    
    
    13
    
    
    
    97Net realized investment losses
    
    
    (8
    )
    
    
    (5
    )
    
    
    (11
    )
    
    
    (11
    )Net income
    
    
    15
    
    
    
    81
    
    
    
    2
    
    
    
    86
 Three Month Comparison
 
   Six Month Comparison
    71




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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 CarriedClaim and Claim Adjustment Expense ReservesJune 30, 2006
    
    
    December 31, 2005(In millions)Gross Case Reserves
    
    $
    2,867
    
    
    $
    3,297Gross IBNR Reserves
    
    
    3,907
    
    
    
    4,075Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    6,774
    
    
    $
    7,372Net Case Reserves
    
    $
    1,312
    
    
    $
    1,554Net IBNR Reserves
    
    
    1,908
    
    
    
    1,902Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    3,220
    
    
    $
    3,456
 APMT Reserves
      72




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
   APMT ReservesJune 30, 2006
    
    
    December 31, 2005Environmental
    
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    
    Pollution andAsbestos
    
    
    Mass Tort
    
    
    Asbestos
    
    
    Mass Tort(In millions)Gross reserves
    
    $
    2,799
    
    
    $
    603
    
    
    $
    2,992
    
    
    $
    680Ceded reserves
    
    
    (1,294
    )
    
    
    (229
    )
    
    
    (1,438
    )
    
    
    (257
    )Net reserves
    
    $
    1,505
    
    
    $
    374
    
    
    $
    1,554
    
    
    $
    423
 Asbestos
      73




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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 ReservesJune 30, 2006Net Paid Losses
    
    
    Net Asbestos
    
    
    Percent ofNumber of
    
    
    in 2006
    
    
    Reserves
    
    
    AsbestosPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    Net ReservesPolicyholders with settlement agreementsStructured Settlements
    
    
    15
    
    
    $
    18
    
    
    $
    165
    
    
    
    11
    %Wellington
    
    
    3
    
    
    
    1
    
    
    
    14
    
    
    
    1Coverage in place
    
    
    39
    
    
    
    (18
    )
    
    
    93
    
    
    
    6Fibreboard
    
    
    1
    
    
    
    
    
    
    
    54
    
    
    
    4Total with settlement agreements
    
    
    58
    
    
    
    1
    
    
    
    326
    
    
    
    22Other policyholders with active accountsLarge asbestos accounts
    
    
    205
    
    
    
    37
    
    
    
    262
    
    
    
    17Small asbestos accounts
    
    
    1,076
    
    
    
    9
    
    
    
    96
    
    
    
    6Total other policyholders
    
    
    1,281
    
    
    
    46
    
    
    
    358
    
    
    
    23Assumed reinsurance and pools
    
    
    
    
    
    
    3
    
    
    
    144
    
    
    
    10Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    677
    
    
    
    45Total
    
    
    1,339
    
    
    $
    50
    
    
    $
    1,505
    
    
    
    100
    %
 74




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
 December 31, 2005Net Paid Losses
    
    
    Net Asbestos
    
    
    Percent ofNumber of
    
    
    in 2005
    
    
    Reserves
    
    
    AsbestosPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    Net ReservesPolicyholders with settlement agreementsStructured Settlements
    
    
    13
    
    
    $
    30
    
    
    $
    167
    
    
    
    11
    %Wellington
    
    
    4
    
    
    
    2
    
    
    
    15
    
    
    
    1Coverage in place
    
    
    34
    
    
    
    13
    
    
    
    58
    
    
    
    4Fibreboard
    
    
    1
    
    
    
    
    
    
    
    54
    
    
    
    3Total with settlement agreements
    
    
    52
    
    
    
    45
    
    
    
    294
    
    
    
    19Other policyholders with active accountsLarge asbestos accounts
    
    
    199
    
    
    
    68
    
    
    
    273
    
    
    
    17Small asbestos accounts
    
    
    1,073
    
    
    
    23
    
    
    
    135
    
    
    
    9Total other policyholders
    
    
    1,272
    
    
    
    91
    
    
    
