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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of incorporation or organization)
  36-6169860
(I.R.S. Employer Identification No.)
     
333 S. Wabash
Chicago, Illinois
(Address of principal executive offices)
   60604
(Zip Code)
(312) 822-5000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
       
Title of each class   Name of each exchange on
which registered
     
Common Stock
with a par value
of $2.50 per share
  New York Stock Exchange
Chicago Stock Exchange
NYSE Arca
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act. (check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of February 16, 2007, 271,406,984 shares of common stock were outstanding. The aggregate market value of the common stock of CNA Financial Corporation held by non-affiliates of the registrant as of June 30, 2006 was approximately $738 million based on the closing price of $32.96 per share of the common stock on the New York Stock Exchange on June 30, 2006.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the CNA Financial Corporation Proxy Statement prepared for the 2007 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report.
 
 

 


 

             
Item       Page
Number       Number
     PART I
1.       3  
   
 
       
1A.       8  
   
 
       
1B.       15  
   
 
       
2.       15  
   
 
       
3.       15  
   
 
       
4.       15  
   
 
       
     PART II
5.       16  
   
 
       
6.       17  
   
 
       
7.       18  
   
 
       
7A.       60  
   
 
       
8.       65  
   
 
       
9.       139  
   
 
       
9A.       139  
   
 
       
9B.       139  
   
 
       
     PART III
10.       140  
   
 
       
11.       141  
   
 
       
12.       141  
   
 
       
13.       141  
   
 
       
14.       141  
   
 
       
     PART IV
15.       142  
 Certificate of Amendment of Certificate of Incorporation
 Amendment to Employment Agreement
 Significant Subsidiaries
 Consent of Independent Registered Public Accounting Firm
 Certification
 Certification
 Certification
 Certification

 


Table of Contents

PART I
ITEM 1. BUSINESS
CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. References to “CNA,” “the Company,” “we,” “our,” “us” or like terms refer to the business of CNA and its subsidiaries. Our property and casualty insurance operations are conducted by Continental Casualty Company (CCC), incorporated in 1897, and its affiliates, and The Continental Insurance Company (CIC), organized in 1853, and its affiliates. CIC became a subsidiary of ours in 1995 as a result of the acquisition of The Continental Corporation (Continental). Loews Corporation (Loews) owned approximately 89% of our outstanding common stock as of December 31, 2006.
We serve a wide variety of customers, including small, medium and large businesses, associations, professionals, and groups and individuals with a broad range of insurance and risk management products and services.
Our insurance products primarily include property and casualty coverages. Our services include risk management, information services, warranty and claims administration. Our products and services are marketed through independent agents, brokers, managing general agents and direct sales.
Our core business, property and casualty insurance operations, is reported in two business segments: Standard Lines and Specialty Lines. Our non-core operations are managed in two segments: Life and Group Non-Core and Corporate and Other Non-Core. These segments are managed separately because of differences in their product lines and markets. Discussions of each segment including the products offered, the customers served, the distribution channels used and competition are set forth in the Management’s Discussion and Analysis (MD&A) included under Item 7 and in Note N of the Consolidated Financial Statements included under Item 8.
Competition
The property and casualty insurance industry is highly competitive both as to rate and service. Our consolidated property and casualty subsidiaries compete not only with other stock insurance companies, but also with mutual insurance companies, reinsurance companies and other entities for both producers and customers. We must continuously allocate resources to refine and improve our insurance products and services.
Rates among insurers vary according to the types of insurers and methods of operation. We compete for business not only on the basis of rate, but also on the basis of availability of coverage desired by customers, ratings and quality of service, including claim adjustment services.
There are approximately 2,400 individual companies that sell property and casualty insurance in the United States. Our consolidated property and casualty subsidiaries ranked as the 13th largest property and casualty insurance organization and we are the seventh largest commercial insurance writer in the United States based upon 2005 statutory net written premiums.
Regulation
The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Each state has established supervisory agencies with broad administrative powers relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, fixing minimum interest rates for accumulation of surrender values and maximum interest rates of policy loans, prescribing the form and content of statutory financial reports and regulating solvency and the type and amount of investments permitted. Such regulatory powers also extend to premium rate regulations, which require that rates not be excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries, intercompany transfers of assets may be subject to prior notice or approval by the state insurance regulators, depending on the size of such transfers and payments in relation to the financial position of the insurance affiliates making the transfer or payment.
Insurers are also required by the states to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each state.

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Further, insurance companies are subject to state guaranty fund and other insurance-related assessments. Guaranty fund and other insurance-related assessments are levied by the state departments of insurance to cover claims of insolvent insurers.
Reform of the U.S. tort liability system is another issue facing the insurance industry. Over the last decade, many states have passed some type of reform. In recent years, for example, significant state general tort reforms have been enacted in Georgia, Ohio, Mississippi and South Carolina. Specific state legislation addressing state asbestos reform has been passed in Ohio, Georgia, Florida and Texas. A few more states will be considering such legislation in the coming year. Although these states’ legislatures have begun to address their litigious environments, some reforms are being challenged in the courts and it will take some time before they are finalized. Even though there has been some tort reform success, new causes of action and theories of damages continue to be proposed in state court actions or by legislatures. As a result of this unpredictability in the law, insurance underwriting and rating is expected to continue to be difficult in commercial lines, professional liability and some specialty coverages.
Although the federal government and its regulatory agencies do not directly regulate the business of insurance, federal legislative and regulatory initiatives can impact the insurance industry in a variety of ways. These initiatives and legislation include tort reform proposals; proposals addressing natural catastrophe exposures; terrorism risk mechanisms; and various tax proposals affecting insurance companies. In 1999, Congress passed the Financial Services Modernization or “Gramm-Leach-Bliley” Act (GLB Act), which repealed portions of the Glass-Steagall Act and enabled closer relationships between banks and insurers. Although “functional regulation” was preserved by the GLB Act for state oversight of insurance, additional financial services modernization legislation could include provisions for an alternate federal system of regulation for insurance companies.
In addition, our domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based capital is a method developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of risk-based capital specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual capital is evaluated by a comparison to the risk-based capital results, as determined by the formula. Companies below minimum risk-based capital requirements are classified within certain levels, each of which requires specified corrective action. As of December 31, 2006 and 2005, all of our domestic insurance subsidiaries exceeded the minimum risk-based capital requirements.
Subsidiaries with insurance operations outside the United States are also subject to regulation in the countries in which they operate. We have operations in the United Kingdom, Canada and other countries.
Employee Relations
As of December 31, 2006, we had approximately 9,800 employees and have experienced satisfactory labor relations. We have never had work stoppages due to labor disputes.
We have comprehensive benefit plans for substantially all of our employees, including retirement plans, savings plans, disability programs, group life programs and group healthcare programs. See Note J of the Consolidated Financial Statements included under Item 8 for further discussion of our benefit plans.

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Supplementary Insurance Data
The following table sets forth supplementary insurance data:
Supplementary Insurance Data
                         
Years ended December 31            
(In millions, except ratio information)   2006   2005   2004
Trade Ratios — GAAP basis (a)
                       
Loss and loss adjustment expense ratio
    75.7 %     89.4 %     74.6 %
Expense ratio
    30.0       31.2       31.5  
Dividend ratio
    0.3       0.3       0.2  
 
                       
 
                       
Combined ratio
    106.0 %     120.9 %     106.3 %
 
                       
 
                       
Trade Ratios — Statutory basis (preliminary) (a)
                       
Loss and loss adjustment expense ratio
    78.7 %     92.2 %     78.1 %
Expense ratio
    30.2       30.0       27.2  
Dividend ratio
    0.2       0.5       0.6  
 
                       
 
                       
Combined ratio
    109.1 %     122.7 %     105.9 %
 
                       
 
                       
Individual Life and Group Life Insurance Inforce
                       
Individual life
  $ 9,866     $ 10,711     $ 11,566  
Group life
    5,787       9,838       45,079  
 
                       
 
                       
Total
  $ 15,653     $ 20,549     $ 56,645  
 
                       
 
                       
Other Data — Statutory basis (preliminary) (b)
                       
Property and casualty companies’ capital and surplus (c)
  $ 8,137     $ 6,940     $ 6,998  
Life company’s capital and surplus
    687       627       1,177  
Property and casualty companies’ written premiums to surplus ratio
    0.9       1.0       1.0  
Life company’s capital and surplus-percent to total liabilities
    38.9 %     33.1 %     56.0 %
Participating policyholders-percent of gross life insurance inforce
    4.4 %     3.5 %     1.4 %
 
(a)  
Trade ratios reflect the results of our property and casualty insurance subsidiaries. Trade ratios are industry measures of property and casualty underwriting results. The loss and loss adjustment expense ratio is the percentage of net incurred claim and claim adjustment expenses and the expenses incurred related to uncollectible reinsurance receivables to net earned premiums. The primary difference in this ratio between accounting principles generally accepted in the United States of America (GAAP) and statutory accounting practices (SAP) is related to the treatment of active life reserves (ALR) related to long term care insurance products written in property and casualty insurance subsidiaries. For GAAP, ALR is classified as claim and claim adjustment expense reserves whereas for SAP, ALR is classified as unearned premium reserves. The expense ratio, using amounts determined in accordance with GAAP, is the percentage of underwriting and acquisition expenses (including the amortization of deferred acquisition expenses) to net earned premiums. The expense ratio, using amounts determined in accordance with SAP, is the percentage of acquisition and underwriting expenses (with no deferral of acquisition expenses) to net written premiums. The dividend ratio, using amounts determined in accordance with GAAP, is the ratio of dividends incurred to net earned premiums. The dividend ratio, using amounts determined in accordance with SAP, is the ratio of dividends paid to net earned premiums. The combined ratio is the sum of the loss and loss adjustment expense, expense and dividend ratios.
 
(b)  
Other data is determined in accordance with SAP. Life and group statutory capital and surplus as a percent of total liabilities is determined after excluding separate account liabilities and reclassifying the statutorily required Asset Valuation Reserve to surplus.
 
(c)  
Surplus includes the property and casualty companies’ equity ownership of the life company’s capital and surplus.

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The following table displays the distribution of gross written premiums for our operations by geographic concentration.
Gross Written Premiums
                         
    Percent of Total
Years ended December 31   2006   2005   2004
California
    9.6 %     9.0 %     9.3 %
Florida
    7.9       7.1       7.1  
New York
    7.3       7.9       7.9  
Texas
    5.9       5.7       5.4  
New Jersey
    4.4       3.8       5.3  
Illinois
    4.1       4.2       5.1  
Pennsylvania
    3.4       4.2       4.7  
United Kingdom
    3.2       2.8       2.3  
Missouri
    3.0       2.8       1.4  
Massachusetts
    2.4       3.3       3.2  
All other states, countries or political subdivisions (a)
    48.8       49.2       48.3  
 
                       
 
                       
Total
    100.0 %     100.0 %     100.0 %
 
                       
 
(a)  
No other individual state, country or political subdivision accounts for more than 3.0% of gross written premiums.
Approximately 7.1%, 6.1% and 5.0% of our gross written premiums were derived from outside of the United States for the years ended December 31, 2006, 2005 and 2004. Premiums from any individual foreign country excluding the United Kingdom were not significant.
Property and Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over time of reserves established for property and casualty claim and claim adjustment expenses at the end of the preceding ten calendar years for our property and casualty insurance operations. The table excludes our life subsidiary(ies), and as such, the carried reserves will not agree to the Consolidated Financial Statements included under Item 8. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the originally reported reserve liability. The third section, reading down, shows re-estimates of the originally recorded reserves as of the end of each successive year, which is the result of our property and casualty insurance subsidiaries’ expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserves to the reserves originally established, and indicates whether the original reserves were adequate or inadequate to cover the estimated costs of unsettled claims.
The loss reserve development table for property and casualty companies is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. Additionally, the development amounts in the table below are the amounts prior to consideration of any related reinsurance bad debt allowance impacts.

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Schedule of Loss Reserve Development
                                                                                         
Calendar Year Ended                                                                  
(In millions)   1996     1997     1998     1999 (a)     2000     2001 (b)     2002 (c)     2003     2004     2005     2006  
Originally reported gross reserves for unpaid claim and claim adjustment expenses
  $ 29,559     $ 28,731     $ 28,506     $ 26,850     $ 26,510     $ 29,649     $ 25,719     $ 31,284     $ 31,204     $ 30,694     $ 29,459  
Originally reported ceded recoverable
    5,385       5,056       5,182       6,091       7,333       11,703       10,490       13,847       13,682       10,438       8,078  
 
                                                                 
 
                                                                                       
Originally reported net reserves for unpaid claim and claim adjustment expenses
  $ 24,174     $ 23,675     $ 23,324     $ 20,759     $ 19,177     $ 17,946     $ 15,229     $ 17,437     $ 17,522     $ 20,256     $ 21,381  
 
                                                                 
Cumulative net paid as of:
                                                                                       
One year later
  $ 5,851     $ 5,954     $ 7,321     $ 6,547     $ 7,686     $ 5,981     $ 5,373     $ 4,382     $ 2,651     $ 3,442     $  
Two years later
    9,796       11,394       12,241       11,937       11,992       10,355       8,768       6,104       4,963              
Three years later
    13,602       14,423       16,020       15,256       15,291       12,954       9,747       7,780                    
Four years later
    15,793       17,042       18,271       18,151       17,333       13,244       10,870                          
Five years later
    17,736       18,568       20,779       19,686       17,775       13,922                                
Six years later
    18,878       20,723       21,970       20,206       18,970                                      
Seven years later
    20,828       21,649       22,564       21,231                                            
Eight years later
    21,609       22,077       23,453                                                  
Nine years later
    21,986       22,800                                                        
Ten years later
    22,642                                                              
 
                                                                                       
Net reserves re-estimated as of:
                                                                                       
End of initial year
  $ 24,174     $ 23,675     $ 23,324     $ 20,759     $ 19,177     $ 17,946     $ 15,229     $ 17,437     $ 17,522     $ 20,256     $ 21,381  
One year later
    23,970       23,904       24,306       21,163       21,502       17,980       17,650       17,671       18,513       20,588        
Two years later
    23,610       24,106       24,134       23,217       21,555       20,533       18,248       19,120       19,044              
Three years later
    23,735       23,776       26,038       23,081       24,058       21,109       19,814       19,760                    
Four years later
    23,417       25,067       25,711       25,590       24,587       22,547       20,384                          
Five years later
    24,499       24,636       27,754       26,000       25,594       22,983                                
Six years later
    24,120       26,338       28,078       26,625       26,023                                      
Seven years later
    25,629       26,537       28,437       27,009                                            
Eight years later
    25,813       26,770       28,705                                                  
Nine years later
    26,072       26,997                                                        
Ten years later
    26,305                                                              
 
                                                                 
Total net (deficiency) redundancy
  $ (2,131 )   $ (3,322 )   $ (5,381 )   $ (6,250 )   $ (6,846 )   $ (5,037 )   $ (5,155 )   $ (2,323 )   $ (1,522 )   $ (332 )   $  
 
                                                                 
 
                                                                                       
Reconciliation to gross re-estimated reserves:
                                                                                       
Net reserves re-estimated
  $ 26,305     $ 26,997     $ 28,705     $ 27,009     $ 26,023     $ 22,983     $ 20,384     $ 19,760     $ 19,044     $ 20,588     $  
Re-estimated ceded recoverable
    7,619       6,953       7,469       9,810       10,541       15,939       15,298       13,722       12,624       10,094        
 
                                                                 
Total gross re-estimated reserves
  $ 33,924     $ 33,950     $ 36,174     $ 36,819     $ 36,564     $ 38,922     $ 35,682     $ 33,482     $ 31,668     $ 30,682     $  
 
                                                                 
 
                                                                                       
Net (deficiency) redundancy related to:
                                                                                       
Asbestos claims
  $ (2,461 )   $ (2,361 )   $ (2,120 )   $ (1,544 )   $ (1,479 )   $ (707 )   $ (707 )   $ (65 )   $ (11 )   $     $  
Environmental and mass tort claims
    (807 )     (834 )     (618 )     (722 )     (716 )     (256 )     (263 )     (117 )     (116 )     (63 )      
 
                                                                 
Total asbestos, environmental and mass tort
    (3,268 )     (3,195 )     (2,738 )     (2,266 )     (2,195 )     (963 )     (970 )     (182 )     (127 )     (63 )      
Other claims
    1,137       (127 )     (2,643 )     (3,984 )     (4,651 )     (4,074 )     (4,185 )     (2,141 )     (1,395 )     (269 )      
 
                                                                 
Total net (deficiency) redundancy
  $ (2,131 )   $ (3,322 )   $ (5,381 )   $ (6,250 )   $ (6,846 )   $ (5,037 )   $ (5,155 )   $ (2,323 )   $ (1,522 )   $ (332 )   $  
 
                                                                 

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(a)  
Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of $784 million as of December 31, 1999.
 
(b)  
Effective January 1, 2001, we established a new life insurance company, CNA Group Life Assurance Company (CNAGLA). Further, on January 1, 2001 approximately $1,055 million of reserves were transferred from CCC to CNAGLA.
 
(c)  
Effective October 31, 2002, we sold CNA Reinsurance Company Limited (CNA Re U.K.). As a result of the sale, net reserves were reduced by approximately $1,316 million.
Additional information regarding our property and casualty claim and claim adjustment expense reserves and reserve development is set forth in the MD&A included under Item 7 and in Notes A and F of the Consolidated Financial Statements included under Item 8.
Investments
Information on our investments is set forth in the MD&A included under Item 7 and in Notes A, B, C and D of the Consolidated Financial Statements included under Item 8.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including CNA, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.
We also make available free of charge on or through our internet website (http://www.cna.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Copies of these reports may also be obtained, free of charge, upon written request to: CNA Financial Corporation, 333 S. Wabash Avenue, Chicago, IL 60604, Attn. Jonathan D. Kantor, Executive Vice President, General Counsel and Secretary.
ITEM 1A. RISK FACTORS
Our business faces many risks. We have described below some of the more significant risks which we face. There may be additional risks that we do not yet know of or that we do not currently perceive to be significant that may also impact our business. Each of the risks and uncertainties described below could lead to events or circumstances that have a material adverse effect on our business, results of operations, financial condition or equity. You should carefully consider and evaluate all of the information included in this Report and any subsequent reports we may file with the Securities and Exchange Commission or make available to the public before investing in any securities we issue.
If we determine that loss reserves are insufficient to cover our estimated ultimate unpaid liability for claims, we may need to increase our loss reserves.
We maintain loss reserves to cover our estimated ultimate unpaid liability for claims and claim adjustment expenses for reported and unreported claims and for future policy benefits. Reserves represent our best estimate at a given point in time. Insurance reserves are not an exact calculation of liability but instead are complex estimates derived by us, generally utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, mortality, morbidity, expected interest rates, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Many of these uncertainties are not precisely quantifiable and require significant judgment on our part. As trends in underlying claims develop, particularly in so-called “long tail” or long duration coverages, we are sometimes required to add to our reserves. This is called unfavorable development and results in a charge to our earnings in the amount of the added reserves, recorded in the

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period the change in estimate is made. These charges can be substantial and can have a material adverse effect on our results of operations and equity. Additional information on our reserves is included in Management’s Discussion and Analysis (MD&A) under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.
We are subject to the uncertain effects of emerging or potential claims and coverages issues that arise as industry practices and legal, judicial, social and other environmental conditions change. These issues have had, and may continue to have, a negative effect on our business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims, resulting in further increases in our reserves which can have a material adverse effect on our results of operations and equity. The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. Examples of emerging or potential claims and coverage issues include:
 
increases in the number and size of claims relating to injuries from medical products;
 
 
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;
 
 
clergy abuse claims, including passage of legislation to reopen or extend various statutes of limitations; and
 
 
mass tort claims, including bodily injury claims related to silica, welding rods, benzene, lead and various other chemical exposure claims.
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, we review and change our reserve estimates in a regular and ongoing process as experience develops and further claims are reported and settled. In addition, we periodically undergo state regulatory financial examinations, including review and analysis of our reserves. If estimated reserves are insufficient for any reason, the required increase in reserves would be recorded as a charge against our earnings for the period in which reserves are determined to be insufficient. These charges can be substantial and can materially adversely affect our results of operations and equity.
Loss reserves for asbestos, environmental pollution and mass torts are especially difficult to estimate and may result in more frequent and larger additions to these reserves.
Our experience has been that establishing reserves for casualty coverages relating to asbestos, environmental pollution and mass tort (which we refer to as APMT) claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported asbestos, environmental pollution and mass tort claims is subject to a higher degree of variability due to a number of additional factors including, among others, the following:
 
coverage issues including whether certain costs are covered under the policies and whether policy limits apply;
 
 
inconsistent court decisions and developing legal theories;
 
 
increasingly aggressive tactics of plaintiffs’ lawyers;
 
 
the risks and lack of predictability inherent in major litigation;
 
 
changes in the volume of asbestos, environmental pollution and mass tort claims which cannot now be anticipated;
 
 
continued increases in mass tort claims relating to silica and silica-containing products;
 
 
the impact of the exhaustion of primary limits and the resulting increase in claims on any umbrella or excess policies we have issued;
 
 
the number and outcome of direct actions against us;