    408
    
    
    
    26Assumed reinsurance and pools
    
    
    
    
    
    
    6
    
    
    
    143
    
    
    
    9Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    709
    
    
    
    46Total
    
    
    1,324
    
    
    $
    142
    
    
    $
    1,554
    
    
    
    100
    %
 
  75




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
   Environmental Pollution and Mass Tort
        76




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
   Pending Environmental Pollution Accounts and Associated ReservesJune 30, 2006
    
    
    
    
    
    
    
    
    
    NetEnvironmental
    
    
    Percent ofNet Paid Losses
    
    
    Pollution
    
    
    EnvironmentalNumber of
    
    
    in 2006
    
    
    Reserves
    
    
    Pollution NetPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    ReservePolicyholders with Settlement AgreementsStructured settlements
    
    
    10
    
    
    $
    10
    
    
    $
    11
    
    
    
    4
    %Coverage in place
    
    
    18
    
    
    
    3
    
    
    
    22
    
    
    
    7Total with Settlement Agreements
    
    
    28
    
    
    
    13
    
    
    
    33
    
    
    
    11Other Policyholders with Active AccountsLarge pollution accounts
    
    
    113
    
    
    
    12
    
    
    
    55
    
    
    
    18Small pollution accounts
    
    
    366
    
    
    
    11
    
    
    
    44
    
    
    
    15Total Other Policyholders
    
    
    479
    
    
    
    23
    
    
    
    99
    
    
    
    33Assumed Reinsurance & Pools
    
    
    
    
    
    
    1
    
    
    
    33
    
    
    
    11Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    45Total
    
    
    507
    
    
    $
    37
    
    
    $
    299
    
    
    
    100
    %
 Pending Environmental Pollution Accounts and Associated ReservesDecember 31, 2005NetEnvironmental
    
    
    Percent ofNet Paid Losses
    
    
    Pollution
    
    
    EnvironmentalNumber of
    
    
    in 2005
    
    
    Reserves
    
    
    Pollution NetPolicyholders
    
    
    (In millions)
    
    
    (In millions)
    
    
    ReservePolicyholders with Settlement AgreementsStructured settlements
    
    
    6
    
    
    $
    10
    
    
    $
    17
    
    
    
    5
    %Coverage in place
    
    
    16
    
    
    
    10
    
    
    
    23
    
    
    
    7Total with Settlement Agreements
    
    
    22
    
    
    
    20
    
    
    
    40
    
    
    
    12Other Policyholders with Active AccountsLarge pollution accounts
    
    
    120
    
    
    
    18
    
    
    
    63
    
    
    
    19Small pollution accounts
    
    
    362
    
    
    
    15
    
    
    
    50
    
    
    
    15Total Other Policyholders
    
    
    482
    
    
    
    33
    
    
    
    113
    
    
    
    34Assumed Reinsurance & Pools
    
    
    
    
    
    
    3
    
    
    
    33
    
    
    
    10Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    44Total
    
    
    504
    
    
    $
    56
    
    
    $
    336
    
    
    
    100
    %
 77




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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 IncomeThree Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Fixed maturity securities
    
    $
    480
    
    
    $
    410
    
    
    $
    895
    
    
    $
    774Short term investments
    
    
    58
    
    
    
    29
    
    
    
    123
    
    
    
    61Limited partnerships
    
    
    53
    
    
    
    38
    
    
    
    127
    
    
    
    117Equity securities
    
    
    8
    
    
    
    8
    
    
    
    14
    
    
    
    12Income (loss) from trading portfolio (a)
    
    
    (9
    )
    
    
    14
    
    
    
    33
    
    
    
    (16
    )Interest on funds withheld and other deposits
    
    
    (30
    )
    
    
    (50
    )
    
    
    (55
    )
    
    
    (89
    )Other
    
    
    5
    
    
    
    4
    
    
    
    8
    
    
    
    11Gross investment income
    
    
    565
    
    
    
    453
    
    
    
    1,145
    
    
    
    870Investment expense
    
    
    (13
    )
    
    
    (14
    )
    
    
    (23
    )
    
    
    (25
    )Net investment income
    
    $
    552
    
    
    $
    439
    
    
    $
    1,122
    
    
    $
    845
  
   78




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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
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Realized investment gains (losses):Fixed maturity securities:U.S. Government bonds
    
    $
    
    
    
    $
    14
    
    
    $
    4
    
    
    $
    (12
    )Corporate and other taxable bonds
    
    
    (76
    )
    
    
    (24
    )
    
    
    (96
    )
    
    
    (45
    )Tax-exempt bonds
    
    
    (14
    )
    
    
    27
    
    
    
    11
    
    
    
    34Asset-backed bonds
    
    
    (5
    )
    
    
    4
    
    
    
    (14
    )
    
    
    11Redeemable preferred stock
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    10Total fixed maturity securities
    
    
    (96
    )
    
    
    21
    
    
    
    (96
    )
    
    
    (2
    )Equity securities
    
    
    3
    
    
    
    25
    
    
    
    6
    
    
    
    39Derivative securities
    
    
    (2
    )
    
    
    (23
    )
    
    
    5
    
    
    
    (19
    )Short term investments
    
    
    (2
    )
    
    
    
    
    
    
    (4
    )
    
    
    Other, including disposition of businesses, net of
participating policyholders interest
    
    
    (2
    )
    
    
    4
    
    
    
    (2
    )
    
    
    (13
    )Realized investment gains (losses) before allocation to
participating policyholders and minority interests
    
    
    (99
    )
    
    
    27
    
    
    
    (91
    )
    
    
    5Allocated to participating policyholders and minority interest
    
    
    1
    
    
    
    (1
    )
    
    
    2
    
    
    
    2Income tax (expense) benefit
    
    
    34
    
    
    
    (10
    )
    
    
    26
    
    
    
    (5
    )Net realized investment gains (losses), net of participating
policyholders and minority interests
    
    $
    (64
    )
    
    $
    16
    
    
    $
    (63
    )
    
    $
    2
 
   79




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
   â
    Realized Gains and LossesThree Months
    
    
    Six MonthsPeriod ended June 30
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Net realized gains (losses) on fixed maturity securities
and equity securities:Fixed maturity securities:Gross realized gains
    
    $
    25
    
    
    $
    89
    
    
    $
    102
    
    
    $
    265Gross realized losses
    
    
    (121
    )
    
    
    (68
    )
    
    
    (198
    )
    
    
    (267
    )Net realized gains (losses) on fixed maturity securities
    
    
    (96
    )
    
    
    21
    
    
    
    (96
    )
    
    
    (2
    )Equity securities:Gross realized gains
    
    
    4
    
    
    
    34
    
    
    
    8
    
    
    
    54Gross realized losses
    
    
    (1
    )
    
    
    (9
    )
    
    
    (2
    )
    
    
    (15
    )Net realized gains on equity securities
    
    
    3
    
    
    
    25
    
    
    
    6
    
    
    
    39Net realized gains (losses) on fixed maturity and equity
securities
    
    $
    (93
    )
    
    $
    46
    
    
    $
    (90
    )
    
    $
    37
 
 80




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
  Largest Realized Losses from Securities Sold at a LossSix Months Ended June 30, 2006
    
    Fair
    
    
    
    
    
    
    Months inValue at
    
    
    
    
    
    
    UnrealizedDate of
    
    
    Loss
    
    
    Loss PriorIssuer Description and Discussion
    
    Sale
    
    
    On Sale
    
    
    To Sale (a)(In millions)Various notes and bonds issued by the United States Treasury. Securities sold
due to inflationary outlook and asset class reallocation.
    
    $
    2,289
    
    
    $
    8
    
    
    
    0-6State of New York revenue bonds. Position was sold to reduce municipal holdings.
    
    
    289
    
    
    
    6
    
    
    
    0-12Company provides property and casualty, managed care, life and various other
insurance products in the United States. Position was sold to reduce exposure
in the insurance sector.
    