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our ability to recover reinsurance for these claims; and
 
 
changes in the legal and legislative environment in which we operate.
As a result of this higher degree of variability, we have necessarily supplemented traditional actuarial methods and techniques with additional estimating techniques and methodologies, many of which involve significant judgment on our part. Consequently, we may periodically need to record changes in our claim and claim adjustment expense reserves in the future in these areas in amounts that may be material. Additional information on APMT is included in MD&A under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.
     Environmental pollution claims. The estimation of reserves for environmental pollution claims is complicated by the assertion by many policyholders of claims for defense costs and indemnification. We and others in the insurance industry are disputing coverage for many such claims. Key coverage issues in these claims include the following:
 
whether cleanup costs are considered damages under the policies (and accordingly whether we would be liable for these costs);
 
 
the trigger of coverage and the allocation of liability among triggered policies;
 
 
the applicability of pollution exclusions and owned property exclusions;
 
 
the potential for joint and several liability; and
 
 
the definition of an occurrence.
To date, courts have been inconsistent in their rulings on these issues, thus adding to the uncertainty of the outcome of many of these claims.
Further, the scope of federal and state statutes and regulations determining liability and insurance coverage for environmental pollution liabilities have been the subject of extensive litigation. In many cases, courts have expanded the scope of coverage and liability for cleanup costs beyond the original intent of our insurance policies. Additionally, the standards for cleanup in environmental pollution matters are unclear, the number of sites potentially subject to cleanup under applicable laws is unknown, and the impact of various proposals to reform existing statutes and regulations is difficult to predict.
     Asbestos claims. The estimation of reserves for asbestos claims is particularly difficult for many of the same reasons discussed above for environmental pollution claims, as well as the following:
 
inconsistency of court decisions and jury attitudes, as well as future court decisions;
 
 
specific policy provisions;
 
 
allocation of liability among insurers and insureds;
 
 
missing policies and proof of coverage;
 
 
the proliferation of bankruptcy proceedings and attendant uncertainties;
 
 
novel theories asserted by policyholders and their legal counsel;
 
 
the targeting of a broader range of businesses and entities as defendants;
 
 
uncertainties in predicting the number of future claims and which other insureds may be targeted in the future;
 
 
volatility in claim numbers and settlement demands;
 
 
increases in the number of non-impaired claimants and the extent to which they can be precluded from making claims;
 
 
the efforts by insureds to obtain coverage that is not subject to aggregate limits;
 
 
the long latency period between asbestos exposure and disease manifestation, as well as the resulting potential for involvement of multiple policy periods for individual claims;
 
 
medical inflation trends;

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the mix of asbestos-related diseases presented; and
 
 
the ability to recover reinsurance.
In addition, a number of our insureds have asserted that their claims for insurance are not subject to aggregate limits on coverage. If these insureds are successful in this regard, our potential liability for their claims would be unlimited. Some of these insureds contend that their asbestos claims fall within the so-called “non-products” liability coverage within their policies, rather than the products liability coverage, and that this “non-products” liability coverage is not subject to any aggregate limit. It is difficult to predict the extent to which these claims will succeed and, as a result, the ultimate size of these claims.
Catastrophe losses are unpredictable.
Catastrophe losses are an inevitable part of our business. Various events can cause catastrophe losses, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather, and fires, and their frequency and severity are inherently unpredictable. In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, and snow. For example, in 2005, we experienced substantial losses from Hurricanes Katrina, Rita and Wilma and in 2004, we experienced substantial losses from Hurricanes Charley, Frances, Ivan and Jeanne. The extent of our losses from catastrophes is a function of both the total amount of our insured exposures in the affected areas and the severity of the events themselves. In addition, as in the case of catastrophe losses generally, it can take a long time for the ultimate cost to us to be finally determined. As our claim experience develops on a particular catastrophe, we may be required to adjust our reserves, or take additional unfavorable development, to reflect our revised estimates of the total cost of claims. We believe we could incur significant catastrophe losses in the future. Additional information on catastrophe losses is included in the MD&A under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.
Our key assumptions used to determine reserves and deferred acquisition costs for our long term care product offerings could vary significantly.
Our reserves and deferred acquisition costs for our long term care product offerings are based on certain key assumptions including morbidity, which is the frequency and severity of illness, sickness and diseases contracted, policy persistency, which is the percentage of policies remaining in force, interest rates and/or future health care cost trends. If actual experience differs from these assumptions, the deferred acquisition costs may not be fully recovered and the reserves may not be adequate, requiring us to add to reserves, or take unfavorable development. Therefore, our financial results could be adversely impacted.
We continue to face exposure to losses arising from terrorist acts, despite the passage of the Terrorism Risk Insurance Extension Act of 2005.
We may bear substantial losses from future acts of terrorism. The Terrorism Risk Insurance Extension Act of 2005 (TRIEA) extended, until December 31, 2007, the program established by the Terrorism Risk Insurance Act of 2002. Under this program, insurers are required to offer terrorism insurance and the federal government will share the risk of loss by commercial property and casualty insurers arising from future terrorist attacks. TRIEA does not provide complete protection for future losses derived from acts of terrorism. Additional information on TRIEA is included in the MD&A under Item 7.
High levels of retained overhead expenses associated with business lines in run-off negatively impact our operating results.
During the past few years, we ceased offering certain insurance products relating principally to our life, group and reinsurance segments. Many of these business lines were sold, others have been placed in run-off and, as a result, revenue will progressively decrease. Our results of operations have been materially, adversely affected by the high levels of retained overhead expenses associated with these run-off operations, and will continue to be so affected if we are not successful in eliminating or reducing these costs.
Our premium writings and profitability are affected by the availability and cost of reinsurance.
We purchase reinsurance to help manage our exposure to risk. Under our reinsurance arrangements, another insurer assumes a specified portion of our claim and claim adjustment expenses in exchange for a specified portion of policy premiums. Market conditions determine the availability and cost of the reinsurance protection we purchase,

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which affects the level of our business and profitability, as well as the level and types of risk we retain. If we are unable to obtain sufficient reinsurance at a cost we deem acceptable, we may be unwilling to bear the increased risk and would reduce the level of our underwriting commitments. Additional information on Reinsurance is included in the MD&A under Item 7 and Note H to the Consolidated Financial Statements included under Item 8.
We may not be able to collect amounts owed to us by reinsurers.
We have significant amounts recoverable from reinsurers which are reported as receivables in our balance sheets and are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves. The ceding of insurance does not, however, discharge our primary liability for claims. As a result, we are subject to credit risk relating to our ability to recover amounts due from reinsurers. Certain of our reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies. In addition, reinsurers could dispute amounts which we believe are due to us. If we are not able to collect the amounts due to us from reinsurers, our claims expenses will be higher which could materially adversely affect our results of operations or equity. Additional information on reinsurance is included in the MD&A under Item 7 and Note H to the Consolidated Financial Statements included under Item 8.
Rating agencies may downgrade their ratings of us and thereby adversely affect our ability to write insurance at competitive rates or at all.
Ratings are an increasingly important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries, as well as our public debt, are rated by four major rating agencies, namely, A.M. Best Company, Inc., Standard & Poor’s Rating Services, Moody’s Investors Service, Inc. and Fitch, Inc. Ratings reflect the rating agency’s opinions of an insurance company’s financial strength, capital adequacy, operating performance, strategic position and ability to meet its obligations to policyholders and debtholders. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating.
Due to the intense competitive environment in which we operate, the uncertainty in determining reserves and the potential for us to take material unfavorable development in the future, and possible changes in the methodology or criteria applied by the rating agencies, the rating agencies may take action to lower our ratings in the future. If our property and casualty insurance financial strength ratings are downgraded below current levels, our business and results of operations could be materially adversely affected. The severity of the impact on our business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of our insurance products to certain markets, and the required collateralization of certain future payment obligations or reserves.
In addition, we believe that a lowering of the debt ratings of Loews Corporation by certain of the rating agencies could result in an adverse impact on our ratings, independent of any change in our circumstances. We have entered into several settlement agreements and assumed reinsurance contracts that require collateralization of future payment obligations and assumed reserves if our ratings or other specific criteria fall below certain thresholds. The ratings triggers are generally more than one level below our current ratings. Additional information on our ratings is included in the MD&A under Item 7.
We are subject to extensive federal, state and local governmental regulations that restrict our ability to do business and generate revenues.
The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Most insurance regulations are designed to protect the interests of our policyholders rather than our investors. Each state in which we do business has established supervisory agencies that regulate the manner in which we do business. Their regulations relate to, among other things, the following:
 
standards of solvency including risk-based capital measurements;
 
 
restrictions on the nature, quality and concentration of investments;
 
 
restrictions on our ability to withdraw from unprofitable lines of insurance;
 
 
the required use of certain methods of accounting and reporting;

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the establishment of reserves for unearned premiums, losses and other purposes;
 
 
potential assessments for funds necessary to settle covered claims against impaired, insolvent or failed insurance companies;
 
 
licensing of insurers and agents;
 
 
approval of policy forms; and
 
 
limitations on the ability of our insurance subsidiaries to pay dividends to us.
Regulatory powers also extend to premium rate regulations which require that rates not be excessive, inadequate or unfairly discriminatory. The states in which we do business also require us to provide coverage to persons whom we would not otherwise consider eligible. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each state.
We are subject to capital adequacy requirements and, if we do not meet these requirements, regulatory agencies may restrict or prohibit us from operating our business.
Insurance companies such as us are subject to risk-based capital standards set by state regulators to help identify companies that merit further regulatory attention. These standards apply specified risk factors to various asset, premium and reserve components of our statutory capital and surplus reported in our statutory basis of accounting financial statements. Current rules require companies to maintain statutory capital and surplus at a specified minimum level determined using the risk-based capital formula. If we do not meet these minimum requirements, state regulators may restrict or prohibit us from operating our business. If we are required to record a charge against earnings in connection with a change in estimates or circumstances, we may violate these minimum capital adequacy requirements unless we are able to raise sufficient additional capital. Examples of events leading us to record a charge against earnings include impairment of our investments or unexpectedly poor claims experience.
Our insurance subsidiaries, upon whom we depend for dividends in order to fund our working capital needs, are limited by state regulators in their ability to pay dividends.
We are a holding company and are dependent upon dividends, loans and other sources of cash from our subsidiaries in order to meet our obligations. Dividend payments, however, must be approved by the subsidiaries’ domiciliary state departments of insurance and are generally limited to amounts determined by formula which varies by state. The formula for the majority of the states is the greater of 10% of the prior year statutory surplus or the prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to the date of payment. Some states, however, have an additional stipulation that dividends cannot exceed the prior year’s earned surplus. If we are restricted, by regulatory rule or otherwise, from paying or receiving inter-company dividends, we may not be able to fund our working capital needs and debt service requirements from available cash. As a result, we would need to look to other sources of capital which may be more expensive or may not be available at all.
We are responding to subpoenas, interrogatories and inquiries relating to insurance brokers and agents, contingent commissions and bidding practices, and certain finite-risk insurance products.
Along with other companies in the industry, we have received subpoenas, interrogatories and inquiries from: (i) California, Connecticut, Delaware, Florida, Hawaii, Illinois, Michigan, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, West Virginia and the Canadian Council of Insurance Regulators concerning investigations into practices including contingent compensation arrangements, fictitious quotes, and tying arrangements; (ii) the Securities and Exchange Commission (SEC), the New York State Attorney General, the United States Attorney for the Southern District of New York, the Connecticut Attorney General, the Connecticut Department of Insurance, the Delaware Department of Insurance, the Georgia Office of Insurance and Safety Fire Commissioner and the California Department of Insurance concerning reinsurance products and finite insurance products purchased and sold by us; (iii) the Massachusetts Attorney General and the Connecticut Attorney General concerning investigations into anti-competitive practices; and (iv) the New York State Attorney General concerning declinations of attorney malpractice insurance. We continue to respond to these subpoenas, interrogatories and inquiries to the extent they are still open.
Subsequent to receipt of the SEC subpoena, we produced documents and provided additional information at the SEC’s request. In addition, the SEC and representatives of the United States Attorney’s Office for the Southern District of New York conducted interviews with several of our current and former executives relating to the

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restatement of our financial results for 2004, including our relationship with and accounting for transactions with an affiliate that were the basis for the restatement. The SEC also requested information relating to our restatement in 2006 of prior period results. It is possible that our analyses of, or accounting treatment for, finite reinsurance contracts or discontinued operations could be questioned or disputed by regulatory authorities. As a result, further restatements of our financial results are possible.
In prior years, we restated our financial results and identified material weaknesses in our internal control over financial reporting.
In May of 2005 we restated our financial results for prior years to correct our accounting for several reinsurance contracts, primarily with a former affiliate, and to correct our equity accounting for that affiliate. In February of 2006 we restated our financial results for prior years to correct the accounting for discontinued operations acquired in our merger with The Continental Corporation in 1995. Additionally, in March of 2006, we restated our financial results for prior years to correct classification errors within our Consolidated Statements of Cash Flows.
As a result of the foregoing restatements, we identified material weaknesses in our internal control over financial reporting as of December 31, 2004 and 2005, respectively. We also determined that our internal control over financial reporting as of such dates was not effective. Our system of internal control over financial reporting is a process designed to provide reasonable assurance to our management, Audit Committee and Board of Directors regarding the reliability of our financial reporting and the preparation and fair presentation of our published financial statements. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and the implementing rules of the Securities and Exchange Commission, the periodic reports we file with the SEC include information on our system of disclosure controls and procedures, as well as our overall internal control over financial reporting.
While we have remediated the referenced material weaknesses, if we fail to maintain effective internal control over financial reporting, we could be scrutinized by regulators in a manner that extends beyond the SEC’s requests for information relating to the restatements (as further described in the prior risk factor). We could also be scrutinized by securities analysts and investors. As a result of this scrutiny, we could suffer a loss of public confidence in our financial reporting capabilities and thereby face adverse effects on our business and the market price of our securities.
Our investment portfolio, which is a key component of our overall profitability, may suffer reduced returns or losses, especially with respect to our equity in various limited partnership net assets which are often subject to greater leverage and volatility.
Investment returns are an important part of our overall profitability. General economic conditions, stock market conditions, fluctuations in interest rates, and many other factors beyond our control can adversely affect the returns and the overall value of our equity investments and our ability to control the timing of the realization of investment income. In addition, any defaults in the payments due to us for our investments, especially with respect to liquid corporate and municipal bonds, could reduce our investment income and realized investment gains or could cause us to incur investment losses. Further, we invest a portion of our assets in equity investments, primarily through limited partnerships, which are subject to greater volatility than our fixed income investments. In some cases, these limited partnerships use leverage and are thereby subject to even greater volatility. Although limited partnership investments generally provide higher expected return, they present greater risk and are more illiquid than our fixed income investments. As a result of these factors, we may not realize an adequate return on our investments, may incur losses on sales of our investments and may be required to write down the value of our investments.
We may be adversely affected by the cyclical nature of the property and casualty business.
The property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates.
We face intense competition in our industry.
All aspects of the insurance industry are highly competitive and we must continuously allocate resources to refine and improve our insurance products and services. Insurers compete on the basis of factors including products, price, services, ratings and financial strength. We may lose business to competitors offering competitive insurance products at lower prices. We compete with a large number of stock and mutual insurance companies and other entities for both distributors and customers. In addition, the Graham-Leach-Bliley Act of 1999 has encouraged

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growth in the number, size and financial strength of our potential competitors by removing barriers that previously prohibited holding companies from simultaneously owning commercial banks, insurers and securities firms.
We may suffer losses from non-routine litigation and arbitration matters which may exceed the reserves we have established.
We face substantial risks of litigation and arbitration beyond ordinary course claims and APMT matters, which may contain assertions in excess of amounts covered by reserves that we have established. These matters may be difficult to assess or quantify and may seek recovery of very large or indeterminate amounts that include punitive or treble damages. Accordingly, unfavorable results in these proceedings could have a material adverse impact on our results of operations.
Additional information on litigation is included in the MD&A under Item 7 and Note G to the Consolidated Financial Statements included under Item 8.
We are dependent on a small number of key executives and other key personnel to operate our business successfully.
Our success substantially depends upon our ability to attract and retain high quality key executives and other employees. We believe there are only a limited number of available qualified executives in the business lines in which we compete. We rely substantially upon the services of our executive officers to implement our business strategy. The loss of the services of any members of our management team or the inability to attract and retain other talented personnel could impede the implementation of our business strategies. We do not maintain key man life insurance policies with respect to any of our employees.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The 333 S. Wabash Avenue building, located in Chicago, Illinois and owned by Continental Assurance Company (CAC), a wholly-owned subsidiary of CCC, serves as our home office. Our subsidiaries own or lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to our principal office locations:
             
    Amount (Square Feet) of Building    
    Owned and Occupied or Leased    
Location   and Occupied by CNA   Principal Usage
333 S. Wabash Avenue, Chicago, Illinois
    904,990     Principal executive offices of CNAF
401 Penn Street, Reading, Pennsylvania
    171,406     Property and casualty insurance offices
2405 Lucien Way, Maitland, Florida
    147,815     Property and casualty insurance offices
40 Wall Street, New York, New York
    110,131     Property and casualty insurance offices
675 Placentia Avenue, Brea, California
    78,655     Property and casualty insurance offices
600 N. Pearl Street, Dallas, Texas
    75,544     Property and casualty insurance offices
1100 Cornwall Road, Monmouth Junction, New Jersey
    74,067     Property and casualty insurance offices
3175 Satellite Boulevard, Duluth, Georgia
    48,696     Property and casualty insurance offices
405 Howard Street, San Francisco, California
    47,195     Property and casualty insurance offices
4150 N. Drinkwater Boulevard, Scottsdale, Arizona
    37,799     Property and casualty insurance offices
We lease our office space described above except for the Chicago, Illinois building and the Reading, Pennsylvania building, which are owned. We consider that our properties are generally in good condition, are well maintained and are suitable and adequate to carry on our business.
ITEM 3. LEGAL PROCEEDINGS
Information on our legal proceedings is set forth in Notes F and G of the Consolidated Financial Statements included under Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange, the NYSE Arca and is traded on the Philadelphia Stock Exchange, under the symbol CNA.
As of February 16, 2006, we had 271,406,984 shares of common stock outstanding. Approximately 89% of our outstanding common stock is owned by Loews. We had 2,094 stockholders of record as of February 16, 2006 according to the records maintained by our transfer agent.
The table below shows the high and low closing sales prices for our common stock based on the New York Stock Exchange Composite Transactions.
Common Stock Information
                                 
    2006   2005
    High   Low   High   Low
Quarter:
                               
Fourth
  $ 40.32     $ 36.19     $ 34.91     $ 28.52  
Third
    36.04       33.05       30.46       28.40  
Second
    33.20       30.90       28.90       26.21  
First
    33.60       29.88       29.79       25.84  
No dividends have been paid on our common stock in 2006 or 2005. Our ability to pay dividends is limited by regulatory dividend restrictions on our principal operating insurance subsidiaries.
 