    
    56
    
    
    
    5
    
    
    
    0-6Total
    
    $
    2,634
    
    
    $
    19
  81




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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 InvestmentsJune 30,
    
    
    
    
    
    
    December 31,2006
    
    
    %
    
    
    2005
    
    
    %(In millions)General account investments:Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations of government
agencies
    
    $
    1,708
    
    
    
    4
    %
    
    $
    1,469
    
    
    
    4
    %Asset-backed securities
    
    
    14,778
    
    
    
    37
    
    
    
    12,859
    
    
    
    32States, municipalities and political subdivisions  tax-exempt
    
    
    5,291
    
    
    
    13
    
    
    
    9,209
    
    
    
    23Corporate securities
    
    
    6,533
    
    
    
    16
    
    
    
    6,165
    
    
    
    15Other debt securities
    
    
    3,276
    
    
    
    8
    
    
    
    3,044
    
    
    
    8Redeemable preferred stock
    
    
    306
    
    
    
    1
    
    
    
    216
    
    
    
    1Options embedded in convertible debt securities
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total fixed maturity securities available-for-sale
    
    
    31,893
    
    
    
    79
    
    
    
    32,963
    
    
    
    83Fixed maturity securities trading:U.S. Treasury securities and obligations of government
agencies
    
    
    3
    
    
    
    
    
    
    
    4
    
    
    
    Asset-backed securities
    
    
    51
    
    
    
    
    
    
    
    87
    
    
    
    Corporate securities
    
    
    126
    
    
    
    1
    
    
    
    154
    
    
    
    1Other debt securities
    
    
    16
    
    
    
    
    
    
    
    26
    
    
    
    Redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities trading
    
    
    196
    
    
    
    1
    
    
    
    271
    
    
    
    1Equity securities available-for-sale:Common stock
    
    
    358
    
    
    
    1
    
    
    
    289
    
    
    
    1Preferred stock
    
    
    505
    
    
    
    1
    
    
    
    343
    
    
    
    1Total equity securities available-for-sale
    
    
    863
    
    
    
    2
    
    
    
    632
    
    
    
    2Total equity securities trading
    
    
    61
    
    
    
    
    
    
    
    49
    
    
    
    Short term investments available-for-sale
    
    
    5,429
    
    
    
    13
    
    
    
    3,870
    
    
    
    9Short term investments trading
    
    
    192
    
    
    
    1
    
    
    
    368
    
    
    
    1Limited partnerships
    
    
    1,671
    
    
    
    4
    
    
    
    1,509
    
    
    
    4Other investments
    
    
    27
    
    
    
    
    
    
    
    33
    
    
    
    Total general account investments
    
    $
    40,332
    
    
    
    100
    %
    
    $
    39,695
    
    
    
    100
    %
 
   82




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
    Contractual MaturityPercent of
    
    
    Percent ofMarket
    
    
    UnrealizedValue
    
    
    LossDue in one year or less
    
    
    2
    %
    
    
    1
    %Due after one year through five years
    
    
    8
    
    
    
    5Due after five years through ten years
    
    
    9
    
    
    
    9Due after ten years
    
    
    23
    
    
    
    25Asset-backed securities
    
    
    58
    
    
    
    60Total
    
    
    100
    %
    
    
    100
    %
 
 Unrealized Loss Aging for Non-investment Grade SecuritiesFair Value as a Percentage of Book Value
    
    
    GrossEstimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedJune 30, 2006
    
    Fair Value
    
    
    90-99%
    
    
    80-89%
    
    
    70-79%
    
    
    <70%
    
    
    Loss(In millions)Fixed maturity securities:Non-investment grade:0-6 months
    
    $
    1,023
    
    
    $
    24
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    247-12 months
    
    
    217
    
    
    
    12
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1413-24 months
    
    
    54
    
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    5Greater than 24 months
    
    
    11
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Total non-investment grade
    
    $
    1,305
    
    
    $
    40
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    44
 Unrealized Loss Aging for Non-investment Grade SecuritiesFair Value as a Percentage of Book Value
    
    
    GrossEstimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedDecember 31, 2005
    
    Fair Value
    
    
    90-99%
    
    
    80-89%
    
    
    70-79%
    
    
    <70%
    
    
    Loss(In millions)Fixed maturity securities:Non-investment grade:0-6 months
    
    $
    632
    
    
    $
    20
    
    
    $
    8
    
    
    $
    1
    
    
    $
    
    
    
    $
    297-12 months
    
    
    118
    
    
    
    4
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    1013-24 months
    
    
    122
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Greater than 24 months
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    $
    874
    
    
    $
    27
    
    
    $
    14
    
    
    $
    1
    
    
    $
    
    
    
    $
    42
 83




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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 RatingsJune 30,
    
    
    
    
    
    
    December 31,2006
    
    
    %
    
    
    2005
    
    
    %(In millions)U.S. Government and affiliated agency securities
    
    $
    1,870
    
    
    
    6
    %
    
    $
    1,628
    
    
    
    5
    %Other AAA rated
    
    
    17,340
    
    
    
    55
    
    
    
    18,233
    
    
    
    55AA and A rated
    
    
    5,166
    
    
    
    16
    
    
    
    6,046
    
    
    
    18BBB rated
    
    
    4,544
    
    
    
    14
    
    
    
    4,499
    
    
    
    14Below investment-grade
    
    
    2,863
    
    
    
    9
    
    
    
    2,612
    
    
    
    8Total
    
    $
    31,783
    
    
    
    100
    %
    
    $
    33,018
    
    
    
    100
    %
 
    84




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
   Short term InvestmentsJune 30,
    
    
    December 31,2006
    
    
    2005(In millions)Short term investments available-for-sale:Commercial paper
    
    $
    1,295
    
    
    $
    1,906U.S. Treasury securities
    
    
    1,740
    
    
    
    251Money market funds
    
    
    439
    
    
    
    294Other, including collateral held related to securities lending
    
    
    1,955
    
    
    
    1,419Total short term investments available-for-sale
    
    
    5,429
    
    
    
    3,870Short term investments trading:Commercial paper
    
    
    63
    
    
    
    94U.S. Treasury securities
    
    
    2
    
    
    
    64Money market funds
    
    
    127
    
    
    
    200Other
    
    
    
    
    
    
    10Total short term investments trading
    
    
    192
    
    
    
    368Total short term investments
    
    $
    5,621
    
    
    $
    4,238
 
 LIQUIDITY AND CAPITAL RESOURCES
 Cash Flow
       85




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
   Commitments, Contingencies and Guarantees
   Contractual CommitmentsJune 30, 2006
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 years(In millions)Debt (a)
    
    $
    2,589
    
    
    $
    307
    
    
    $
    555
    
    
    $
    141
    
    
    $
    1,586Lease obligations
    
    
    243
    
    
    
    30
    
    
    
    86
    
    
    
    58
    
    
    
    69Claim and claim expense reserves (b)
    
    
    32,044
    
    
    
    3,996
    
    
    
    10,931
    
    
    
    5,642
    
    
    
    11,475Future policy benefits reserves (c)
    
    
    10,092
    
    
    
    109
    
    
    
    354
    
    
    
    343
    
    
    
    9,286Policyholder funds reserves (c)
    
    
    1,108
    
    
    
    329
    
    
    
    455
    
    
    
    176
    
    
    
    148Guaranteed payment contracts (d)
    
    
    24
    
    
    
    11
    
    
    
    13
    
    
    
    
    
    
    
    Total
    
    $
    46,100
    
    
    $
    4,782
    
    
    $
    12,394
    
    
    $
    6,360
    
    
    $
    22,564
 (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 our
estimate of the amount and timing of the ultimate settlement and administration of claims
based on our assessment of facts and circumstances known as of June 30, 2006. See the
Critical Accounting Estimates section of this MD&A for further information. Claim and
claim adjustment expense reserves of $18 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
our estimate of the ultimate amount and timing of the settlement of benefits based on our
assessment of facts and circumstances known as of June 30, 2006. Future policy benefit
reserves of $933 million and policyholder fund reserves of $49 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.
 