The following graph compares the total return of our common stock, the Standard & Poor’s 500 Composite Stock Index (“S&P 500”) and the Standard & Poor’s 500 Property & Casualty Insurance Index for the five years ended December 31, 2006. The graph assumes that the value of the investment in our common stock and for each index was $100 on December 31, 2001 and that dividends were reinvested.
Stock Price Performance Graph
                                                 
Company Index   2001   2002   2003   2004   2005   2006
CNA Financial Corp.
    100       87.76       82.62       91.70       112.20       138.22  
S&P 500 Index
    100       77.90       100.25       111.15       116.61       135.03  
S&P Property & Casualty Insurance
    100       88.98       112.48       124.20       142.97       161.38  
(LINE GRAPH)

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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data. The table should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data of this Form 10-K.
Selected Financial Data
                                         
As of and for the Years Ended                              
December 31                              
(In millions, except per share data and ratios)   2006     2005     2004     2003     2002  
Results of Operations:
                                       
Revenues
  $ 10,376     $ 9,862     $ 9,924     $ 11,715     $ 12,293  
 
                             
Income (loss) from continuing operations
  $ 1,137     $ 243     $ 446     $ (1,419 )   $ 263  
Income (loss) from discontinued operations, net of tax
    (29 )     21       (21 )     2       (43 )
Cumulative effects of changes in accounting principles, net of tax
                            (57 )
 
                             
Net income (loss)
  $ 1,108     $ 264     $ 425     $ (1,417 )   $ 163  
 
                             
 
                                       
Basic Earnings (Loss) per Share:
                                       
Income (loss) from continuing operations
  $ 4.17     $ 0.68     $ 1.49     $ (6.52 )   $ 1.18  
Income (loss) from discontinued operations
    (0.11 )     0.08       (0.09 )     0.01       (0.20 )
Cumulative effects of changes in accounting principles
                            (0.26 )
 
                             
 
                                       
Basic earnings (loss) per share available to common stockholders
  $ 4.06     $ 0.76     $ 1.40     $ (6.51 )   $ 0.72  
 
                             
 
                                       
Diluted Earnings (Loss) per Share:
                                       
Income (loss) from continuing operations
  $ 4.16     $ 0.68     $ 1.49     $ (6.52 )   $ 1.18  
Income (loss) from discontinued operations
    (0.11 )     0.08       (0.09 )     0.01       (0.20 )
Cumulative effects of changes in accounting principles
                            (0.26 )
 
                             
 
                                       
Diluted earnings (loss) per share available to common stockholders
  $ 4.05     $ 0.76     $ 1.40     $ (6.51 )   $ 0.72  
 
                             
 
                                       
Financial Condition:
                                       
Total investments
  $ 44,096     $ 39,695     $ 39,231     $ 38,100     $ 35,293  
Total assets
    60,283       59,016       62,496       68,296       61,426  
Insurance reserves
    41,080       42,436       43,653       45,494       40,250  
Long and short term debt
    2,156       1,690       2,257       1,904       2,292  
Stockholders’ equity
    9,768       8,950       8,974       8,735       9,139  
 
                                       
Book value per share
  $ 36.03     $ 31.26     $ 31.63     $ 30.95     $ 37.51  
 
                                       
Statutory Surplus (preliminary):
                                       
Property and casualty companies (a)
  $ 8,137     $ 6,940     $ 6,998     $ 6,170     $ 6,836  
Life and group insurance company(ies)
    687       627       1,177       707       1,645  
 
(a)  
Surplus includes the property and casualty companies’ equity ownership of the life and group company(ies)’ capital and surplus.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with Item 1A. Risk Factors, Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data of this Form 10-K.
Index to this MD&A
Management’s discussion and analysis of financial condition and results of operations is comprised of the following sections:
     
    Page No.
Consolidated Operations
  19
Critical Accounting Estimates
  22
Reserves — Estimates and Uncertainties
  23
Reinsurance
  29
Terrorism Insurance
  30
Restructuring
  30
Segment Results
  30
Standard Lines
  30
Specialty Lines
  33
Life and Group Non-Core
  36
Corporate and Other Non-Core
  37
Asbestos and Environmental Pollution and Mass Tort (APMT) Reserves
  39
Investments
  45
Net Investment Income
  45
Net Realized Investment Gains (Losses)
  46
Valuation and Impairment of Investments
  49
Liquidity and Capital Resources
  53
Cash Flows
  53
Commitments, Contingencies, and Guarantees
  53
Off-Balance Sheet Arrangements
  54
Regulatory Matters
  54
Dividends from Subsidiaries
  55
Loews
  55
Ratings
  55
Accounting Pronouncements
  56
Forward-Looking Statements
  57

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CONSOLIDATED OPERATIONS
Results of Operations
The following table includes the consolidated results of our operations. For more detailed components of our business operations and the net operating income financial measure, see the segment discussions within this MD&A.
                         
Years ended December 31                  
(In millions, except per share data)   2006     2005     2004  
Revenues
                       
Net earned premiums
  $ 7,603     $ 7,569     $ 8,209  
Net investment income
    2,412       1,892       1,680  
Other revenues
    275       411       283  
 
                 
 
                       
Total operating revenues
    10,290       9,872       10,172  
 
                 
 
                       
Claims, Benefits and Expenses
                       
Net incurred claims and benefits
    6,025       6,975       6,434  
Policyholders’ dividends
    22       24       11  
Amortization of deferred acquisition costs
    1,534       1,543       1,680  
Other insurance related expenses
    757       829       972  
Restructuring and other related charges
    (13 )           (3 )
Other expenses
    401       329       326  
 
                 
 
                       
Total claims, benefits and expenses
    8,726       9,700       9,420  
 
                 
 
                       
Operating income from continuing operations before income tax and minority interest
    1,564       172       752  
Income tax (expense) benefit on operating income
    (450 )     105       (126 )
Minority interest
    (44 )     (24 )     (27 )
 
                 
 
                       
Net operating income from continuing operations
    1,070       253       599  
 
                       
Realized investment gains (losses), net of participating policyholders’ and minority interests
    86       (10 )     (248 )
Income tax (expense) benefit on realized investment gains (losses)
    (19 )           95  
 
                 
 
                       
Income from continuing operations
    1,137       243       446  
 
                       
Income (loss) from discontinued operations, net of income tax (expense) benefit of $7, $(2) and $(1)
    (29 )     21       (21 )
 
                 
 
                       
Net income
  $ 1,108     $ 264     $ 425  
 
                 
 
                       
Basic Earnings per Share
                       
 
                       
Income from continuing operations
  $ 4.17     $ 0.68     $ 1.49  
Income (loss) from discontinued operations
    (0.11 )     0.08       (0.09 )
 
                 
 
                       
Basic earnings per share available to common stockholders
  $ 4.06     $ 0.76     $ 1.40  
 
                 
 
                       
Diluted Earnings per Share
                       
 
                       
Income from continuing operations
  $ 4.16     $ 0.68     $ 1.49  
Income (loss) from discontinued operations
    (0.11 )     0.08       (0.09 )
 
                 
 
                       
Diluted earnings per share available to common stockholders
  $ 4.05     $ 0.76     $ 1.40  
 
                 
 
                       
Weighted Average Outstanding Common Stock and Common Stock Equivalents
                       
 
                       
Basic
    262.1       256.0       256.0  
 
                 
Diluted
    262.3       256.0       256.0  
 
                 

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2006 Compared with 2005
Net income increased $844 million in 2006 as compared with 2005. This increase was primarily due to increased net operating income and net realized investment results. These favorable impacts were partially offset by unfavorable results from discontinued operations. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income from continuing operations increased $817 million in 2006 as compared with 2005. Favorably impacting net operating income was increased net investment income and significantly decreased unfavorable net prior year development as discussed below. The 2005 results included a $334 million after-tax impact of catastrophes resulting from Hurricanes Katrina, Wilma, Rita, Dennis and Ophelia, net of anticipated reinsurance recoveries. Additionally, the 2005 results included a $115 million benefit related to a federal income tax settlement and release of federal income tax reserves.
Unfavorable net prior year development of $185 million was recorded in 2006, including $251 million of unfavorable claim and allocated claim adjustment expense reserve development and $66 million of favorable premium development. Unfavorable net prior year development of $807 million, including $945 million of unfavorable claim and allocated claim adjustment expense reserve development and $138 million of favorable premium development, was recorded in 2005. Further information on Net Prior Year Development for 2006 and 2005 is included in Note F of the Consolidated Financial Statements included under Item 8.
During 2006 and 2005, we commuted several significant reinsurance contracts that resulted in unfavorable development of $110 million and $433 million, which is included in the development above, and which were partially offset by the release of previously established allowance for uncollectible reinsurance. These commutations resulted in an unfavorable impact of $31 million after-tax and $259 million after-tax in 2006 and 2005. These contracts contained interest crediting provisions and maintenance charges. Interest charges associated with the reinsurance contracts commuted were $9 million after-tax and $55 million after-tax in 2006 and 2005. The 2005 amount includes the interest charges associated with the contract commuted in 2006. There will be no further interest crediting charges or other charges related to these commuted contracts in future periods.
Net earned premiums increased $34 million in 2006 as compared with 2005, including an $80 million increase related to the Specialty Lines segment and a $3 million increase related to the Standard Lines segment. Net earned premiums for the Life and Group Non-Core segment decreased $63 million. See the Segment Results section of this MD&A for further discussion.
Loss from discontinued operations was $29 million for the year ended December 31, 2006. Results in 2006 reflect a $29 million impairment loss on the anticipated sale of a portion of the run-off business. Further information on this impairment loss is included in Note Q of the Consolidated Financial Statements included under Item 8. Also, the 2006 results were impacted by an increase in unallocated loss adjustment expense reserves and bad debt provision for reinsurance receivables. These items were partially offset by the release of tax reserves and net investment income.
2005 Compared with 2004
Net income decreased $161 million in 2005 as compared with 2004, due to decreased net operating income partially offset by improved net investment results. See the Investments section of this MD&A for further discussion of net investment results.
Net operating income from continuing operations decreased $346 million in 2005 as compared with 2004. This decrease in net operating income was primarily driven by increased unfavorable net prior year development of $437 million after-tax which includes the impact of significant commutations in 2005 and 2004, decreased earned premiums, and increased catastrophe impacts in 2005. Partially offsetting these impacts were increased net investment income, a $115 million after-tax benefit related to a federal income tax settlement and release of federal income tax reserves, and lower insurance acquisition and operating expenses.
Unfavorable net prior year development of $807 million was recorded in 2005, including $945 million of unfavorable claim and allocated claim adjustment expense reserve development and $138 million of favorable premium development. Unfavorable net prior year development of $134 million, including $250 million of unfavorable claim and allocated claim adjustment expense reserve development and $116 million of favorable premium development, was recorded in 2004. Further information on Net Prior Year Development for 2005 and 2004 is included in Note F of the Consolidated Financial Statements included under Item 8.

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During 2005 and 2004, we commuted several significant reinsurance contracts that resulted in unfavorable development of $433 million and $76 million, which is included in the development above, and which was partially offset by the release of previously established allowance for uncollectible reinsurance. These commutations resulted in an unfavorable impact of $259 million after-tax and favorable impact of $18 million after-tax in 2005 and 2004. These contracts contained interest crediting provisions and maintenance charges. Interest charges associated with the reinsurance contracts commuted were $47 million after-tax and $86 million after-tax in 2005 and 2004. There will be no further interest crediting charges or other charges related to these commuted contracts in future periods.
Unfavorable net prior year development was also recorded related to our assumed reinsurance operations which are in run-off, workers’ compensation and excess workers’ compensation lines, primarily in accident years 2003 and prior, the architects and engineers book of business, pollution exposures and large directors and officers (D&O) claims.
The impact of catastrophes was $334 million after-tax and $196 million after-tax in 2005 and 2004. This increase was primarily due to 2005 catastrophe impacts resulting from Hurricanes Katrina, Wilma, Rita, Dennis and Ophelia and 2004 catastrophe impacts primarily resulting from Hurricanes Charley, Frances, Ivan and Jeanne. These impacts are net of anticipated reinsurance recoveries, and include the effect of reinstatement premiums and estimated insurance assessments.
Net realized investment results, after-tax, improved $143 million in 2005 as compared with 2004. Net results in 2004 included a loss on the sale of the individual life insurance business of $389 million after-tax, which was partly offset by the 2004 gain of $105 million after-tax on the sale of our investment in Canary Wharf Group PLC (Canary Wharf), a London-based real estate company.
Net earned premiums decreased $640 million in 2005 as compared with 2004. Net earned premiums from the core property and casualty operations decreased by $309 million, as discussed in more detail in the segment discussions below. The remainder of the decrease in earned premiums was primarily due to the sale of the individual life business on April 30, 2004, as well as decreased premiums from CNA Re which exited the reinsurance market in 2003.
Income from discontinued operations increased $42 million in 2005 as compared to 2004, primarily due to a decrease in unfavorable net prior year development, including the effects of commutations of assumed and ceded reinsurance, increased foreign exchange gains and improved investment results primarily related to realized investment gains.

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Critical Accounting Estimates
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the amounts of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates discussed below are considered by us to be critical to an understanding of our Consolidated Financial Statements as their application places the most significant demands on our judgment. Note A of the Consolidated Financial Statements included under Item 8 should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations and/or equity.
Insurance Reserves
Insurance reserves are established for both short and long-duration insurance contracts. Short-duration contracts are primarily related to property and casualty insurance policies where the reserving process is based on actuarial estimates of the amount of loss, including amounts for known and unknown claims. Long-duration contracts typically include traditional life insurance and long term care products and are estimated using actuarial estimates about mortality and morbidity, as well as assumptions about expected investment returns. The reserve for unearned premiums on property and casualty and accident and health contracts represents the portion of premiums written related to the unexpired terms of coverage. The inherent risks associated with the reserving process are discussed in the Reserves — Estimates and Uncertainties section below.
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported as receivables in the Consolidated Balance Sheets. The ceding of insurance does not discharge us of our primary liability under insurance contracts written by us. An exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities assumed under reinsurance agreements. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, our past experience and current economic conditions.
Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses, as compared to deposit accounting, which requires cash flows to be reflected as assets and liabilities. To qualify for reinsurance accounting, reinsurance agreements must include risk transfer. Considerable judgment by management may be necessary to determine if risk transfer requirements are met. We believe we have appropriately applied reinsurance accounting principles in our evaluation of risk transfer. However, our evaluation of risk transfer and the resulting accounting could be challenged in connection with regulatory reviews or possible changes in accounting and/or financial reporting rules related to reinsurance, which could materially adversely affect our results of operations and/or equity. Further information on our reinsurance program is included in the Reinsurance section below and Note H of the Consolidated Financial Statements included under Item 8.

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Valuation of Investments and Impairment of Securities
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term could have an adverse material impact on our results of operations or equity.
Our investment portfolio is subject to market declines below book value that may be other-than-temporary. We have an Impairment Committee, which reviews the investment portfolio on a quarterly basis, with ongoing analysis as new information becomes available. Any decline that is determined to be other-than-temporary is recorded as an other-than-temporary impairment loss in the results of operations in the period in which the determination occurred. Further information on our process for evaluating impairments is included in Note B of the Consolidated Financial Statements included under Item 8.
Long Term Care Products
Reserves and deferred acquisition costs for our long term care products are based on certain assumptions including morbidity, policy persistency and interest rates. The recoverability of deferred acquisition costs and the adequacy of the reserves are contingent on actual experience related to these key assumptions and other factors such as future health care cost trends. If actual experience differs from these assumptions, the deferred acquisition costs may not be fully recovered and the reserves may not be adequate, requiring us to add to reserves, or take unfavorable development. Therefore, our financial results could be adversely impacted.
Pension and Postretirement Benefit Obligations
We make a significant number of assumptions in estimating the liabilities and costs related to our pension and postretirement benefit obligations to employees under our benefit plans. The assumptions that most impact these costs are the discount rate, the expected return on plan assets and the rate of compensation increases. These assumptions are evaluated relative to current market factors such as inflation, interest rates and fiscal and monetary policies. Changes in these assumptions can have a material impact on pension obligations and pension expense.
In determining the discount rate assumption, we utilized current market information, including a discounted cash flow analysis of our pension and postretirement obligations and general movements in the current market environment. In particular, the basis for our discount rate selection was fixed income debt securities that receive one of the two highest ratings given by a recognized rating agency. In 2006 and historically, the Moody’s Aa Corporate Bond Index was the benchmark for discount rate selection. The index is used as the basis for the change in discount rate from the last measurement date. Additionally, we have supplemented our discount rate decision with a yield curve analysis. The yield curve was applied to expected future retirement plan payments to adjust the discount rate to reflect the cash flow characteristics of the plans. The yield curve is a hypothetical double A yield curve represented by a series of annualized discount rates reflecting bond issues having a rating of Aa or better by Moody’s Investors Service, Inc. or a rating of AA or better by Standard & Poor’s. Based on all available information, it was determined that 5.750% and 5.625% were the appropriate discount rates as of December 31, 2006 to calculate our accrued pension and postretirement liabilities, respectively. Accordingly, the 5.750% and 5.625% rates will also be used to determine our 2007 pension and postretirement expense. At December 31, 2005, the discount rates used to calculate our accrued pension and postretirement liabilities were 5.625% and 5.500% respectively.
Further information on our pension and postretirement benefit obligations is included in Note J of the Consolidated Financial Statements included under Item 8.
Legal Proceedings
We are involved in various legal proceedings that have arisen during the ordinary course of business. We evaluate the facts and circumstances of each situation, and when we determine it is necessary, a liability is estimated and recorded. Further information on our legal proceedings and related contingent liabilities is provided in Notes F and G of the Consolidated Financial Statements included under Item 8.
Reserves - Estimates and Uncertainties
We maintain reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled

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(case reserves) and claims that have been incurred but not reported (IBNR). Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Balance Sheets under the heading “Insurance Reserves.” Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. The carried case and IBNR reserves are provided in the Segment Results section of this MD&A and in Note F of the Consolidated Financial Statements included under Item 8.
The level of reserves we maintain represents our best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that we derive, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain.
Our experience has been that establishing reserves for casualty coverages relating to asbestos, environmental pollution and mass tort (APMT) claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others:
 
coverage issues, including whether certain costs are covered under the policies and whether policy limits apply;
 
inconsistent court decisions and developing legal theories;
 
continuing aggressive tactics of plaintiffs’ lawyers;
 
the risks and lack of predictability inherent in major litigation;
 
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.
It is also not possible to predict changes in the legal and legislative environment and the impact on the future development of APMT claims. This development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. It is difficult to predict the ultimate outcome of large coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. A further uncertainty exists as to whether a national privately financed trust to replace litigation of asbestos claims with payments to claimants from the trust will be established and approved through federal legislation, and, if established and approved, whether it will contain funding requirements in excess of our carried loss reserves.
Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment reserves for APMT, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimation techniques and methodologies, many of which involve significant judgments that are required of management. For APMT, we regularly monitor our exposures, including reviews of loss activity, regulatory developments and court rulings. In addition, we perform a comprehensive ground up analysis on our exposures annually. Our actuaries, in conjunction with our specialized claim unit, use various modeling techniques to estimate our overall exposure to known accounts. We use this information and additional modeling techniques to develop loss distributions and claim reporting patterns to determine reserves for accounts that will report APMT exposure in the future. Estimating the average claim size requires analysis of the impact of large losses and claim cost trend based on changes in the cost of repairing or replacing property, changes in the cost of legal fees, judicial decisions, legislative changes, and other factors. Due to the inherent uncertainties in estimating reserves for APMT claim and claim adjustment expenses and the degree of variability due to, among other things, the factors described above, we may be required to record material changes in our claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge.