 Regulatory Matters
   86




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
   Dividends from Subsidiaries
   Loews
     87




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
  Ratings
    Insurance Financial StrengthRatings
    
    Debt Ratings (a)Property &Casualty (a)
    
    Life (b)
    
    CNAF
    
    ContinentalCCC
    
    CAC
    
    Senior
    
    SeniorGroup
    
    
    
    Debt
    
    DebtA.M. Best
    
    A
    
    A-
    
    bbb
    
    Not ratedFitch
    
    A-
    
    A-
    
    BBB-
    
    BBB-Moodys
    
    A3
    
    Baa1
    
    Baa3
    
    Baa3S&P
    
    A-
    
    BBB+
    
    BBB-
    
    BBB-
   
   88




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##### Table of Contents



CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
  Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
 Accounting for Life Settlement
Contracts by Third-Party Investors Accounting for Purchases of Life Insurance
 Accounting for Certain Hybrid Financial Instruments Accounting for Derivative Instruments and Hedging Activities Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets
 Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance
Contracts Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments
 89




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##### Table of Contents



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 us,
and rulings and changes in tax laws and regulations;
    
    effects upon insurance markets and upon industry business practices and
relationships of current litigation, investigations and regulatory activity by the New York
State Attorney Generals office and other authorities concerning contingent commission
arrangements with brokers and bid solicitation activities;
    
    legal and regulatory activities with respect to certain non-traditional and
finite-risk insurance products, and possible resulting changes in accounting and financial
reporting in relation to such products, including our restatement of financial results in May
of 2005 and our relationship with an affiliate, Accord Re Ltd., as disclosed in connection
with that restatement;
    
    regulatory limitations, impositions and restrictions upon us, including the
effects of assessments and other surcharges for guaranty funds and second-injury funds and
other mandatory pooling arrangements;
    
    the impact of competitive products, policies and pricing and the competitive
environment in which we operate, including changes in our book of business;
    
    product and policy availability and demand and market responses, including the
level of ability to obtain rate increases and decline or non-renew under priced accounts, to
achieve premium targets and profitability and to realize growth and retention estimates;
    
    development of claims and the impact on loss reserves, including changes in claim
settlement policies;
    
    the effectiveness of current initiatives by claims management to reduce loss and
expense ratios through more efficacious claims handling techniques;
    
    the performance of reinsurance companies under reinsurance contracts with us;
    
    results of financing efforts, including the availability of bank credit facilities;
    
    changes in our composition of operating segments;
    
    weather and other natural physical events, including the severity and frequency of
storms, hail, snowfall and other winter conditions, 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;
 90




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CNA FINANCIAL CORPORATION  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS, Continued
 
    
    the unpredictability of the nature, targets, severity or frequency of potential
terrorist events, as well as the uncertainty as to our ability to contain our terrorism
exposure effectively, notwithstanding the extension until 2007 of the Terrorism Risk Insurance
Act of 2002;
    
    the occurrence of epidemics;
    
    exposure to liabilities due to claims made by insureds and others relating to
asbestos remediation and health-based asbestos impairments, as well as exposure to liabilities
for environmental pollution, mass tort, construction defect claims and exposure to liabilities
due to claims made by insureds and others relating to lead-based paint;
    
    whether a national privately financed trust to replace litigation of asbestos
claims with payments to claimants from the trust will be established or approved through
federal legislation, or, if established and approved, whether it will contain funding
requirements in excess of our established loss reserves or carried loss reserves;
    
    the sufficiency of our loss reserves and the possibility of future increases in reserves;
    
    regulatory limitations and restrictions, including limitations upon our ability to
receive dividends from our insurance subsidiaries imposed by state regulatory agencies and
minimum risk-based capital standards established by the National Association of Insurance
Commissioners;
    
    the risks and uncertainties associated with our loss reserves as outlined in the
Critical Accounting Estimates section of this MD&A;
    
    the level of success in integrating acquired businesses and operations, and in
consolidating, or selling existing ones;
    
    the possibility of further changes in our ratings by ratings agencies, including
the inability to access certain markets or distribution channels and the required
collateralization of future payment obligations as a result of such changes, and changes in
rating agency policies and practices; and
    
    the actual closing of contemplated transactions and agreements.
  91




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##### Table of Contents



CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk
   Sensitivity Analysis
       92