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See the APMT Reserves section of this MD&A and Note F of the Consolidated Financial Statements included under Item 8 for additional information relating to APMT claims and reserves.
In addition, we are subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social and other environmental conditions change. These issues have had, and may continue to have, a negative effect on our business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Examples of emerging or potential claims and coverage issues include:
 
increases in the number and size of claims relating to injuries from medical products;
 
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;
 
clergy abuse claims, including passage of legislation to reopen or extend various statutes of limitations; and
 
mass tort claims, including bodily injury claims related to silica, welding rods, benzene, lead and various other chemical exposure claims.
The impact of these and other unforeseen emerging or potential claims and coverage issues is difficult to predict and could materially adversely affect the adequacy of our claim and claim adjustment expense reserves and could lead to future reserve additions. See the Segment Results sections of this MD&A and Note F of the Consolidated Financial Statements included under Item 8 for a discussion of changes in reserve estimates and the impact on our results of operations.
Establishing Reserve Estimates
In developing claim and claim adjustment expense (“loss” or “losses”) reserve estimates, our actuaries perform detailed reserve analyses that are staggered throughout the year. The data is organized at a “product” level. A product can be a line of business covering a subset of insureds such as commercial automobile liability for small and middle market customers, it can encompass several lines of business provided to a specific set of customers such as dentists, or it can be a particular type of claim such as construction defect. Every product is analyzed at least once during the year, and many products are analyzed multiple times. The analyses generally review losses gross of ceded reinsurance and apply the ceded reinsurance terms to the gross estimates to establish estimates net of reinsurance. In addition to the detailed analyses, we review actual loss emergence for all products each quarter.
The detailed analyses use a variety of generally accepted actuarial methods and techniques to produce a number of estimates of ultimate loss. We determine a point estimate of ultimate loss by reviewing the various estimates and assigning weight to each estimate given the characteristics of the product being reviewed. The reserve estimate is the difference between the estimated ultimate loss and the losses paid to date. The difference between the estimated ultimate loss and the case incurred loss (paid loss plus case reserve) is IBNR. IBNR calculated as such includes a provision for development on known cases (supplemental development) as well as a provision for claims that have occurred but have not yet been reported (pure IBNR).
Most of our business can be characterized as long-tail. For long tail business, it will generally be several years between the time the business is written and the time when all claims are settled. Our long-tail exposures include commercial automobile liability, workers’ compensation, general liability, medical malpractice, other professional liability coverages, assumed reinsurance run-off and products liability. Short-tail exposures include property, commercial automobile physical damage, marine and warranty. Each of our property/casualty segments, Standard Lines, Specialty Lines and Corporate and Other Non-Core, contain both long-tail and short-tail exposures.
The methods used to project ultimate loss for both long-tail and short-tail exposures include, but are not limited to, the following:
 
Paid Development,
 
Incurred Development,

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Loss Ratio,
 
Bornhuetter-Ferguson Using Premiums and Paid Loss,
 
Bornhuetter-Ferguson Using Premiums and Incurred Loss, and
 
Average Loss.
The paid development method estimates ultimate losses by reviewing paid loss patterns and applying them to accident years with further expected changes in paid loss. Selection of the paid loss pattern requires analysis of several factors including the impact of inflation on claims costs, the rate at which claims professionals make claim payments and close claims, the impact of judicial decisions, the impact of underwriting changes, the impact of large claim payments and other factors. Claim cost inflation itself requires evaluation of changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors. Because this method assumes that losses are paid at a consistent rate, changes in any of these factors can impact the results. Since the method does not rely on case reserves, it is not directly influenced by changes in the adequacy of case reserves.
For many products, paid loss data for recent periods may be too immature or erratic for accurate predictions. This situation often exists for long-tail exposures. In addition, changes in the factors described above may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most mature point available in the data analyzed often involves considerable uncertainty for long-tail products such as workers’ compensation.
The incurred development method is similar to the paid development method, but it uses case incurred losses instead of paid losses. Since the method uses more data (case reserves in addition to paid losses) than the paid development method, the incurred development patterns may be less variable than paid patterns. However, selection of the incurred loss pattern requires analysis of all of the factors above. In addition, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place, and the use of case incurred losses may not eliminate the issues associated with estimating the incurred loss pattern subsequent to the most mature point available.
The loss ratio method multiplies premiums by an expected loss ratio to produce ultimate loss estimates for each accident year. This method may be useful if loss development patterns are inconsistent, losses emerge very slowly, or there is relatively little loss history from which to estimate future losses. The selection of the expected loss ratio requires analysis of loss ratios from earlier accident years or pricing studies and analysis of inflationary trends, frequency trends, rate changes, underwriting changes, and other applicable factors.
The Bornhuetter-Ferguson using premiums and paid loss method is a combination of the paid development approach and the loss ratio approach. The method normally determines expected loss ratios similar to the approach used to estimate the expected loss ratio for the loss ratio method and requires analysis of the same factors described above. The method assumes that only future losses will develop at the expected loss ratio level. The percent of paid loss to ultimate loss implied from the paid development method is used to determine what percentage of ultimate loss is yet to be paid. The use of the pattern from the paid development method requires consideration of all factors listed in the description of the paid development method. The estimate of losses yet to be paid is added to current paid losses to estimate the ultimate loss for each year. This method will react very slowly if actual ultimate loss ratios are different from expectations due to changes not accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson using premiums and incurred loss method is similar to the Bornhuetter-Ferguson using premiums and paid loss method except that it uses case incurred losses. The use of case incurred losses instead of paid losses can result in development patterns that are less variable than paid patterns. However, the inclusion of case reserves can lead to distortions if changes in case reserving have taken place, and the method requires analysis of all the factors that need to be reviewed for the loss ratio and incurred development methods.
The average loss method multiplies a projected number of ultimate claims by an estimated ultimate average loss for each accident year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for products where loss development patterns are inconsistent or too variable to be relied on exclusively. In addition, this method can more directly account for changes in coverage that impact the number and size of claims. However, this method can be difficult to apply to situations where very large claims or a substantial number of unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims requires analysis of several factors including the rate

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at which policyholders report claims to us, the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating the ultimate average loss requires analysis of the impact of large losses and claim cost trend based on changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors.
For other more complex products where the above methods may not produce reliable indications, we use additional methods tailored to the characteristics of the specific situation. Such products include construction defect losses and APMT.
For construction defect losses, our actuaries organize losses by report year. Report year groups claims by the year in which they were reported. To estimate losses from claims that have not been reported, various extrapolation techniques are applied to the pattern of claims that have been reported to estimate the number of claims yet to be reported. This process requires analysis of several factors including the rate at which policyholders report claims to us, the impact of judicial decisions, the impact of underwriting changes and other factors. An average claim size is determined from past experience and applied to the number of unreported claims to estimate reserves for these claims.
For many exposures, especially those that can be considered long-tail, a particular accident year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, our actuaries typically assign more weight to the incurred development method than to the paid development method. As claims continue to settle and the volume of paid loss increases, the actuaries may assign additional weight to the paid development method. For most of our products, even the incurred losses for accident years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, we will not assign any weight to the paid and incurred development methods. We will use loss ratio, Bornhuetter-Ferguson and average loss methods. For short-tail exposures, the paid and incurred development methods can often be relied on sooner primarily because our history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, we may also use loss ratio, Bornhuetter-Ferguson and average loss methods for short-tail exposures.
Periodic Reserve Reviews
The reserve analyses performed by our actuaries result in point estimates. Each quarter, the results of the detailed reserve reviews are summarized and discussed with our senior management to determine the best estimate of reserves. This group considers many factors in making this decision. The factors include, but are not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.
Our recorded reserves reflect our best estimate as of a particular point in time based upon known facts, current law and our judgment. The carried reserve may differ from the actuarial point estimate as the result of our consideration of the factors noted above as well as the potential volatility of the projections associated with the specific product being analyzed and other factors impacting claims costs that may not be quantifiable through actuarial analysis. This process results in management’s best estimate which is then recorded as the loss reserve.
Currently, our reserves are slightly higher than the actuarial point estimate. We do not establish a specific provision for uncertainty. For Standard and Specialty Lines, the difference between our reserves and the actuarial point estimate is due to the two most recent complete accident years. The claim data from these accident years is very immature. We believe it is prudent to wait until actual experience confirms that the loss reserves should be adjusted. For Corporate and Other Non-Core, the carried reserve is slightly higher than the actuarial point estimate. While the actuarial estimates for APMT exposures reflect current knowledge, we feel it is prudent, based on the history of developments in this area, to reflect some margin in the carried reserve until the ultimate outcome of the issues associated with these exposures is clearer.
The key assumptions fundamental to the reserving process are often different for various products and accident years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the paid development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims.

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As a result, the effect on reserve estimates of a particular change in assumptions usually cannot be specifically quantified, and changes in these assumptions cannot be tracked over time.
Our recorded reserves are management’s best estimate. In order to provide an indication of the variability associated with our net reserves, the following discussion provides a sensitivity analysis that shows the approximate estimated impact of variations in the most significant factor affecting our reserve estimates for particular types of business. These significant factors are the ones that could most likely materially impact the reserves. This discussion covers the major types of business for which we believe a material deviation to our reserves is reasonably possible. There can be no assurance that actual experience will be consistent with the current assumptions or with the variation indicated by the discussion. In addition, there can be no assurance that other factors and assumptions will not have a material impact on our reserves.
Within Standard Lines, the two types of business for which we believe a material deviation to our net reserves is reasonably possible are workers’ compensation and general liability.
For Standard Lines workers’ compensation, since many years will pass from the time the business is written until all claim payments have been made, claim cost inflation on claim payments is the most significant factor affecting workers’ compensation reserve estimates. Workers’ compensation claim cost inflation is driven by the cost of medical care, the cost of wage replacement, expected claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated workers’ compensation claim cost inflation increases by one point for the entire period over which claim payments will be made, we estimate that our net reserves would increase by approximately $500 million. If estimated workers’ compensation claim cost inflation decreases by one point for the entire period over which claim payments will be made, we estimate that our net reserves would decrease by approximately $450 million. Our net reserves for Standard Lines workers’ compensation were approximately $4.4 billion at December 31, 2006.
For Standard Lines general liability, the predominant method used for estimating reserves is the incurred development method. Changes in the cost to repair or replace property, the cost of medical care, the cost of wage replacement, judicial decisions, legislation and other factors all impact the pattern selected in this method. The pattern selected results in the incurred development factor that estimates future changes in case incurred loss. If the estimated incurred development factor for general liability increases by 15%, we estimate that our net reserves would increase by approximately $370 million. If the estimated incurred development factor for general liability decreases by 13%, we estimate that our net reserves would decrease by approximately $320 million. Our net reserves for Standard Lines general liability were approximately $4.0 billion at December 31, 2006.
Within Specialty Lines, we believe a material deviation to our net reserves is reasonably possible for the US Specialty Lines group. This group provides professional liability coverages to various professional firms, including architects, realtors, small and mid-sized accounting firms, law firms and technology firms. US Specialty Lines also provide D&O, employment practices, fiduciary and fidelity coverages. US Specialty Lines also offers insurance products to serve the healthcare delivery system. The most significant factor affecting US Specialty Lines reserve estimates is claim severity. Claim severity for US Specialty Lines is driven by the cost of medical care, the cost of wage replacement, legal fees, judicial decisions, legislation and other factors. Underwriting and claim handling decisions such as the classes of business written and individual claim settlement decisions can also impact claim severity. If the estimated claim severity for US Specialty Lines increases by 7%, we estimate that US Specialty Lines net reserves would increase by approximately $270 million. If the estimated claim severity for US Specialty Lines decreases by 3%, we estimate that US Specialty net reserves would decrease by approximately $110 million. Our net reserves for US Specialty Lines were approximately $3.9 billion at December 31, 2006.
Within Corporate and Other Non-Core, the two types of business for which we believe a material deviation to our net reserves is reasonably possible are CNA Re and APMT.
For CNA Re, the predominant method used for estimating reserves is the incurred development method. Changes in the cost to repair or replace property, the cost of medical care, the cost of wage replacement, the rate at which ceding companies report claims, judicial decisions, legislation and other factors all impact the incurred development pattern for CNA Re. The pattern selected results in the incurred development factor that estimates future changes in case incurred loss. If the estimated incurred development factor for CNA Re increases by 21%, we estimate that our net reserves for CNA Re would increase by approximately $150 million. If the estimated incurred development factor for CNA Re decreases by 21%, we estimate that our net reserves would decrease by approximately $150 million. Our net reserves for CNA Re were approximately $1.2 billion at December 31, 2006.

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For APMT, the most significant factor affecting reserve estimates is overall account size trend. Overall account size trend for APMT reflects the combined impact of economic trends (inflation), changes in the types of defendants involved, the expected mix of asbestos disease types, judicial decisions, legislation and other factors. If the estimated overall account size trend for APMT increases by 4 points, we estimate that our APMT net reserves would increase by approximately $700 million. If the estimated overall account size trend for APMT decreases by 4 points, we estimate that our APMT net reserves would decrease by approximately $400 million. Our net reserves for APMT were approximately $1.9 billion at December 31, 2006.
Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, we regularly review the adequacy of our reserves and reassess our reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods.
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, we review our reserve estimates on a regular basis and make adjustments in the period that the need for such adjustments is determined. These reviews have resulted in our identification of information and trends that have caused us to increase our reserves in prior periods and could lead to the identification of a need for additional material increases in claim and claim adjustment expense reserves, which could materially adversely affect our results of operations, equity, business and insurer financial strength and debt ratings. See the Ratings section of this MD&A for further information regarding our financial strength and debt ratings.
Reinsurance
Due to significant catastrophes during 2005, the cost of our catastrophe reinsurance program has increased. Our catastrophe reinsurance protection cost us premiums of approximately $64 million in 2005, including reinstatement premiums and cost us approximately $79 million in 2006, which did not include any reinstatement premiums. During 2007, our catastrophe reinsurance program will cost us $89 million before the impact of any reinstatement premiums.
The terms of our 2007 catastrophe programs are different than those of our 2006 programs. The Corporate Property Catastrophe treaty provides coverage for the accumulation of losses between $300 million and $1 billion arising out of a single catastrophe occurrence in the United States, its territories and possessions, and Canada. Our co-participation is 50% of the first $100 million layer and 10% of the remaining layer. In addition, we previously purchased an aggregate property catastrophe treaty to obtain reinsurance protection against the aggregation of losses from multiple catastrophic events. We did not purchase an aggregate property catastrophe treaty for 2007.
In certain circumstances, including significant deterioration of a reinsurer’s financial strength ratings, we may engage in commutation discussions with individual reinsurers. The outcome of such discussions may result in a lump sum settlement that is less than the recorded receivable, net of any applicable allowance for doubtful accounts. Losses arising from commutations could have an adverse material impact on our results of operations.
In 2001, we entered into a one-year corporate aggregate reinsurance treaty related to the 2001 accident year covering substantially all property and casualty lines of business in the Continental Casualty Company pool (the CCC Cover). The CCC Cover was fully utilized in 2003. In 2006, we commuted our CCC Cover. This commutation had no impact on the Consolidated Statements of Operations for the year ended December 31, 2006.
Also, in 2006, we commuted several reinsurance treaties, including several finite treaties, with a European reinsurance group. This commutation resulted in a pretax loss, net of allowance for uncollectible reinsurance, of $48 million. We received $35 million of cash in connection with this significant commutation.
As of December 31, 2006 and 2005, there were one and thirteen ceded reinsurance treaties inforce respectively that we consider to be finite reinsurance. In 2003, we discontinued purchases of such contracts. The remaining treaty at December 31, 2006 provides reinsurance protection for the 1999 accident year on specified portions of our domestic property and casualty business and is fully utilized. Therefore, we do not expect to cede any additional losses under finite reinsurance contracts in future periods nor incur interest costs.
Further information on our reinsurance program is included in Note H of the Consolidated Financial Statements included under Item 8.

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Terrorism Insurance
We and the insurance industry incurred substantial losses related to the 2001 World Trade Center event. The Terrorism Risk Insurance Act of 2002 (TRIA) established a program within the Department of the Treasury under which insurers are required to offer terrorism insurance and the federal government will share the risk of loss by commercial property and casualty insurers arising from future terrorist attacks. Although TRIA expired on December 31, 2005, the Terrorism Risk Insurance Extension Act of 2005 (TRIEA) extended this program through December 31, 2007 with changes such as the lines of business covered, the deductible amount that must be paid by the insurance company and the aggregate industry loss prior to federal government assistance becoming available.
While TRIEA provides the property and casualty industry with an increased ability to withstand the effect of a terrorist event through 2007, given the unpredictability of the nature, targets, severity or frequency of potential terrorist events, our results of operations or equity could nevertheless be materially adversely impacted by them. We are attempting to mitigate this exposure through our underwriting practices, as well as policy terms and conditions (where applicable). Under the laws of certain states, we are generally prohibited from excluding terrorism exposure from our primary workers’ compensation policies. Further, in those states that mandate property insurance coverage of damage from fire following a loss, we are prohibited from excluding terrorism exposure.
Over the past several years, we have been underwriting our business to manage our terrorism exposure through strict underwriting standards, risk avoidance measures and conditional terrorism exclusions where permitted by law. There is substantial uncertainty as to our ability to effectively contain our terrorism exposure since, notwithstanding our efforts described above, we continue to issue forms of coverage, in particular, workers’ compensation, that are exposed to risk of loss from a terrorism event.
Restructuring
In 2001, we finalized and approved a plan related to restructuring the property and casualty segments and Life and Group Non-Core segment, discontinuation of the variable life and annuity business and consolidation of real estate locations. During 2006, we reevaluated the sufficiency of the remaining accrual, which related to lease termination costs, and determined that the liability is no longer required as we have completed our lease obligations. As a result, the excess remaining accrual was released in 2006, resulting in income of $8 million after-tax for the year ended December 31, 2006.
Further information on the restructuring plan is included in Note O of the Consolidated Financial Statements included under Item 8.
SEGMENT RESULTS
The following discusses the results of continuing operations for our operating segments. We utilize the net operating income financial measure to monitor our operations. Net operating income is calculated by excluding from net income the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) cumulative effects of changes in accounting principles. See further discussion regarding how we manage our business in Note N of the Consolidated Financial Statements included under Item 8. In evaluating the results of the Standard Lines and Specialty Lines, we utilize the combined ratio, the loss ratio, the expense ratio and the dividend ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.
STANDARD LINES
Business Overview
Standard Lines works with an independent agency distribution system and network of brokers to market a broad range of property and casualty insurance products and services to small, middle-market and large businesses

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domestically and abroad. The Standard Lines operating model focuses on underwriting performance, relationships with selected distribution sources and understanding customer needs.
Standard Lines includes Property, Casualty and CNA Global.
Property provides standard and excess property coverage, as well as marine coverage and boiler and machinery to a wide range of businesses.
Casualty provides standard casualty insurance products such as workers’ compensation, general and product liability and commercial auto coverage through traditional products to a wide range of businesses. Most insurance programs are provided on a guaranteed cost basis; however, Casualty has the capability to offer specialized, loss-sensitive insurance programs to those customers viewed as higher risk and less predictable in exposure.
Excess & Surplus (E&S) is included in Casualty. E&S provides specialized insurance and other financial products for selected commercial risks on both an individual customer and program basis. Customers insured by E&S are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. E&S’s products are distributed throughout the United States through specialist producers, program agents and Property and Casualty’s agents and brokers.
Property and Casualty’s (P&C) field structure consists of 33 branch locations across the country organized into 4 regions. Each branch provides the marketing, underwriting and risk control expertise on the entire portfolio of products. The Centralized Processing Operation for small and middle-market customers, located in Maitland, Florida, handles policy processing and accounting, and also acts as a call center to optimize customer service. The claims structure consists of a centralized claim center designed to efficiently handle property damage and medical only claims and 18 claim office locations around the country handling the more complex claims. Also, Standard Lines provides total risk management services relating to claim and information services to the large commercial insurance marketplace, through a wholly-owned subsidiary, ClaimsPlus, Inc., a third party administrator.
CNA Global consists of subsidiaries operating in Europe, Latin America, Canada and Hawaii. These affiliates offer property and casualty insurance to small and medium size businesses and capitalize on strategic indigenous opportunities.
The following table details results of operations for Standard Lines.
Results of Operations
                         
Years ended December 31   2006     2005     2004  
(In millions)                        
Net written premiums
  $ 4,433     $ 4,382     $ 4,582  
Net earned premiums
    4,413       4,410       4,917  
Net investment income
    991       767       496  
Net operating income (loss)
    617       (41 )     220  
Net realized investment gains, after-tax
    55       9       139  
Net income (loss)
    672       (32 )     359  
 
                       
Ratios
                       
Loss and loss adjustment expense
    70.1 %     87.5 %     70.8 %
Expense
    31.1       32.4       34.6  
Dividend
    0.4       0.4       0.2  
 
                 
 
                       
Combined
    101.6 %     120.3 %     105.6 %
 
                 
2006 Compared with 2005
Net written premiums for Standard Lines increased $51 million in 2006 as compared with 2005. This increase was primarily driven by favorable new business, rate and retention in the Property lines of business. Net earned premiums increased $3 million in 2006 as compared with 2005. Net earned premiums were impacted by decreased favorable premium development in 2006 as compared to 2005, as discussed below. We continue to focus on portfolio optimization.