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##### Table of Contents



CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
 Market Risk Scenario 1Increase (Decrease)Market
    
    
    Interest
    
    
    Currency
    
    
    EquityJune 30, 2006
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    31,893
    
    
    $
    (1,853
    )
    
    $
    (95
    )
    
    $
    (30
    )Fixed maturity securities trading
    
    
    196
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Equity securities available-for-sale
    
    
    863
    
    
    
    
    
    
    
    (8
    )
    
    
    (86
    )Equity securities trading
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Short term investments available-for-sale
    
    
    5,429
    
    
    
    (12
    )
    
    
    (56
    )
    
    
    Short term investments trading
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,671
    
    
    
    1
    
    
    
    
    
    
    
    (33
    )Other invested assets
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity indexed futures for trading securities
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (67
    )Other derivative securities
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    Total general account
    
    
    40,332
    
    
    
    (1,863
    )
    
    
    (155
    )
    
    
    (224
    )Separate accounts:Fixed maturity securities
    
    
    445
    
    
    
    (21
    )
    
    
    
    
    
    
    Equity securities
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Short term investments
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    499
    
    
    
    (21
    )
    
    
    
    
    
    
    (4
    )Total securities
    
    $
    40,831
    
    
    $
    (1,884
    )
    
    $
    (155
    )
    
    $
    (228
    )Debt (carrying value)
    
    $
    1,679
    
    
    $
    (86
    )
    
    $
    
    
    
    $
    
 Market Risk Scenario 1Increase (Decrease)Market
    
    
    Interest
    
    
    Currency
    
    
    EquityDecember 31, 2005
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    32,963
    
    
    $
    (1,897
    )
    
    $
    (89
    )
    
    $
    (22
    )Fixed maturity securities trading
    
    
    271
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )Equity securities available-for-sale
    
    
    632
    
    
    
    
    
    
    
    (6
    )
    
    
    (63
    )Equity securities trading
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Short term investments available-for-sale
    
    
    3,870
    
    
    
    (4
    )
    
    
    (37
    )
    
    
    Short term investments trading
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,509
    
    
    
    1
    
    
    
    
    
    
    
    (29
    )Other invested assets
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    Equity index futures for trading
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (102
    )Other derivative securities
    
    
    3
    
    
    
    3
    
    
    
    10
    
    
    
    Total general account
    
    
    39,695
    
    
    
    (1,831
    )
    
    
    (123
    )
    
    
    (223
    )Separate accounts:Fixed maturity securities
    
    
    466
    
    
    
    (23
    )
    
    
    
    
    
    
    Equity securities
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Short term investments
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    546
    
    
    
    (23
    )
    
    
    
    
    
    
    (4
    )Total securities
    
    $
    40,241
    
    
    $
    (1,854
    )
    
    $
    (123
    )
    
    $
    (227
    )Debt (carrying value)
    
    $
    1,690
    
    
    $
    (92
    )
    
    $
    
    
    
    $
    
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##### Table of Contents



CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
 
 Market Risk Scenario 2Increase (Decrease)Market
    
    
    Interest
    
    
    Currency
    
    
    EquityJune 30, 2006
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    31,893
    
    
    $
    (2,757
    )
    
    $
    (189
    )
    
    $
    (76
    )Fixed maturity securities trading
    
    
    196
    
    
    
    (3
    )
    
    
    (1
    )
    
    
    (6
    )Equity securities available-for-sale
    
    
    863
    
    
    
    
    
    
    
    (16
    )
    
    
    (216
    )Equity securities trading
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Short term investments available-for-sale
    
    
    5,429
    
    
    
    (18
    )
    
    
    (112
    )
    
    
    Short term securities trading
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,671
    
    
    
    1
    
    
    
    
    
    
    