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Standard Lines averaged flat rates for 2006, as compared to average rate decreases of 1% for 2005 for the contracts that renewed during those periods. Retention rates of 81% and 77% were achieved for those contracts that were up for renewal in each period.
Net results increased $704 million in 2006 as compared with 2005. This increase was attributable to increases in net operating results and net realized investment gains. See the Investments section of this MD&A for further discussion of net investment income and net realized investment gains.
Net operating results increased $658 million in 2006 as compared with 2005. This increase was primarily driven by significantly reduced catastrophe losses in 2006, an increase in net investment income and a decrease in unfavorable net prior year development as discussed below. The 2006 net operating results included catastrophe impacts of $31 million after-tax. The 2005 net operating results included catastrophe impacts of $318 million after-tax related to Hurricanes Katrina, Wilma, Rita, Dennis and Ophelia, net of reinsurance recoveries.
The combined ratio improved 18.7 points in 2006 as compared with 2005. The loss ratio improved 17.4 points due to decreased unfavorable net prior year development as discussed below and decreased catastrophe losses in 2006. The 2006 and 2005 loss ratios included 1.3 and 11.1 points related to the impact of catastrophes.
The expense ratio improved 1.3 points in 2006 as compared with 2005. This improvement was primarily due to a decrease in the provision for insurance bad debt. In addition, the 2005 ratio included increased ceded commissions as a result of an unfavorable arbitration ruling related to two reinsurance treaties. Changes in estimates for premium taxes partially offset these favorable impacts.
Unfavorable net prior year development of $69 million was recorded in 2006, including $157 million of unfavorable claim and allocated claim adjustment expense reserve development and $88 million of favorable premium development. Unfavorable net prior year development of $452 million, including $559 million of unfavorable claim and allocated claim adjustment expense reserve development and $107 million of favorable premium development, was recorded in 2005. Further information on Standard Lines Net Prior Year Development for 2006 and 2005 is included in Note F of the Consolidated Financial Statements included under Item 8.
During 2006 and 2005, we commuted several significant reinsurance contracts that resulted in unfavorable development of $110 million and $285 million, which is included in the development above, and which was partially offset by the release of previously established allowance for uncollectible reinsurance. These commutations resulted in an unfavorable after-tax impact of $31 million and $173 million in 2006 and 2005. Several of the commuted contracts contained interest crediting provisions. The interest charges associated with the reinsurance contracts commuted were $9 million after-tax and $35 million after-tax in 2006 and 2005. The 2005 amount includes the interest charges associated with the contract commuted in 2006. There will be no further interest crediting charges related to these commuted contracts in future periods.
The following table summarizes the gross and net carried reserves as of December 31, 2006 and 2005 for Standard Lines.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2006     2005  
(In millions)                
Gross Case Reserves
  $ 6,746     $ 7,033  
Gross IBNR Reserves
    8,188       8,051  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 14,934     $ 15,084  
 
           
Net Case Reserves
  $ 5,234     $ 5,165  
Net IBNR Reserves
    6,632       6,081  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 11,866     $ 11,246  
 
           
2005 Compared with 2004
Net written premiums for Standard Lines decreased $200 million in 2005 as compared with 2004. This decrease was primarily driven by decreased premium writings in our casualty lines of business, increased reinstatement

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premium in 2005 related to catastrophe losses and decreased rates as discussed further below. Net earned premiums decreased $507 million in 2005 as compared with 2004. This decrease was primarily driven by the decline in premiums written. The lower premium is consistent with our strategy of portfolio optimization. Our priority is a diversified portfolio in profitable classes of business.
Standard Lines averaged rate decreases of 1% for 2005, as compared to average rate increases of 4% for 2004 for the contracts that renewed during those periods. Retention rates of 77% and 70% were achieved for those contracts that were up for renewal in each period.
Net results decreased $391 million in 2005 as compared with 2004. This decrease was attributable to declines in both net operating results and net realized investment results. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating results decreased $261 million in 2005 as compared with 2004. This decrease was due primarily to increased unfavorable net prior year development of $282 million after-tax including $185 million after-tax related to significant commutations in 2005, a $135 million after-tax increase in catastrophe losses, the decreased earned premium as discussed above and decreased current accident year results. These unfavorable items were partially offset by a $271 million increase in net investment income and a decrease in the provision for insurance bad debt.
Unfavorable net prior year development of $452 million was recorded in 2005, including $559 million of unfavorable claim and allocated claim adjustment expense reserve development and $107 million of favorable premium development. Unfavorable net prior year development of $18 million, including $115 million of unfavorable claim and allocated claim adjustment expense reserve development and $97 million of favorable premium development, was recorded in 2004. Further information on Standard Lines Net Prior Year Development for 2005 and 2004 is included in Note F of the Consolidated Financial Statements included under Item 8.
During 2005 and 2004, we commuted several significant reinsurance contracts that resulted in unfavorable development of $285 million and $5 million, which is included in the development above, and which was partially offset by the release of previously established allowance for uncollectible reinsurance. These commutations resulted in an unfavorable impact of $173 million after-tax and favorable impact of $4 million after-tax in 2005 and 2004. These contracts contained interest crediting provisions. The interest charges associated with the reinsurance contracts commuted were $42 million and $110 million in 2005 and 2004. There will be no further interest crediting charges related to these commuted contracts in future periods.
The impact of catastrophes was $318 million after-tax and $183 million after-tax for 2005 and 2004, net of anticipated reinsurance recoveries.
The combined ratio increased 14.7 points in 2005 as compared with 2004. The loss ratio increased 16.7 points in 2005 as compared with 2004. These increases were primarily due to increased net prior year development, increased catastrophe losses and decreased current accident year results. Catastrophe losses of $470 million and $260 million were recorded in 2005 and 2004.
The expense ratio improved 2.2 points in 2005 as compared with 2004. This improvement was primarily due to a decrease in the provision for insurance bad debt.
The dividend ratio increased 0.2 points in 2005 as compared with 2004. The 2004 ratio was impacted by favorable dividend development, partially offset by decreased participation in dividend plans and lower dividend amounts related to the current accident year.
SPECIALTY LINES
Business Overview
Specialty Lines provides professional, financial and specialty property and casualty products and services through a network of brokers, managing general underwriters and independent agencies. Specialty Lines provides solutions for managing the risks of its clients, including architects, lawyers, accountants, healthcare professionals, financial intermediaries and public and private corporations. Product offerings also include surety and fidelity bonds and vehicle and equipment warranty services.
Specialty Lines includes the following business groups: US Specialty Lines, Surety and Warranty.

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US Specialty Lines provides management and professional liability insurance and risk management services, primarily in the United States. This group provides professional liability coverages to various professional firms, including architects, realtors, small and mid-sized accounting firms, law firms and technology firms. US Specialty Lines also provides directors and officers (D&O), employment practices, fiduciary and fidelity coverages. Specific areas of focus include small and mid-size firms as well as privately held firms and not-for-profit organizations where tailored products for this client segment are offered. Products within US Specialty Lines are distributed through brokers, agents and managing general underwriters.
US Specialty Lines, through CNA HealthPro, also offers insurance products to serve the healthcare delivery system. Products, which include professional liability as well as associated standard property and casualty coverages, are distributed on a national basis through a variety of channels including brokers, agents and managing general underwriters. Key customer segments include long term care facilities, allied healthcare providers, life sciences, dental professionals and mid-size and large healthcare facilities and delivery systems.
Surety consists primarily of CNA Surety and its insurance subsidiaries and offers small, medium and large contract and commercial surety bonds. CNA Surety provides surety and fidelity bonds in all 50 states through a combined network of independent agencies. CNA owns approximately 63% of CNA Surety.
Warranty provides vehicle warranty service contracts that protect individuals and businesses from the financial burden associated with mechanical breakdown or maintenance.
The following table details results of operations for Specialty Lines.
Results of Operations
                         
Years ended December 31   2006     2005     2004  
(In millions)                        
Net written premiums
  $ 2,596     $ 2,463     $ 2,391  
Net earned premiums
    2,555       2,475       2,277  
Net investment income
    403       281       246  
Net operating income
    464       336       324  
Net realized investment gains, after-tax
    18       12       54  
Net income
    482       348       378  
 
                       
Ratios
                       
Loss and loss adjustment expense
    60.5 %     65.3 %     63.3 %
Expense
    26.7       26.1       26.1  
Dividend
    0.2       0.2       0.2  
 
                 
 
                       
Combined
    87.4 %     91.6 %     89.6 %
 
                 
2006 Compared with 2005
Net written premiums for Specialty Lines increased $133 million in 2006 as compared with 2005. This increase was primarily due to improved production across certain lines of business. Net earned premiums increased $80 million in 2006 as compared with 2005, consistent with the increased premium written.
Specialty Lines averaged flat rates for 2006, as compared to average rate increases of 1% for 2005 for the contracts that renewed during those periods. Retention rates of 87% and 86% were achieved for those contracts that were up for renewal in each period.
Net income increased $134 million in 2006 as compared with 2005. This increase was attributable to increases in net operating income and realized investment gains. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income increased $128 million in 2006 as compared with 2005. This improvement was primarily driven by an increase in net investment income, a decrease in net prior year development as discussed below and reduced catastrophe impacts in 2006. Catastrophe impacts were $1 million after-tax for the year ended December 31, 2006, as compared to $16 million after-tax for the year ended December 31, 2005. Also, the 2005 results included a $59 million loss, after the impact of taxes and minority interests, in the surety line of business related to a large national contractor. Further information related to the large national contractor is included in Note S of the Consolidated Financial Statements included under Item 8.

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The combined ratio improved 4.2 points in 2006 as compared with 2005. The loss ratio improved 4.8 points, due to improved current accident year impacts and decreased net prior year development as discussed below. The 2005 loss ratio was unfavorably impacted by surety losses of $110 million, before the impacts of minority interest, related to a national contractor as discussed above. Partially offsetting this favorable impact was less favorable current accident year loss ratios across several other lines of business in 2006.
Unfavorable net prior year development of $15 million was recorded in 2006, including $10 million of favorable claim and allocated claim adjustment expense reserve development and $25 million of unfavorable premium development. Unfavorable net prior year development of $54 million, including $47 million of unfavorable claim and allocated claim adjustment expense reserve development and $7 million of unfavorable premium development, was recorded in 2005. Further information on Specialty Lines Net Prior Year Development for 2006 and 2005 is included in Note F of the Consolidated Financial Statements included under Item 8.
The following table summarizes the gross and net carried reserves as of December 31, 2006 and 2005 for Specialty Lines.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2006     2005  
(In millions)                
Gross Case Reserves
  $ 1,715     $ 1,907  
Gross IBNR Reserves
    3,814       3,298  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 5,529     $ 5,205  
 
           
 
               
Net Case Reserves
  $ 1,350     $ 1,442  
Net IBNR Reserves
    2,921       2,352  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 4,271     $ 3,794  
 
           
2005 Compared with 2004
Net written premiums for Specialty Lines increased $72 million in 2005 as compared with 2004. This increase was primarily due to improved retention across most professional liability insurance lines of business. These favorable impacts were partially offset by increased ceded premiums for certain professional liability lines of business and decreased premiums for the warranty business. Due to a change in 2005 in the warranty product offering, fees related to the new warranty product are included within other revenues. Written premiums for the warranty line of business decreased $70 million in 2005 as compared to 2004. Net earned premiums increased $198 million in 2005 as compared with 2004, which reflects the increased premium written trend over several prior quarters in Specialty Lines.
Specialty Lines averaged rate increases of 1% and 9% in 2005 and 2004 for the contracts that renewed during those periods. Retention rates of 86% and 83% were achieved for those contracts that were up for renewal in each period.
Net income decreased $30 million in 2005 as compared with 2004. This decrease was due primarily to a $42 million decrease in net realized investment gains partially offset by increased net operating income. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income increased $12 million in 2005 as compared with 2004. This increase was primarily driven by an increase in net investment income and increased earned premiums. These increases to operating income were partially offset by decreased current accident year results. Additionally, 2004 results were favorably impacted by the release of a previously established reinsurance bad debt allowance as the result of a significant commutation. Catastrophe impacts were $16 million after-tax and $11 million after-tax for the years ended December 31, 2005 and 2004.

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The combined ratio increased 2.0 points in 2005 as compared with 2004. The loss ratio increased 2.0 points. The 2004 loss ratio was favorably impacted by the release of reinsurance bad debt reserve as discussed above. Additionally, the 2005 loss ratio was unfavorably impacted by increased current year accident losses. This was driven by increased surety losses of $110 million related to a national contractor, before the impacts of minority interest, as discussed in further detail in Note S of the Consolidated Financial Statements included under Item 8, partially offset by improved current accident year loss ratios in several professional liability lines of business.
Unfavorable net prior year development of $54 million was recorded in 2005, including $47 million of unfavorable claim and allocated claim adjustment expense reserve development and $7 million of unfavorable premium development. Unfavorable net prior year development of $30 million, including $58 million of unfavorable claim and allocated claim adjustment expense reserve development and $28 million of favorable premium development, was recorded in 2004. Further information on Specialty Lines Net Prior Year Development for 2005 and 2004 is included in Note F of the Consolidated Financial Statements included under Item 8.
The expense ratio was the same in 2005 as compared with 2004. The 2005 ratio was impacted by a change in estimate related to profit commissions in the warranty line of business, which was offset by the impact of the increased earned premium base.
LIFE AND GROUP NON-CORE
Business Overview
The Life and Group Non-Core segment primarily includes the results of the life and group lines of business that have either been sold or placed in run-off. We sold our individual life business on April 30, 2004 and our specialty medical business on January 6, 2005. The segment includes operating results for these businesses in periods prior to the sales, the realized gain/loss from the sales and the effects of the shared corporate overhead expenses which continue to be allocated to the segment. We continue to service our existing individual long term care commitments, our payout annuity business and our pension deposit business. We also manage a block of group reinsurance and life settlement contracts. These businesses are being managed as a run-off operation. Our group long term care and Index 500 products, while considered non-core, continue to be actively marketed.
The following table summarizes the results of operations for Life and Group Non-Core.
Results of Operations
                         
Years ended December 31   2006   2005   2004
(In millions)                        
Net earned premiums
  $ 641     $ 704     $ 921  
Net investment income
    698       593       692  
Net operating loss
    (14 )     (51 )     (29 )
Net realized investment losses, after-tax
    (33 )     (19 )     (385 )
Net loss
    (47 )     (70 )     (414 )
2006 Compared with 2005
Net earned premiums for Life and Group Non-Core decreased $63 million in 2006 as compared with 2005. The 2006 and 2005 net earned premiums relate primarily to the group and individual long term care businesses.
Net results increased $23 million in 2006 as compared with 2005, driven by increased net investment income. A significant portion of the increase in net investment income was offset by a corresponding increase in the policyholders’ funds reserves supported by the trading portfolio. The portion not offset by the policyholders’ funds reserves increased by $25 million. Also impacting net results was $15 million of income related to the resolution of contingencies and the absence of a $17 million provision recorded in 2005 for estimated indemnification liabilities related to the sold individual life business. Partially offsetting these favorable impacts were increased net realized investment losses and the absence of income related to agreements with buyers of sold businesses which ended as of December 31, 2005. In addition, the 2005 net results included a change in estimate, which reduced a prior accrual of state premium taxes. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.

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2005 Compared with 2004
Net earned premiums for Life and Group Non-Core decreased $217 million in 2005 as compared with 2004. The premiums in 2004 include $115 million from the individual life business and $165 million from the specialty medical business.
Net results improved by $344 million in 2005 as compared with 2004. The improvement in net results related primarily to a $389 million realized loss on the sale of the individual life business in 2004. Also contributing to the improvement in net results was the reduction in 2005 of significant 2004 items related to certain assumed reinsurance exposures. Additionally, 2005 results included $13 million income related to a service agreement with a purchaser for sold businesses. These agreements have expired. These results were partially offset by a decline in net investment income of $99 million. This included a decrease of approximately $64 million from the trading portfolio which was largely offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio. In addition, it included the absence of favorable results from sold insurance operations. Also unfavorably impacting the 2005 results was a $17 million provision increase for estimated indemnification liabilities related to the sold individual life business and unfavorable results related to the long term care business. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
CORPORATE AND OTHER NON-CORE
Overview
Corporate and Other Non-Core includes the results of certain property and casualty lines of business placed in run-off. CNA Re, formerly a separate property and casualty operating segment, is in run-off and is included in the Corporate and Other Non-Core segment. This segment also includes the results related to the centralized adjusting and settlement of APMT claims, as well as the results of our participation in voluntary insurance pools and various non-insurance operations. Other operations also include interest expense on corporate borrowings and intercompany eliminations.
The following table summarizes the results of operations for the Corporate and Other Non-Core segment, including APMT and intrasegment eliminations.
Results of Operations
                         
Years ended December 31   2006   2005   2004
(In millions)                        
Net investment income
  $ 320     $ 251     $ 246  
Revenues
    305       311       358  
Net operating income
    3       9       84  
Net realized investment gains (losses), after-tax
    27       (12 )     39  
Net income (loss)
    30       (3 )     123  
2006 Compared with 2005
Revenues decreased $6 million in 2006 as compared with 2005. Revenues in 2006 and 2005 included interest income related to federal income tax settlements of $4 million and $121 million as further discussed in Note E to the Consolidated Financial Statements included under Item 8. This decrease was substantially offset by increased net investment income and improved realized investment results. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net results increased $33 million in 2006 as compared with 2005. The improvement was primarily driven by a decrease in unfavorable net prior year development as discussed further below. Offsetting this favorable impact was an increase in current accident year losses related to mass torts, discontinuation of royalty income related to a sold business and increased interest costs related to the issuance of $750 million of senior notes in August 2006.
Unfavorable net prior year development of $88 million was recorded during 2006, including $86 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $2 million of unfavorable premium development. Unfavorable net prior year development of $306 million was recorded in 2005, including $291 million of unfavorable net prior year claim and allocated claim adjustment expense reserve

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development and $15 million of unfavorable premium development. Further information on Corporate and Other Non-Core’s Net Prior Year Development for 2006 and 2005 is included in Note F of the Consolidated Financial Statements included under Item 8.
The following table summarizes the gross and net carried reserves as of December 31, 2006 and 2005 for Corporate and Other Non-Core.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2006     2005  
(In millions)                
Gross Case Reserves
  $ 2,511     $ 3,297  
Gross IBNR Reserves
    3,528       4,075  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 6,039     $ 7,372  
 
           
 
               
Net Case Reserves
  $ 1,453     $ 1,554  
Net IBNR Reserves
    1,999       1,902  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 3,452     $ 3,456  
 
           
2005 Compared with 2004
Revenues decreased $47 million in 2005 as compared with 2004. The decrease in revenues was primarily due to reduced net earned premiums in CNA Re of $134 million due to the exit from the assumed reinsurance business in 2003 and decreased net realized investment results. Partially offsetting these decreases was $121 million of interest income related to a federal income tax settlement. See Note E to the Consolidated Financial Statements included under Item 8 for further information.
Net results decreased $126 million in 2005 as compared with 2004. The decrease in net results was primarily due to a $139 million after-tax increase in unfavorable net prior year development related primarily to commutations and reserve strengthening, a $51 million decrease in net realized investment results and a decrease in the provision recorded for uncollectible reinsurance. Net realized investment results for the year ended December 31, 2005 and 2004 included a $22 million after-tax and $36 million after-tax impairment related to a national contractor. See Note S to the Consolidated Financial Statements included under Item 8 for additional information regarding the national contractor. Partially offsetting these decreases was a $115 million after-tax benefit related to a federal income tax settlement and release of federal income tax reserves.
Unfavorable net prior year development of $306 million was recorded during 2005, including $291 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $15 million of unfavorable premium development. Unfavorable net prior year development of $93 million was recorded in 2004, including $84 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $9 million of unfavorable premium development. Further information on Corporate and Other Non-Core’s Net Prior Year Development for 2005 and 2004 is included in Note F of the Consolidated Financial Statements included under Item 8.
During 2005 and 2004, we commuted several significant reinsurance contracts that resulted in unfavorable development of $118 million and $39 million, which is included in the development above, and which was partially offset by the release in 2004 of a previously established allowance for uncollectible reinsurance. These commutations resulted in unfavorable impacts of $71 million after-tax and $5 million after-tax in 2005 and 2004. These contracts contained interest crediting provisions and maintenance charges. Interest charges associated with the reinsurance contracts commuted were $13 million after-tax and $11 million after-tax in 2005 and 2004. There will be no further interest crediting charges or other charges related to these commuted contracts in future periods.

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APMT Reserves
Our property and casualty insurance subsidiaries have actual and potential exposures related to asbestos, environmental pollution and mass tort (APMT) claims.
Establishing reserves for APMT claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment expense reserves for APMT, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial, and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimating techniques and methodologies, many of which involve significant judgments that are required on our part. Accordingly, a high degree of uncertainty remains for our ultimate liability for APMT claim and claim adjustment expenses.
In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others: the number and outcome of direct actions against us; coverage issues, including whether certain costs are covered under the policies and whether policy limits apply; allocation of liability among numerous parties, some of whom may be in bankruptcy proceedings, and in particular the application of “joint and several” liability to specific insurers on a risk; inconsistent court decisions and developing legal theories; continuing aggressive tactics of plaintiffs’ lawyers; the risks and lack of predictability inherent in major litigation; enactment of state and federal legislation to address asbestos claims; the potential for increases and decreases in asbestos, environmental pollution and mass tort claims which cannot now be anticipated; the potential for increases and decreases in costs to defend asbestos, pollution and mass tort claims; the possibility of expanding theories of liability against our policyholders in environmental and mass tort matters; possible exhaustion of underlying umbrella and excess coverage; and future developments pertaining to our ability to recover reinsurance for asbestos, pollution and mass tort claims.
Due to the inherent uncertainties in estimating claim and claim adjustment expense reserves for APMT and due to the significant uncertainties described related to APMT claims, our ultimate liability for these cases, both individually and in aggregate, may exceed the recorded reserves. Any such potential additional liability, or any range of potential additional amounts, cannot be reasonably estimated currently, but could be material to our business, results of operations, equity, and insurer financial strength and debt ratings. Due to, among other things, the factors described above, it may be necessary for us to record material changes in our APMT claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge.
We have annually performed ground up reviews of all open APMT claims to evaluate the adequacy of our APMT reserves. In performing our comprehensive ground up analysis, we consider input from our professionals with direct responsibility for the claims, inside and outside counsel with responsibility for our representation and our actuarial staff. These professionals consider, among many factors, the policyholder’s present and predicted future exposures, including such factors as claims volume, trial conditions, prior settlement history, settlement demands and defense costs; the impact of asbestos defendant bankruptcies on the policyholder; facts or allegations regarding the policies we issued or are alleged to have issued, including such factors as aggregate or per occurrence limits, whether the policy is primary, umbrella or excess, and the existence of policyholder retentions and/or deductibles; the policyholders’ allegations; the existence of other insurance; and reinsurance arrangements.
Further information on APMT Net Prior Year Development is included in Note F of the Consolidated Financial Statements included under Item 8.

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The following table provides data related to our APMT claim and claim adjustment expense reserves.
APMT Reserves
                                 
    December 31, 2006     December 31, 2005  
            Environmental             Environmental  
            Pollution and             Pollution and  
    Asbestos     Mass Tort     Asbestos     Mass Tort  
(In millions)                                
Gross reserves
  $ 2,635     $ 647     $ 2,992     $ 680  
Ceded reserves
    (1,183 )     (231 )     (1,438 )     (257 )
 
                       
 
                               
Net reserves
  $ 1,452     $ 416     $ 1,554     $ 423  
 
                       
Asbestos
In the past several years, we experienced, at certain points in time, significant increases in claim counts for asbestos-related claims. The factors that led to these increases included, among other things, intensive advertising campaigns by lawyers for asbestos claimants, mass medical screening programs sponsored by plaintiff lawyers and the addition of new defendants such as the distributors and installers of products containing asbestos. In recent years, the rate of new filings has decreased. Various challenges to mass screening claimants have been successful. Historically, the majority of asbestos bodily injury claims have been filed by persons exhibiting few, if any, disease symptoms. Studies have concluded that the percentage of unimpaired claimants to total claimants ranges between 66% and up to 90%. Some courts and some state statutes mandate that so-called “unimpaired” claimants may not recover unless at some point the claimant’s condition worsens to the point of impairment. Some plaintiffs classified as “unimpaired” continue to challenge those orders and statutes. Therefore, the ultimate impact of the orders and statutes on future asbestos claims remains uncertain.
Several factors are, in our view, negatively impacting asbestos claim trends. Plaintiff attorneys who previously sued entities that are now bankrupt continue to seek other viable targets. As a result, companies with few or no previous asbestos claims are becoming targets in asbestos litigation and, although they may have little or no liability, nevertheless must be defended. Additionally, plaintiff attorneys and trustees for future claimants are demanding that policy limits be paid lump-sum into the bankruptcy asbestos trusts prior to presentation of valid claims and medical proof of these claims. Various challenges to these practices have succeeded in litigation, and are continuing to be litigated. Plaintiff attorneys and trustees for future claimants are also attempting to devise claims payment procedures for bankruptcy trusts that would allow asbestos claims to be paid under lax standards for injury, exposure and causation. This also presents the potential for exhausting policy limits in an accelerated fashion. Challenges to these practices are being mounted, though the ultimate impact or success of these tactics remains uncertain.
As a result of bankruptcies and insolvencies, we had in the past observed an increase in the total number of policyholders with current asbestos claims as additional defendants are added to existing lawsuits and are named in new asbestos bodily injury lawsuits. During the last few years the rate of new bodily injury claims had moderated and most recently the new claims filing rate has decreased although the number of policyholders claiming coverage for asbestos related claims has remained relatively constant in the past several years.
We have resolved a number of our large asbestos accounts by negotiating settlement agreements. Structured settlement agreements provide for payments over multiple years as set forth in each individual agreement.
In 1985, 47 asbestos producers and their insurers, including The Continental Insurance Company (CIC), executed the Wellington Agreement. The agreement was intended to resolve all issues and litigation related to coverage for asbestos exposures. Under this agreement, signatory insurers committed scheduled policy limits and made the limits available to pay asbestos claims based upon coverage blocks designated by the policyholders in 1985, subject to extension by policyholders. CIC was a signatory insurer to the Wellington Agreement.
We have also used coverage in place agreements to resolve large asbestos exposures. Coverage in place agreements are typically agreements between us and our policyholders identifying the policies and the terms for payment of asbestos related liabilities. Claims payments are contingent on presentation of adequate documentation showing exposure during the policy periods and other documentation supporting the demand for claims payment. Coverage in place agreements may have annual payment caps. Coverage in place agreements are evaluated based on claims filings trends and severities.

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We categorize active asbestos accounts as large or small accounts. We define a large account as an active account with more than $100 thousand of cumulative paid losses. We have made closing large accounts a significant management priority. Small accounts are defined as active accounts with $100 thousand or less of cumulative paid losses. Approximately 80% and 81% of our total active asbestos accounts are classified as small accounts at December 31, 2006 and 2005.
We also evaluate our asbestos liabilities arising from our assumed reinsurance business and our participation in various pools, including Excess & Casualty Reinsurance Association (ECRA).
IBNR reserves relate to potential development on accounts that have not settled and potential future claims from unidentified policyholders.
The tables below depict our overall pending asbestos accounts and associated reserves at December 31, 2006 and 2005.
Pending Asbestos Accounts and Associated Reserves
                                 
            Net Paid              
            (Recovered) Losses     Net Asbestos     Percent of  
    Number of     in 2006     Reserves     Asbestos  
December 31, 2006   Policyholders     (In millions)     (In millions)     Net Reserves  
Policyholders with settlement agreements
                               
Structured Settlements
    15     $ 22     $ 171       12 %
Wellington
    3       (1 )     14       1  
Coverage in place
    37       (18 )     79       5  
Fibreboard
    1             53       4  
 
                       
 
                               
Total with settlement agreements
    56       3       317       22  
 
                       
 
                               
Other policyholders with active accounts
                               
Large asbestos accounts
    220       76       254       17  
Small asbestos accounts
    1,080       17       101       7  
 
                       
 
                               
Total other policyholders
    1,300       93       355       24  
 
                       
 
Assumed reinsurance and pools
          6       141       10  
Unassigned IBNR
                639       44  
 
                       
 
                               
Total
    1,356     $ 102     $ 1,452       100 %
 
                       

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Pending Asbestos Accounts and Associated Reserves
                                 
            Net Paid Losses     Net Asbestos     Percent of  
    Number of     in 2005     Reserves     Asbestos  
December 31, 2005   Policyholders     (In millions)     (In millions)     Net Reserves  
Policyholders with settlement agreements
                               
Structured Settlements
    13     $ 30     $ 167       11 %
Wellington
    4       2       15       1  
Coverage in place
    34       13       58       4  
Fibreboard
    1             54       3  
 
                       
 
                               
Total with settlement agreements
    52       45       294       19  
 
                       
 
                               
Other policyholders with active accounts
                               
Large asbestos accounts
    199       68       273       17  
Small asbestos accounts
    1,073       23       135       9  
 
                       
 
                               
Total other policyholders
    1,272       91       408       26  
 
                       
 
                               
Assumed reinsurance and pools
          6       143       9  
Unassigned IBNR
                709       46  
 
                       
 
                               
Total
    1,324     $ 142     $ 1,554       100 %
 
                       
Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. We have such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called “non-products” liability coverage contained within their policies rather than products liability coverage, and that the claimed “non-products” coverage is not subject to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what extent, if any, the attempts to assert “non-products” claims outside the products liability aggregate will succeed. Our policies also contain other limits applicable to these claims and we have additional coverage defenses to certain claims. We have attempted to manage our asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to us. Where we cannot settle a claim on acceptable terms, we aggressively litigate the claim. However, adverse developments with respect to such matters could have a material adverse effect on our results of operations and/or equity.
As a result of the uncertainties and complexities involved, reserves for asbestos claims cannot be estimated with traditional actuarial techniques that rely on historical accident year loss development factors. In establishing asbestos reserves, we evaluate the exposure presented by each insured. As part of this evaluation, we consider the available insurance coverage; limits and deductibles; the potential role of other insurance, particularly underlying coverage below any of our excess liability policies; and applicable coverage defenses, including asbestos exclusions. Estimation of asbestos-related claim and claim adjustment expense reserves involves a high degree of judgment on our part and consideration of many complex factors, including: inconsistency of court decisions, jury attitudes and future court decisions; specific policy provisions; allocation of liability among insurers and insureds; missing policies and proof of coverage; the proliferation of bankruptcy proceedings and attendant uncertainties; novel theories asserted by policyholders and their counsel; the targeting of a broader range of businesses and entities as defendants; the uncertainty as to which other insureds may be targeted in the future and the uncertainties inherent in predicting the number of future claims; volatility in claim numbers and settlement demands; increases in the number of non-impaired claimants and the extent to which they can be precluded from making claims; the efforts by insureds to obtain coverage not subject to aggregate limits; long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims; medical inflation trends; the mix of asbestos-related diseases presented and the ability to recover reinsurance.

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We are involved in significant asbestos-related claim litigation, which is described in Note F of the Consolidated Financial Statements included under Item 8.
Environmental Pollution and Mass Tort
Environmental pollution cleanup is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and restoration by “Potentially Responsible Parties” (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs fail to do so and assign liability to PRPs. The extent of liability to be allocated to a PRP is dependent upon a variety of factors. Further, the number of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been identified by the Environmental Protection Agency (EPA) and included on its National Priorities List (NPL). State authorities have designated many cleanup sites as well.
Many policyholders have made claims against us for defense costs and indemnification in connection with environmental pollution matters. The vast majority of these claims relate to accident years 1989 and prior, which coincides with our adoption of the Simplified Commercial General Liability coverage form, which includes what is referred to in the industry as absolute pollution exclusion. We and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether cleanup costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and the definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues.
We have made resolution of large environmental pollution exposures a management priority. We have resolved a number of our large environmental accounts by negotiating settlement agreements. In our settlements, we sought to resolve those exposures and obtain the broadest release language to avoid future claims from the same policyholders seeking coverage for sites or claims that had not emerged at the time we settled with our policyholder. While the terms of each settlement agreement vary, we sought to obtain broad environmental releases that include known and unknown sites, claims and policies. The broad scope of the release provisions contained in those settlement agreements should, in many cases, prevent future exposure from settled policyholders. It remains uncertain, however, whether a court interpreting the language of the settlement agreements will adhere to the intent of the parties and uphold the broad scope of language of the agreements.
We classify our environmental pollution accounts into several categories, which include structured settlements, coverage in place agreements and active accounts. Structured settlement agreements provide for payments over multiple years as set forth in each individual agreement.
We have also used coverage in place agreements to resolve pollution exposures. Coverage in place agreements are typically agreements between us and our policyholders identifying the policies and the terms for payment of pollution related liabilities. Claims payments are contingent on presentation of adequate documentation of damages during the policy periods and other documentation supporting the demand for claims payment. Coverage in place agreements may have annual payment caps.
We categorize active accounts as large or small accounts in the pollution area. We define a large account as an active account with more than $100 thousand cumulative paid losses. We have made closing large accounts a significant management priority. Small accounts are defined as active accounts with $100 thousand or less cumulative paid losses.
We also evaluate our environmental pollution exposures arising from our assumed reinsurance and our participation in various pools, including ECRA.
We carry unassigned IBNR reserves for environmental pollution. These reserves relate to potential development on accounts that have not settled and potential future claims from unidentified policyholders.

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The tables below depict our overall pending environmental pollution accounts and associated reserves at December 31, 2006 and 2005.
Pending Environmental Pollution Accounts and Associated Reserves
                                 
                    Net        
                    Environmental     Percent of  
            Net Paid Losses     Pollution     Environmental  
    Number of     in 2006     Reserves     Pollution Net  
December 31, 2006   Policyholders     (In millions)     (In millions)     Reserve  
Policyholders with Settlement Agreements
                               
Structured settlements
    11     $ 16     $ 9       3 %
Coverage in place
    18       5       14       5  
 
                       
Total with Settlement Agreements
    29       21       23       8  
 
                               
Other Policyholders with Active Accounts
                               
Large pollution accounts
    115       20       58       20  
Small pollution accounts
    346       9       46       17  
 
                       
Total Other Policyholders
    461       29       104       37  
 
                               
Assumed Reinsurance & Pools
          1       32       11  
Unassigned IBNR
                126       44  
 
                       
 
                               
Total
    490     $ 51     $ 285       100 %
 
                       
Pending Environmental Pollution Accounts and Associated Reserves
                                 
                    Net        
                    Environmental     Percent of  
            Net Paid Losses     Pollution     Environmental  
    Number of     in 2005     Reserves     Pollution Net  
December 31, 2005   Policyholders     (In millions)     (In millions)     Reserve  
Policyholders with Settlement Agreements
                               
Structured settlements
    6     $ 10     $ 17       5 %
Coverage in place
    16       10       23       7  
 
                       
Total with Settlement Agreements
    22       20       40       12  
 
                               
Other Policyholders with Active Accounts
                               
Large pollution accounts
    120       18       63       19  
Small pollution accounts
    362       15       50       15  
 
                       
Total Other Policyholders
    482       33       113       34  
 
                               
Assumed Reinsurance & Pools
          3       33       10  
Unassigned IBNR
                150       44  
 
                       
Total
    504     $ 56     $ 336       100 %
 
                       

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INVESTMENTS
Net Investment Income
The significant components of net investment income are presented in the following table.
Net Investment Income
                         
Years ended December 31   2006     2005     2004  
(In millions)                        
Fixed maturity securities
  $ 1,842     $ 1,608     $ 1,571  
Short term investments
    248       147       56  
Limited partnerships
    288       254       212  
Equity securities
    23       25       14  
Income from trading portfolio (a)
    103       47       110  
Interest on funds withheld and other deposits
    (68 )     (166 )     (261 )
Other
    18       20       18  
 
                 
 
                       
Gross investment income
    2,454       1,935       1,720  
Investment expense
    (42 )     (43 )     (40 )
 
                 
 
                       
Net investment income
  $ 2,412     $ 1,892     $ 1,680  
 
                 
 
(a)   There was no change in net unrealized gains (losses) on trading securities included in net investment income for the year ended December 31, 2006. The change in net unrealized gains (losses) on trading securities included in net investment income was $(7) million and $2 million for the years ended December 31, 2005 and 2004.
Net investment income increased by $520 million for 2006 compared with 2005. The improvement was primarily driven by interest rate increases across fixed maturity securities and short term investments, an increase in the overall invested asset base resulting from improved cash flow and a reduction of interest expense on funds withheld and other deposits. During 2006 and 2005, we commuted several significant finite reinsurance contracts which contained interest crediting provisions and as a result, interest expense on funds withheld has declined significantly. No further interest expense is due on the funds withheld on the commuted contracts. The pretax interest expense on funds withheld related to these significant commuted contracts was $14 million, $84 million and $146 million for December 31, 2006, 2005 and 2004, and was reflected as a component of Net investment income in our Consolidated Statements of Operations. The 2005 and 2004 amounts include the interest charges associated with the contract commuted in 2006. See Note H of the Consolidated Financial Statements included under Item 8 for additional information for interest costs on funds withheld and other deposits. Also impacting net investment income was increased income from the trading portfolio of approximately $56 million. The increased income from the trading portfolio was largely offset by a corresponding increase in the policyholders’ funds reserves supported by the trading portfolio, which is included in Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations.
Net investment income increased by $212 million for 2005 compared with 2004. This increase was due to the reduced interest expense on funds withheld and other deposits discussed above and improved results across all other available-for-sale asset classes, especially short term investments, due to the improved period over period yields. This improvement was partly offset by decreases in investment income from the trading portfolio.
The bond segment of the investment portfolio yielded 5.6% in 2006, 4.9% in 2005 and 4.6% in 2004.

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Net Realized Investment Gains (Losses)
The components of net realized investment results for available-for-sale securities are presented in the following table.
Net Realized Investment Gains (Losses)
                         
Years ended December 31   2006     2005     2004  
(In millions)                        
Realized investment gains (losses):
                       
Fixed maturity securities:
                       
U.S. Government bonds
  $ 62     $ (33 )   $ 10  
Corporate and other taxable bonds
    (98 )     (86 )     123  
Tax-exempt bonds
    53       12       42  
Asset-backed bonds
    (9 )     14       53  
Redeemable preferred stock
    (3 )     3       19  
 
                 
 
                       
Total fixed maturity securities
    5       (90 )     247  
Equity securities
    16       38       202  
Derivative securities
    18       49       (84 )
Short term investments
    (5 )           (3 )
Other, including dispositions of businesses net of participating policyholders’ interest
    53       (10 )     (601 )
 
                 
 
                       
Realized investment gains (losses) before allocation to participating policyholders’ and minority interests
    87       (13 )     (239 )
Allocated to participating policyholders’ and minority interests
    (1 )     3       (9 )
 
                       
Income tax (expense) benefit
    (19 )           95  
 
                 
 
                       
Net realized investment gains (losses), net of participating policyholders’ and minority interests
  $ 67     $ (10 )   $ (153 )
 
                 
Net realized investment results increased by $77 million for 2006 compared with 2005. The increase in net realized investment results was primarily driven by improved results in fixed maturity securities, partially offset by increases in interest rate related other-than-temporary impairment (OTTI) losses for which we did not assert an intent to hold until an anticipated recovery in value. For 2006, OTTI losses of $112 million were recorded primarily in the corporate and other taxable bonds sector. Other realized investment gains (losses) for the year ended December 31, 2006, included a $37 million pretax gain related to a settlement received as a result of bankruptcy litigation of a major telecommunications corporation.
Net realized investment results improved $143 million in 2005 compared with 2004. This improvement was primarily the result of a 2004 loss of $389 million on the sale of the individual life insurance business, partly offset by reduced gains for equities securities. Equity results in 2004 included a gain of $105 million related to our investment in Canary Wharf Group PLC, a London-based real estate company. Also impacting results for 2005 versus 2004 were decreased results in the overall fixed maturity asset class partly offset by improved results for the derivatives asset class. OTTI losses of $70 million were recorded in 2005 across various sectors, including an OTTI loss of $22 million related to loans made under a credit facility to a national contractor, that are classified as fixed maturities. OTTI losses of $60 million were recorded in 2004 across various sectors, including an OTTI loss of $36 million related to loans to the national contractor. For additional information on loans to the national contractor, see Note S of the Consolidated Financial Statements included under Item 8. Other realized investment gains (losses) for the year ended December 31, 2005 and 2004 include gains and losses related to the sales of certain operations or affiliates that are described in Note P of the Consolidated Financial Statements included under Item 8.
A primary objective in the management of the fixed maturity and equity portfolios is to optimize return relative to underlying liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions, and the domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
The investment portfolio is periodically analyzed for changes in duration and related price change risk. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other

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factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in Item 7A – Quantitative and Qualitative Disclosures about Market Risk included herein.
We invest in certain derivative financial instruments primarily to reduce our exposure to market risk (principally interest rate, equity price and foreign currency risk) and credit risk (risk of nonperformance of underlying obligor). Derivative securities are recorded at fair value at the reporting date. We also use derivatives to mitigate market risk by purchasing S&P 500â index futures in a notional amount equal to the contract liability relating to Life and Group Non-Core indexed group annuity contracts. We provided collateral to satisfy margin deposits on exchange-traded derivatives totaling $27 million as of December 31, 2006. For over-the-counter derivative transactions we utilize International Swaps and Derivatives Association (ISDA) Master Agreements that specify certain limits over which collateral is exchanged. As of December 31, 2006, we provided $31 million of cash as collateral for over-the-counter derivative instruments.
A further consideration in the management of the investment portfolio is the characteristics of the underlying liabilities and the ability to align the duration of the portfolio to those liabilities to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and long term in nature, we segregate assets for asset liability management purposes.
We classify our fixed maturity securities (bonds and redeemable preferred stocks) and our equity securities as either available-for-sale or trading, and as such, they are carried at fair value. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in net investment income. Changes in fair value related to available-for-sale securities are reported as a component of other comprehensive income. Changes in fair value of trading securities are reported within net investment income.
The following table provides further detail of gross realized gains and gross realized losses on available-for-sale fixed maturity securities and equity securities, which include OTTI losses.
Realized Gains and Losses
                         
Years ended December 31   2006     2005     2004  
(In millions)                        
Net realized gains (losses) on fixed maturity securities and equity securities:
                       
Fixed maturity securities:
                       
Gross realized gains
  $ 382     $ 361     $ 704  
Gross realized losses
    (377 )     (451 )     (457 )
 
                 
 
                       
Net realized gains (losses) on fixed maturity securities
    5       (90 )     247  
 
                 
 
                       
Equity securities:
                       
Gross realized gains
    24       73       225  
Gross realized losses
    (8 )     (35 )     (23 )
 
                 
 
                       
Net realized gains on equity securities
    16       38       202  
 
                 
 
                       
Net realized gains (losses) on fixed maturity and equity securities
  $ 21     $ (52 )   $ 449  
 
                 

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The following table provides details of the largest realized losses from sales of securities aggregated by issuer including: the fair value of the securities at date of sale, the amount of the loss recorded and the period of time that the security had been in an unrealized loss position prior to sale. The period of time that the security had been in an unrealized loss position prior to sale can vary due to the timing of individual security purchases. Also included is a narrative providing the industry sector along with the facts and circumstances giving rise to the loss.
Largest Realized Losses from Securities Sold at a Loss
Year ended December 31, 2006
                         
    Fair             Months in  
    Value at             Unrealized  
    Date of     Loss     Loss Prior  
Issuer Description and Discussion   Sale     On Sale     To Sale (a)  
(In millions)                        
Various notes and bonds issued by the United States Treasury. Securities sold due to outlook on interest rates and inflation.
  $ 4,529     $ 18       0-6  
 
                       
State issued revenue bonds. Positions were sold as part of a broader initiative to reduce municipal holdings.
    289       6       0-12  
 
                       
Financial services group that provides property and casualty, managed care, life, and various other insurance products in the United States. Position was sold to reduce exposure to the issuer and sector.
    56       5       0-6  
 
                       
Company is in the advertising industry, utilizing various venues including television, radio, outdoor displays, and live entertainment. The company has entered into an agreement to be acquired. Position was reduced in response to the announced transaction.
    66       5       0-12+  
 
                       
Company develops and operates broadband cable communication networks, high speed internet service and digital video applications. Position was sold in response to newly issued debt.
    92       5       0-6  
 
                   
 
  $ 5,032     $ 39          
 
                   
 
(a)   Represents the range of consecutive months the various positions were in an unrealized loss prior to sale. 0-12+ means certain positions were less than 12 months, while others were greater than 12 months.