    (82
    )Other invested assets
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity indexed futures for trading
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (167
    )Other derivative securities
    
    
    2
    
    
    
    3
    
    
    
    10
    
    
    
    Total general account
    
    
    40,332
    
    
    
    (2,772
    )
    
    
    (308
    )
    
    
    (562
    )Separate accounts:Fixed maturity securities
    
    
    445
    
    
    
    (31
    )
    
    
    
    
    
    
    Equity securities
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Short term investments
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    499
    
    
    
    (31
    )
    
    
    
    
    
    
    (10
    )Total securities
    
    $
    40,831
    
    
    $
    (2,803
    )
    
    $
    (308
    )
    
    $
    (572
    )Debt (carrying value)
    
    $
    1,679
    
    
    $
    (126
    )
    
    $
    
    
    
    $
    
 94




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##### Table of Contents



CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
 Market Risk Scenario 2Increase (Decrease)Market
    
    
    Interest
    
    
    Currency
    
    
    EquityDecember 31, 2005
    
    Value
    
    
    Rate Risk
    
    
    Risk
    
    
    Risk(In millions)General account:Fixed maturity securities available-for-sale
    
    $
    32,963
    
    
    $
    (2,827
    )
    
    $
    (178
    )
    
    $
    (54
    )Fixed maturity securities trading
    
    
    271
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    (4
    )Equity securities available-for-sale
    
    
    632
    
    
    
    
    
    
    
    (11
    )
    
    
    (158
    )Equity securities trading
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Short term investments available-for-sale
    
    
    3,870
    
    
    
    (6
    )
    
    
    (74
    )
    
    
    Short term investments trading
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,509
    
    
    
    1
    
    
    
    
    
    
    
    (72
    )Other invested assets
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    Equity index futures for trading
    
    
    
    
    
    
    3
    
    
    
    (1
    )
    
    
    (255
    )Other derivative securities
    
    
    3
    
    
    
    5
    
    
    
    20
    
    
    
    (1
    )Total general account
    
    
    39,695
    
    
    
    (2,733
    )
    
    
    (245
    )
    
    
    (556
    )Separate accounts:Fixed maturity securities
    
    
    466
    
    
    
    (34
    )
    
    
    
    
    
    
    Equity securities
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Short term investments
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    546
    
    
    
    (34
    )
    
    
    
    
    
    
    (11
    )Total securities
    
    $
    40,241
    
    
    $
    (2,767
    )
    
    $
    (245
    )
    
    $
    (567
    )Debt (carrying value)
    
    $
    1,690
    
    
    $
    (135
    )
    
    $
    
    
    
    $
    
 95




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##### Table of Contents



CNA FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
 
   96




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##### Table of Contents



CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 4. Matters Subject to a Vote of Security Holders
     
 Votes For
    
    
    Votes WithheldBrenda J. Gaines
    
    
    248,733,692
    
    
    
    1,020,106Stephen W. Lilienthal
    
    
    242,546,753
    
    
    
    7,207,045Paul J. Liska
    
    
    242,578,315
    
    
    
    7,175,483Don M. Randel
    
    
    248,787,700
    
    
    
    966,098Joseph Rosenberg
    
    
    242,554,487
    
    
    
    7,199,311Andrew H. Tisch
    
    
    242,555,471
    
    
    
    7,198,327James S. Tisch
    
    
    242,549,977
    
    
    
    7,203,821Marvin Zonis
    
    
    248,587,684
    
    
    
    1,166,114
 
  
 Item 5. Other Information
  97




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##### Table of Contents



CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION
 
 Item 6. Exhibits
  Description of Exhibit
    
    Exhibit NumberCertification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    31.1Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    31.2Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    32.1
    *Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    32.2
    *
 *
    
    Exhibits 32.1 and 32.2 are being furnished and shall not be deemed filed for the purpose
of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that Section. These Exhibits shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as amended.
 98




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##### Table of Contents



CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION
 
 SIGNATURES
  CNA Financial CorporationDated: July 31, 2006
    
    By
    
    /s/ D. Craig MenseD. Craig MenseChief Financial Officer
 99