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Valuation and Impairment of Investments
The following table details the carrying value of our general account investments.
Carrying Value of Investments
                                 
    December 31,             December 31,        
    2006     %     2005     %  
(In millions)                                
General account investments:
                               
Fixed maturity securities available-for-sale:
                               
U.S. Treasury securities and obligations of government agencies
  $ 5,138       12 %   $ 1,469       4 %
Asset-backed securities
    13,677       31       12,859       32  
States, municipalities and political subdivisions – tax-exempt
    5,146       12       9,209       23  
Corporate securities
    7,132       16       6,165       15  
Other debt securities
    3,642       8       3,044       8  
Redeemable preferred stock
    912       2       216       1  
Options embedded in convertible debt securities
                1        
 
                       
 
                               
Total fixed maturity securities available-for-sale
    35,647       81       32,963       83  
 
                       
 
                               
Fixed maturity securities trading:
                               
U.S. Treasury securities and obligations of government agencies
    2             4        
Asset-backed securities
    55             87        
Corporate securities
    133       1       154       1  
Other debt securities
    14             26        
 
                       
 
                               
Total fixed maturity securities trading
    204       1       271       1  
 
                       
 
                               
Equity securities available-for-sale:
                               
Common stock
    452       1       289       1  
Preferred stock
    145             343       1  
 
                       
 
                               
Total equity securities available-for-sale
    597       1       632       2  
 
                       
 
                               
Total equity securities trading
    60             49        
 
                       
 
                               
Short term investments available-for-sale
    5,538       13       3,870       9  
Short term investments trading
    172             368       1  
Limited partnerships
    1,852       4       1,509       4  
Other investments
    26             33        
 
                       
 
                               
Total general account investments
  $ 44,096       100 %   $ 39,695       100 %
 
                       
Our general account investments consist primarily of asset-backed securities, corporate securities, short term investments, municipal and U.S. treasury securities.
A significant judgment in the valuation of investments is the determination of when an OTTI has occurred. We analyze securities on at least a quarterly basis. Part of this analysis is to monitor the length of time and severity of the decline below book value for those securities in an unrealized loss position. Information on our OTTI process is set forth in Note B of the Consolidated Financial Statements included under Item 8.
Investments in the general account had a total net unrealized gain of $966 million at December 31, 2006 compared with $787 million at December 31, 2005. The unrealized position at December 31, 2006 was comprised of a net unrealized gain of $716 million for fixed maturities, a net unrealized gain of $249 million for equity securities, and a net unrealized gain of $1 million for short term securities. The unrealized position at December 31, 2005 was comprised of a net unrealized gain of $618 million for fixed maturities, a net unrealized gain of $170 million for equity securities, and a net unrealized loss of $1 million for short term securities. See Note B of the Consolidated Financial Statements included under Item 8 for further detail on the unrealized position of our general account investment portfolio.

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Our investment policies for both the general account and separate account emphasize high credit quality and diversification by industry, issuer and issue. Assets supporting interest rate sensitive liabilities are segmented within the general account to facilitate asset/liability duration management.
The following table provides the composition of fixed maturity securities with an unrealized loss at December 31, 2006 in relation to the total of all fixed maturity securities with an unrealized loss by maturity profile. Securities not due at a single date are allocated based on weighted average life.
Maturity Profile
                 
    Percent of     Percent of  
    Market     Unrealized  
    Value     Loss  
Due in one year or less
    5 %     3 %
Due after one year through five years
    44       50  
Due after five years through ten years
    33       24  
Due after ten years
    18       23  
 
           
 
               
Total
    100 %     100 %
 
           
Our non-investment grade fixed maturity securities available-for-sale as of December 31, 2006 that were in a gross unrealized loss position had a fair value of $622 million. The following tables summarize the fair value and gross unrealized loss of non-investment grade securities categorized by the length of time those securities have been in a continuous unrealized loss position and further categorized by the severity of the unrealized loss position in 10% increments as of December 31, 2006 and 2005.
Unrealized Loss Aging for Non-investment Grade Securities
                                                 
            Fair Value as a Percentage of Book Value        
                                            Gross  
    Estimated                                     Unrealized  
December 31, 2006   Fair Value     90-99%     80-89%     70-79%     <70%     Loss  
(In millions)                                                
Fixed maturity securities:
                                               
Non-investment grade:
                                               
0-6 months
  $ 509     $ 2     $     $     $     $ 2  
7-12 months
    87       1       1                   2  
13-24 months
    24                                
Greater than 24 months
    2                                
 
                                   
 
                                               
Total non-investment grade
  $ 622     $ 3     $ 1     $     $     $ 4  
 
                                   
Unrealized Loss Aging for Non-investment Grade Securities
                                                 
            Fair Value as a Percentage of Book Value        
                                            Gross  
    Estimated                                     Unrealized  
December 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     $     $ 29  
7-12 months
    118       4       6                   10  
13-24 months
    122       3                         3  
Greater than 24 months
    2                                
 
                                   
 
                                               
Total non-investment grade
  $ 874     $ 27     $ 14     $ 1     $     $ 42  
 
                                   
As part of the ongoing OTTI monitoring process, we evaluated the facts and circumstances based on available information for each of the non-investment grade securities and determined that the securities presented in the above tables were temporarily impaired when evaluated at December 31, 2006 and 2005. This determination was based on a number of factors that we regularly consider including, but not limited to: the issuers’ ability to meet current and

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future interest and principal payments, an evaluation of the issuers’ financial condition and near term prospects, our assessment of the sector outlook and estimates of the fair value of any underlying collateral. In all cases where a decline in value is judged to be temporary, we have the intent and ability to hold these securities for a period of time sufficient to recover the book value of our investment through an anticipated recovery in the fair value of such securities or by holding the securities to maturity. In many cases, the securities held are matched to liabilities as part of ongoing asset/liability duration management. As such, we continually assess our ability to hold securities for a time sufficient to recover any temporary loss in value or until maturity. We believe we have sufficient levels of liquidity so as to not impact the asset/liability management process.
Our equity securities classified as available-for-sale as of December 31, 2006 that were in an unrealized loss position had a fair value of $14 million and unrealized losses of $1 million. Under the same process as followed for fixed maturity securities, we monitor the equity securities for other-than-temporary declines in value. In all cases where a decline in value is judged to be temporary, we have the intent and ability to hold these securities for a period of time sufficient to recover the book value of our investment through an anticipated recovery in the fair value of such securities.
Invested assets are exposed to various risks, such as interest rate, market and credit risk. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in these risks in the near term, including increases in interest rates, could have an adverse material impact on our results of operations or equity.
The general account portfolio consists primarily of high quality bonds, 91% and 92% of which were rated as investment grade (rated BBB or higher) at December 31, 2006 and 2005. The following table summarizes the ratings of our general account bond portfolio at carrying value.
General Account Bond Ratings
                                 
December 31   2006     %     2005     %  
(In millions)                                
U.S. Government and affiliated agency securities
  $ 5,285       15 %   $ 1,628       5 %
Other AAA rated
    16,311       47       18,233       55  
AA and A rated
    5,222       15       6,046       18  
BBB rated
    4,933       14       4,499       14  
Non investment-grade
    3,188       9       2,612       8  
 
                       
 
                               
Total
  $ 34,939       100 %   $ 33,018       100 %
 
                       
At December 31, 2006 and 2005, approximately 96% and 95% of the general account portfolio was issued by U.S. Government and affiliated agencies or was rated by Standard & Poor’s (S&P) or Moody’s Investors Service (Moody’s). The remaining bonds were rated by other rating agencies or us.
The following table summarizes the bond ratings of the investments supporting separate account products which guarantee principal and a specified rate of interest.
Separate Account Bond Ratings
                                 
December 31   2006     %     2005     %  
(In millions)                                
U.S. Government and affiliated agency securities
  $       %   $       %
Other AAA rated
    111       26       120       26  
AA and A rated
    242       56       193       41  
BBB rated
    75       17       142       31  
Non investment-grade
    6       1       11       2  
 
                       
 
                               
Total
  $ 434       100 %   $ 466       100 %
 
                       
At December 31, 2006 and 2005, 100% and 98% of the separate account portfolio was issued by U.S. Government and affiliated agencies or was rated by S&P or Moody’s. The remaining bonds were rated by other rating agencies or us.

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Non investment-grade bonds, as presented in the tables above, are high-yield securities rated below BBB by bond rating agencies, as well as other unrated securities that, in our opinion, are below investment-grade. High-yield securities generally involve a greater degree of risk than investment-grade securities. However, expected returns should compensate for the added risk. This risk is also considered in the interest rate assumptions for the underlying insurance products.
The carrying value of securities that are either subject to trading restrictions or trade in illiquid private placement markets at December 31, 2006 was $191 million, which represents 0.4% of our total investment portfolio. These securities were in a net unrealized gain position of $143 million at December 31, 2006. Of these securities, 80% are priced by unrelated third party sources.
Included in our general account fixed maturity securities at December 31, 2006 were $13,732 million of asset-backed securities, at fair value, consisting of approximately 63% in collateralized mortgage obligations (CMOs), 21% in corporate asset-backed obligations, 14% in corporate mortgage-backed pass-through certificates and 2% in U.S. Government agency issued pass-through certificates. The majority of CMOs held are actively traded in liquid markets and are primarily priced by a third party pricing service.
The carrying value of the components of the general account short term investment portfolio is presented in the following table.
Short term Investments
                 
    December 31,     December 31,  
    2006     2005  
(In millions)                
Short term investments available-for-sale:
               
Commercial paper
  $ 923     $ 1,906  
U.S. Treasury securities
    1,093       251  
Money market funds
    196       294  
Other, including collateral held related to securities lending
    3,326       1,419  
 
           
 
               
Total short term investments available-for-sale
    5,538       3,870  
 
           
 
               
Short term investments trading:
               
Commercial paper
    43       94  
U.S. Treasury securities
    2       64  
Money market funds
    127       200  
Other
          10  
 
           
 
               
Total short term investments trading
    172       368  
 
           
 
               
Total short term investments
  $ 5,710     $ 4,238  
 
           
The fair value of collateral held related to securities lending, included in other short term investments, was $2,851 million and $767 million at December 31, 2006 and 2005.

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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our principal operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses.
For 2006, net cash provided by operating activities was $2,250 million as compared to $2,169 million in 2005. Cash provided by operating activities was favorably impacted by increased net sales of trading securities to fund policyholder withdrawals of investment contract products issued by us and increased investment income receipts. Policyholder fund withdrawals are reflected as financing cash flows. Cash provided by operating activities was unfavorably impacted by decreased premium collections, increased tax payments, and increased loss payments.
For 2005, net cash provided by operating activities was $2,169 million as compared to $1,968 million in 2004. The increase in cash provided by operations was primarily driven by a reduction in claims and expense payments, including the impact of $446 million related to commutations. Also impacting operating cash flows were net tax payments of $164 million in 2005 as compared with net tax refunds of $627 million in 2004. In addition, we received cash of $121 million related to interest on a federal income tax settlement in 2005.
Cash flows from investing activities include the purchase and sale of financial instruments, as well as the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.
Net cash used for investing activities was $1,646 million, $1,316 million, and $2,084 million for 2006, 2005, and 2004. Cash flows used by investing activities related principally to purchases of fixed maturity securities and short term investments.
The cash flow from investing activities is impacted by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management. A consideration in management of the portfolio is the characteristics of the underlying liabilities and the ability to align the duration of the portfolio to those liabilities to meet future liquidity needs and minimize interest rate risk. For portfolios where future liability cash flows are determinable and are generally long term in nature, management segregates assets and related liabilities for asset/liability management purposes. The asset/liability management strategy is used to mitigate valuation changes due to interest rate risk in those specific portfolios. Another consideration in the asset/liability matched portfolios is to maintain a level of income sufficient to support the underlying insurance liabilities.
For those securities in the portfolio that are not part of a segregated asset/liability management strategy, we typically manage the portfolio to a target duration range dictated by the underlying insurance liabilities. In managing these portfolios, securities are bought and sold based on individual security value assessments made, but with the overall goal of meeting the duration targets.
Cash flows from financing activities include proceeds from the issuance of debt and equity securities, outflows for dividends or repayment of debt, outlays to reacquire equity instruments, and deposits and withdrawals related to investment contract products issued by us.
For 2006 and 2005, net cash used for financing activities was $605 million and $837 million as compared with net cash provided from financing activities of $61 million in 2004. Net cash flows used by financing activities in 2006 were primarily related to the return of investment contract balances. Additionally, we issued long-term debt and common stock, the proceeds of which were used to repurchase the Series H Cumulative Preferred Stock Issue (Series H Issue) and to repay our 6.75% notes. See the Loews section below for further discussion.
We believe that our present cash flows from operations, investing activities and financing activities are sufficient to fund our working capital needs.
We have an effective shelf registration statement under which we may issue debt or equity securities.
Commitments, Contingencies, and Guarantees
We have various commitments, contingencies and guarantees which we become involved with during the ordinary course of business. The impact of these commitments, contingencies and guarantees should be considered when evaluating our liquidity and capital resources.

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A summary of our commitments as of December 31, 2006 is presented in the following table.
Contractual Commitments
                                         
December 31, 2006   Total     Less than 1 year     1-3 years     3-5 years     More than 5 years  
(In millions)                                        
Debt (a)
    3,364       143       604       636       1,981  
Lease obligations
    234       49       78       56       51  
Claim and claim expense reserves (b)
    31,398       7,147       9,341       4,810       10,100  
Future policy benefits reserves (c)
    10,803       346       348       337       9,772  
Policyholder funds reserves (c)
    994       382       454       9       149  
Guaranteed payment contracts (d)
    15       12       3              
 
                             
 
                                       
Total
  $ 46,808     $ 8,079     $ 10,828     $ 5,848     $ 22,053  
 
                             
 
(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 December 31, 2006. See the Reserves – Estimates and Uncertainties section of this MD&A for further information. Claim and claim adjustment expense reserves of $12 million related to business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included.
 
(c)   Future policy benefits and policyholder funds reserves are not discounted and represent our estimate of the ultimate amount and timing of the settlement of benefits based on our assessment of facts and circumstances known as of December 31, 2006. Future policy benefit reserves of $891 million and policyholder fund reserves of $47 million related to business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included. Additional information on future policy benefits and policyholder funds reserves is included in Note A of the Consolidated Financial Statements included under Item 8.
 
(d)   Primarily relating to telecommunications and software services.
Further information on our commitments, contingencies and guarantees is provided in Notes B, F, G, I and K of the Consolidated Financial Statements included under Item 8.
Off-Balance Sheet Arrangements
In the course of selling business entities and assets to third parties, we have agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of December 31, 2006, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $933 million.
In addition, we have agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of December 31, 2006, we had outstanding unlimited indemnifications in connection with the sales of certain of our business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire. As of December 31, 2006, we have recorded approximately $28 million of liabilities related to these indemnification agreements.
Other than the items discussed above, we do not have any other off-balance sheet arrangements.
Regulatory Matters
We previously established a plan to reorganize and streamline our U.S. property and casualty insurance legal entity structure in order to realize capital, operational, and cost efficiencies. Another phase of this multi-year plan has been completed with the mergers of thirteen of our U.S. property and casualty insurance entities into other CNA insurance entities. Effective December 31, 2006, twelve companies merged, either directly or indirectly, with and into CIC, and one company merged directly into CCC. We also reduced the number of states in which these entities

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are domiciled as part of this phase. Previous phases of this plan served to consolidate our U.S. property and casualty insurance risks into CCC, as well as realign the capital supporting these risks. In order to facilitate the execution of this plan, we have agreed to participate in a working group consisting of several states of the National Association of Insurance Commissioners (NAIC). Pursuant to our participation in this working group, we have agreed to certain time frames and informational provisions in relation to the reorganization plan.
Along with other companies in the industry, we have received subpoenas, interrogatories and inquiries from: (i) California, Connecticut, Delaware, Florida, Hawaii, Illinois, Michigan, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, West Virginia and the Canadian Council of Insurance Regulators concerning investigations into practices including contingent compensation arrangements, fictitious quotes and tying arrangements; (ii) the Securities and Exchange Commission (SEC), the New York State Attorney General, the United States Attorney for the Southern District of New York, the Connecticut Attorney General, the Connecticut Department of Insurance, the Delaware Department of Insurance, the Georgia Office of Insurance and Safety Fire Commissioner and the California Department of Insurance concerning reinsurance products and finite insurance products purchased and sold by us; (iii) the Massachusetts Attorney General and the Connecticut Attorney General concerning investigations into anti-competitive practices; and (iv) the New York State Attorney General concerning declinations of attorney malpractice insurance. We continue to respond to these subpoenas, interrogatories and inquiries to the extent they are still open.
Subsequent to receipt of the SEC subpoena, we produced documents and provided additional information at the SEC’s request. In addition, the SEC and representatives of the United States Attorney’s Office for the Southern District of New York conducted interviews with several of our current and former executives relating to the restatement of our financial results for 2004, including our relationship with and accounting for transactions with an affiliate that were the basis for the restatement. The SEC also requested information relating to our restatement in 2006 of prior period results. It is possible that our analyses of, or accounting treatment for, finite reinsurance contracts or discontinued operations could be questioned or disputed by regulatory authorities. As a result, further restatements of our financial results are possible.
Dividends from Subsidiaries
Our ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from our subsidiaries. The payment of dividends to us by our insurance subsidiaries without prior approval of the insurance department of each subsidiary’s domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments.
Further information on our dividends from subsidiaries is provided in Note L of the Consolidated Financial Statements included under Item 8.
Loews
In December 2002, we sold $750 million of a new issue of preferred stock, the Series H Issue, to Loews. The Series H Issue accrued cumulative dividends at an initial rate of 8% per year, compounded annually. In August 2006, we repurchased the Series H Issue from Loews for approximately $993 million, a price equal to the liquidation preference. The Series H Issue dividend amounts through the repurchase date for the years ended December 31, 2006, 2005 and 2004 have been subtracted from Income from Continuing Operations to determine income from continuing operations available to common stockholders in the calculation of earnings per share.
We financed the repurchase of the Series H Issue with the proceeds from our sales of: (i) 7.0 million shares of our common stock in a public offering for approximately $235.5 million; (ii) $400 million of new 6.0% five-year senior notes and $350 million of new 6.5% ten-year senior notes in a public offering; and (iii) 7.86 million shares of our common stock to Loews in a private placement for approximately $264.5 million. We used the proceeds in excess of the amount used to repurchase the Series H Issue to fund the repayment of our $250 million outstanding 6.75% senior notes in November 2006.
Ratings
Ratings are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by major rating agencies, and these ratings reflect the rating agency’s opinion of the insurance company’s financial strength, operating performance, strategic position and ability to meet our obligations to policyholders. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or

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withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating. One or more of these agencies could take action in the future to change the ratings of our insurance subsidiaries.
The table below reflects the various group ratings issued by A.M. Best, Fitch, Moody’s and S&P as of January 24, 2007 for the Property and Casualty and Life companies. The table also includes the ratings for our senior debt and Continental senior debt.
                                 
    Insurance Financial Strength    
    Ratings (a)   Debt Ratings (a)
    Property &            
    Casualty   Life   CNAF   Continental
    CCC   CAC   Senior   Senior
    Group           Debt   Debt
A.M. Best
    A       A-     bbb   Not rated
Fitch
    A-       A-     BBB-   BBB-
Moody’s
    A3     Baa1   Baa3   Baa3
S&P
    A-     BBB+   BBB-   BBB-
 
(a)   A.M. Best, Fitch, Moody’s and Standard & Poor’s outlooks are stable for our debt and insurance financial strength ratings.
If our property and casualty insurance financial strength ratings were downgraded below current levels, our business and results of operations could be materially adversely affected. The severity of the impact on our business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of our insurance products to certain markets and the required collateralization of certain future payment obligations or reserves.
In addition, we believe that a lowering of the debt ratings of Loews by certain of these agencies could result in an adverse impact on our ratings, independent of any change in our circumstances. None of the major rating agencies which rates Loews currently maintains a negative outlook or has Loews on negative Credit Watch.
We have entered into several settlement agreements and assumed reinsurance contracts that require collateralization of future payment obligations and assumed reserves if our ratings or other specific criteria fall below certain thresholds. The ratings triggers are generally more than one level below our current ratings.
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurement (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. SFAS 157 retains the exchange price notion in the definition of fair value and clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157 expands disclosures surrounding the use of fair value to measure assets and liabilities and specifically focuses on the sources used to measure fair value. In instances of recurring use of fair value measures using unobservable inputs, SFAS 157 requires separate disclosure of the effect on earnings for the period. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within the year of adoption. We are currently evaluating the impact that adopting SFAS 157 will have on our results of operations and financial condition.
In January 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS 155 also resolves issues addressed in SFAS 133 Implementation Issue No. D1,

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Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155 will improve financial reporting by eliminating the exemption from applying SFAS 133 to interests in certain securitized financial assets so that similar instruments are accounted for in the same manner regardless of the form of the instruments. SFAS 155 will also improve financial reporting by allowing a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of SFAS 155 may also be applied upon adoption of SFAS 155 for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS 133 prior to the adoption of this Statement. Provisions of SFAS 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. Adoption of SFAS 155 is not expected to have a significant impact on the carrying value of securities currently held or acquired subsequent to January 1, 2007.
In January 2007, the FASB released SFAS 133 Implementation Issue No. B40, Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (Issue B40). Issue B40 provides a narrow scope exception from paragraph 13(b) of SFAS 133 for securitized interests that meet certain criteria and contain only an embedded derivative that is tied to the prepayment risk of the underlying prepayable financial assets. Issue B40 shall be applied upon adoption of SFAS 155. Adoption of Issue B40 in conjunction with SFAS 155 is not expected to have a significant impact on the carrying value of securities currently held or acquired subsequent to January 1, 2007.
In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. Adoption of SOP 05-1 is not expected to have a significant impact on our results of operations or financial condition.
See Note A of the Consolidated Financial Statements included under Item 8 for additional information regarding accounting pronouncements.
FORWARD-LOOKING STATEMENTS
This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. You can identify forward-looking statements because generally they include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates,” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves for asbestos, environmental pollution and mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; expected cost savings and other results from our expense reduction and restructuring activities; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. Some examples of these risks and uncertainties are:
  general economic and business conditions, including inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;
 
  changes in financial markets such as fluctuations in interest rates, long term periods of low interest rates, credit conditions and currency, commodity and stock prices;
 
  the effects of corporate bankruptcies, such as Enron and WorldCom, on capital markets, and on the markets for D&O and errors and omissions coverages;

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  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, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow;
 
  man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;
 
  the unpredictability of the nature, targets, severity or frequency of potential terrorist events, as well as the uncertainty as to our ability to contain our terrorism exposure effectively, notwithstanding the extension through December 31, 2007 of the Terrorism Risk Insurance Act of 2002;
 
  the occurrence of epidemics;
 
  exposure to liabilities due to claims made by insureds and others relating to asbestos remediation and health-based asbestos impairments, as well as exposure to liabilities for environmental pollution, mass tort, construction defect claims and exposure to liabilities due to claims made by insureds and others relating to lead-based paint;
 
  whether a national privately financed trust to replace litigation of asbestos claims with payments to claimants from the trust will be established or approved through federal legislation, or, if established and approved, whether it will contain funding requirements in excess of our established loss reserves or carried loss reserves;
 
  the sufficiency of our loss reserves and the possibility of future increases in reserves;
 
  regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries imposed by state regulatory agencies and minimum risk-based capital standards established by the National Association of Insurance Commissioners;

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  the risks and uncertainties associated with our loss reserves as outlined in the Critical Accounting Estimates and the Reserves – Estimates and Uncertainties sections 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.
Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is a broad term related to changes in the fair value of a financial instrument. Discussions herein regarding market risk focus on only one element of market risk, which is price risk. Price risk relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors that relate to market volatility of the rate, index or price underlying the financial instrument. Our primary market risk exposures are due to changes in interest rates, although we have certain exposures to changes in equity prices and foreign currency exchange rates. The fair value of the financial instruments is adversely affected when interest rates rise, equity markets decline and the dollar strengthens against foreign currency.
Active management of market risk is integral to our operations. We may use the following tools to manage our exposure to market risk within defined tolerance ranges: (1) change the character of future investments purchased or sold, (2) use derivatives to offset the market behavior of existing assets and liabilities or assets expected to be purchased and liabilities to be incurred, or (3) rebalance our existing asset and liability portfolios.
Sensitivity Analysis
We monitor our sensitivity to interest rate risk by evaluating the change in the value of financial assets and liabilities due to fluctuations in interest rates. The evaluation is performed by applying an instantaneous change in interest rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on our fair value at risk and the resulting effect on stockholders’ equity. The analysis presents the sensitivity of the fair value of our financial instruments to selected changes in market rates and prices. The range of change chosen reflects our view of changes that are reasonably possible over a one-year period. The selection of the range of values chosen to represent changes in interest rates should not be construed as our prediction of future market events, but rather an illustration of the impact of such events.
The sensitivity analysis estimates the decline in the fair value of our interest sensitive assets and liabilities that were held on December 31, 2006 and December 31, 2005 due to instantaneous parallel increases in the period end yield curve of 100 and 150 basis points.
The sensitivity analysis also assumes an instantaneous 10% and 20% decline in the foreign currency exchange rates versus the United States dollar from their levels at December 31, 2006 and December 31, 2005, with all other variables held constant.
Equity price risk was measured assuming an instantaneous 10% and 25% decline in the S&P 500 Index (Index) from its level at December 31, 2006 and December 31, 2005, with all other variables held constant. Our equity holdings were assumed to be highly and positively correlated with the Index. At December 31, 2006, a 10% and 25% decrease in the Index would result in a $265 million and $662 million decrease compared to a $227 million and $567 million decrease at December 31, 2005, in the market value of our equity investments.
Of these amounts, under the 10% and 25% scenarios, $4 million and $10 million at December 31, 2006 and $4 million and $11 million at December 31, 2005 pertained to decreases in the fair value of the separate account investments. These decreases would substantially be offset by decreases in related separate account liabilities to customers. Similarly, increases in the fair value of the separate account equity investments would also be offset by increases in the same related separate account liabilities by the same approximate amounts.

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The following tables present the estimated effects on the fair value of our financial instruments at December 31, 2006 and December 31, 2005, due to an increase in interest rates of 100 basis points, a 10% decline in foreign currency exchange rates and a 10% decline in the Index.
Market Risk Scenario 1
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 31, 2006   Value     Rate Risk     Risk     Risk  
(In millions)                                
General account:
                               
Fixed maturity securities available-for-sale
  $ 35,647     $ (1,959 )   $ (98 )   $ (91 )
Fixed maturity securities trading
    204       (2 )           (2 )
Equity securities available-for-sale
    597             (9 )     (60 )
Equity securities trading
    60                   (6 )
Short term investments available-for-sale
    5,538       (5 )     (32 )      
Short term investments trading
    172                    
Limited partnerships
    1,852       1             (37 )
Other invested assets
    23                    
Interest rate swaps
    1       190              
Equity index futures trading
          1             (65 )
Other derivative securities
    2       1       (2 )      
 
                       
 
                               
Total general account
    44,096       (1,773 )     (141 )     (261 )
 
                       
 
                               
Separate accounts:
                               
Fixed maturity securities
    434       (21 )            
Equity securities
    41                   (4 )
Short term investments
    21                    
 
                       
 
                               
Total separate accounts
    496       (21 )           (4 )
 
                       
 
                               
Total securities
  $ 44,592     $ (1,794 )   $ (141 )   $ (265 )
 
                       
 
                               
Debt (carrying value)
  $ 2,156     $ (122 )   $     $  
 
                       

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Market Risk Scenario 1
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 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 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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The following tables present the estimated effects on the fair value of our financial instruments at December 31, 2006 and December 31, 2005, due to an increase in interest rates of 150 basis points, a 20% decline in foreign currency exchange rates and a 25% decline in the Index.
Market Risk Scenario 2
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 31, 2006   Value     Rate Risk     Risk     Risk  
(In millions)                                
General account:
                               
Fixed maturity securities available-for-sale
  $ 35,647     $ (2,925 )   $ (197 )   $ (227 )
Fixed maturity securities trading
    204       (3 )           (5 )
Equity securities available-for-sale
    597             (18 )     (149 )
Equity securities trading
    60                   (15 )
Short term investments available-for-sale
    5,538       (7 )     (64 )      
Short term investments trading
    172                    
Limited partnerships
    1,852       1             (93 )
Other invested assets
    23                    
Interest rate swaps
    1       279              
Equity index futures trading
          2             (162 )
Other derivative securities
    2       1       (4 )     (1 )
 
                       
 
                               
Total general account
    44,096       (2,652 )     (283 )     (652 )
 
                       
 
                               
Separate accounts:
                               
Fixed maturity securities
    434       (31 )            
Equity securities
    41                   (10 )
Short term investments
    21                    
 
                       
 
                               
Total separate accounts
    496       (31 )           (10 )
 
                       
 
                               
Total securities
  $ 44,592     $ (2,683 )   $ (283 )   $ (662 )
 
                       
 
                               
Debt (carrying value)
  $ 2,156     $ (180 )   $     $  
 
                       

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Market Risk Scenario 2
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 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 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 )   $     $  
 
                       

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CNA Financial Corporation
Consolidated Statements of Operations
                         
Years ended December 31   2006     2005     2004  
(In millions, except per share data)                        
Revenues
                       
Net earned premiums
  $ 7,603     $ 7,569     $ 8,209  
Net investment income
    2,412       1,892       1,680  
Realized investment gains (losses), net of participating policyholders’ and minority interests
    86       (10 )     (248 )
Other revenues
    275       411       283  
 
                 
 
                       
Total revenues
    10,376       9,862       9,924  
 
                 
 
                       
Claims, Benefits and Expenses
                       
Insurance claims and policyholders’ benefits
    6,047       6,999       6,445  
Amortization of deferred acquisition costs
    1,534       1,543       1,680  
Other operating expenses
    1,027       1,034       1,174  
Restructuring and other related charges
    (13 )           (3 )
Interest
    131       124       124  
 
                 
 
                       
Total claims, benefits and expenses
    8,726       9,700       9,420  
 
                 
 
                       
Income before income tax and minority interest
    1,650       162       504  
Income tax (expense) benefit
    (469 )     105       (31 )
Minority interest
    (44 )     (24 )     (27 )
 
                 
 
                       
Income from continuing operations
    1,137       243       446  
Income (loss) from discontinued operations, net of income tax (expense) benefit of $7, $(2) and $(1)
    (29 )     21       (21 )
 
                 
 
                       
Net income
  $ 1,108     $ 264     $ 425  
 
                 
 
                       
Basic Earnings Per Share
                       
 
                       
Income from continuing operations
  $ 4.17     $ 0.68     $ 1.49  
Income (loss) from discontinued operations
    (0.11 )     0.08       (0.09 )
 
                 
 
                       
Basic earnings per share available to common stockholders
  $ 4.06     $ 0.76     $ 1.40  
 
                 
 
                       
Diluted Earnings Per Share
                       
 
                       
Income from continuing operations
  $ 4.16     $ 0.68     $ 1.49  
Income (loss) from discontinued operations
    (0.11 )     0.08       (0.09 )
 
                 
 
                       
Diluted earnings per share available to common stockholders
  $ 4.05     $ 0.76     $ 1.40  
 
                 
 
                       
Weighted Average Outstanding Common Stock and Common Stock Equivalents
                       
 
                       
Basic
    262.1       256.0       256.0  
 
                 
Diluted
    262.3       256.0       256.0  
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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CNA Financial Corporation
Consolidated Balance Sheets
                 
December 31   2006     2005  
(In millions, except share data)                
Assets
               
Investments:
               
Fixed maturity securities at fair value (amortized cost of $35,135 and $32,616)
  $ 35,851     $ 33,234  
Equity securities at fair value (cost of $408 and $511)
    657       681  
Limited partnership investments
    1,852       1,509  
Other invested assets
    26       33  
Short term investments
    5,710       4,238  
 
           
Total investments
    44,096       39,695  
Cash
    84       96  
Reinsurance receivables (less allowance for uncollectible receivables of $469 and $519)
    9,478       11,917  
Insurance receivables (less allowance for doubtful accounts of $368 and $445)
    2,108       2,096  
Accrued investment income
    313       312  
Receivables for securities sold
    303       565  
Deferred acquisition costs
    1,190       1,197  
Prepaid reinsurance premiums
    342       340  
Federal income taxes recoverable (includes $0 and $68 due from Loews Corporation)
          62  
Deferred income taxes
    855       1,105  
Property and equipment at cost (less accumulated depreciation of $571 and $546)
    277       197  
Goodwill and other intangible assets
    142       146  
Other assets
    592       737  
Separate account business
    503       551  
 
           
Total assets
  $ 60,283     $ 59,016  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Insurance reserves:
               
Claim and claim adjustment expenses
  $ 29,636     $ 30,938  
Unearned premiums
    3,784       3,706  
Future policy benefits
    6,645       6,297  
Policyholders’ funds
    1,015       1,495  
Collateral on loaned securities
    2,851       767  
Payables for securities purchased
    221       129  
Participating policyholders’ funds
    50       53  
Short term debt
          252  
Long term debt
    2,156       1,438  
Federal income taxes payable (includes $38 and $0 due to Loews Corporation)
    40        
Reinsurance balances payable
    539       1,636  
Other liabilities
    2,740       2,513  
Separate account business
    503       551  
 
           
Total liabilities
    50,180       49,775  
 
           
 
               
Commitments and contingencies (Notes B, F, G, I and K)
               
Minority interest
    335       291  
 
               
Stockholders’ equity:
               
Preferred stock (12,500,000 shares authorized)
               
Series H Issue (no par value; $100,000 stated value; no shares and 7,500 shares issued; held by Loews Corporation)
          750  
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,543 and 258,177,285 shares issued; and 271,108,780 and 256,001,968 shares outstanding)
    683       645  
Additional paid-in capital
    2,166       1,701  
Retained earnings
    6,486       5,621  
Accumulated other comprehensive income
    549       359  
Treasury stock (1,931,763 and 2,175,317 shares), at cost
    (58 )     (67 )
 
           
 
    9,826       9,009  
Notes receivable for the issuance of common stock
    (58 )     (59 )
 
           
Total stockholders’ equity
    9,768       8,950  
 
           
Total liabilities and stockholders’ equity
  $ 60,283     $ 59,016  
 
           
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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CNA Financial Corporation
Consolidated Statements of Cash Flows
                         
Years ended December 31   2006     2005     2004  
(In millions)                        
Cash Flows from Operating Activities:
                       
Net income
  $ 1,108     $ 264     $ 425  
Adjustments to reconcile net income to net cash flows provided by operating activities:
                       
(Income) loss from discontinued operations
    29       (21 )     21  
Loss (gain) on disposal of property and equipment
          (1 )     36  
Minority interest
    44       24       27  
Deferred income tax provision
    173       (220 )     37  
Trading securities activity
    374       164       (93 )
Realized investment (gains) losses, net of participating policyholders’ and minority interests
    (86 )     10       248  
Undistributed earnings of equity method investees
    (170 )     (45 )     (67 )
Amortization of bond (discount) premium
    (274 )     (153 )     9  
Depreciation
    48       54       75  
Changes in:
                       
Receivables, net
    2,427       3,531       (545 )
Deferred acquisition costs
    7       71       194  
Accrued investment income
    (1 )     (15 )     (12 )
Federal income taxes recoverable/payable
    102       (62 )     596  
Prepaid reinsurance premiums
    (2 )     788       233  
Reinsurance balances payable
    (1,097 )     (1,344 )     (318 )
Insurance reserves
    (771 )     (943 )     1,075  
Other assets
    142       (16 )     335  
Other liabilities
    306       55       105  
Other, net
    (98 )     75       (397 )
 
                 
 
                       
Total adjustments
    1,153       1,952       1,559  
 
                 
 
                       
Net cash flows provided by operating activities-continuing operations
  $ 2,261     $ 2,216     $ 1,984  
 
                 
Net cash flows used by operating activities-discontinued operations
  $ (11 )   $ (47 )   $ (16 )
 
                 
Net cash flows provided by operating activities-total
  $ 2,250     $ 2,169     $ 1,968  
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Purchases of fixed maturity securities
  $ (48,757 )   $ (62,990 )   $ (58,379 )
Proceeds from fixed maturity securities:
                       
Sales
    42,433       55,611       48,427  
Maturities, calls and redemptions
    4,310       4,579       4,800  
Purchases of equity securities
    (340 )     (482 )     (351 )
Proceeds from sales of equity securities
    221       316       522  
Change in short term investments
    (1,331 )     1,627       2,021  
Change in collateral on loaned securities
    2,084       (151 )     476  
Change in other investments
    (195 )     86       (30 )
Purchases of property and equipment
    (131 )     (45 )     (41 )
Dispositions
    8       57       647  
Other, net
    16       56       (194 )
 
                 
 
                       
Net cash flows used by investing activities-continuing operations
  $ (1,682 )   $ (1,336 )   $ (2,102 )
 
                 
Net cash flows provided by investing activities-discontinued operations
  $ 36     $ 20     $ 18  
 
                 
Net cash flows used by investing activities-total
  $ (1,646 )   $ (1,316 )   $ (2,084 )
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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    2006     2005     2004  
Cash Flows from Financing Activities:
                       
Proceeds from the issuance of long term debt
  $ 759     $     $ 972  
Principal payments on debt
    (294 )     (568 )     (618 )
Return of investment contract account balances
    (589 )     (281 )     (479 )
Receipts of investment contract account balances
    4       7       181  
Payment to repurchase Series H Issue preferred stock
    (993 )            
Proceeds from the issuance of common stock
    499              
Stock options exercised
    10       2        
Other, net
    (1 )     3       5  
 
                 
 
                       
Net cash flows (used) provided by financing activities-continuing operations
  $ (605 )   $ (837 )   $ 61  
 
                 
Net cash flows provided by financing activities-discontinued operations
  $     $     $  
 
                 
Net cash flows (used) provided by financing activities-total
  $ (605 )   $ (837 )   $ 61  
 
                 
 
                       
Net change in cash
    (1 )     16       (55 )
Net cash transactions from continuing operations to discontinued operations
    14       (42 )     13  
Net cash transactions from discontinued operations to continuing operations
    (14 )     42       (13 )
 
                       
Cash, beginning of year
    125       109       164  
 
                 
 
                       
Cash, end of year
  $ 124     $ 125     $ 109  
 
                 
 
                       
Cash-continuing operations
  $ 84     $ 96     $ 95  
Cash-discontinued operations
    40       29       14  
 
                 
Cash-total
  $ 124     $ 125     $ 109  
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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CNA Financial Corporation
Consolidated Statements of Stockholders’ Equity
                                                                 
                                    Accumulated             Notes        
                    Additional             Other             Receivable for     Total  
    Preferred     Common     Paid-in     Retained     Comprehensive     Treasury     the Issuance of     Stockholders’  
(In millions)   Stock     Stock     Capital     Earnings     Income (Loss)     Stock     Common Stock     Equity  
Balance, January 1, 2004
  $ 1,500     $ 565     $ 1,031     $ 4,932     $ 852     $ (69 )   $ (76 )   $ 8,735  
 
                                               
 
                                                               
Comprehensive income:
                                                               
Net income
                      425                         425  
Other comprehensive loss
                            (191 )                 (191 )
 
                                                             
Total comprehensive income
                                                            234  
Conversion of Series I preferred stock to common stock
    (750 )     80       670                                
Decrease in notes receivable for the issuance of common stock
                                        5       5  
 
                                               
 
                                                               
Balance, December 31, 2004
    750       645       1,701       5,357       661       (69 )     (71 )     8,974  
 
                                                               
Comprehensive income:
                                                               
Net income
                      264                         264  
Other comprehensive loss
                            (302 )                 (302 )
 
                                                             
Total comprehensive loss
                                                            (38 )
Stock options exercised
                                  2             2  
Decrease in notes receivable for the issuance of common stock
                                        12       12  
 
                                               
 
                                                               
Balance, December 31, 2005
    750       645       1,701       5,621       359       (67 )     (59 )     8,950  
 
                                                               
Comprehensive income:
                                                               
Net income
                      1,108                         1,108  
Other comprehensive income
                            236                   236  
 
                                                             
Total comprehensive income
                                                            1,344  
Liquidation preference in excess of par value on Series H Issue
                      (243 )                       (243 )
Repurchase of Series H Issue
    (750 )                                         (750 )
Issuance of common stock
            38       461                                       499  
Adjustment to initially apply FAS 158, net of tax
                                    (46 )                     (46 )
Stock options exercised
                1                   9             10  
Decrease in notes receivable for the issuance of common stock
                                        1       1  
Other
                3                               3  
 
                                               
 
                                                               
Balance, December 31, 2006
  $     $ 683     $ 2,166     $ 6,486     $ 549     $ (58 )   $ (58 )   $ 9,768  
 
                                               
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. CNA’s property and casualty and the remaining life and group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company (CIC) and Continental Assurance Company (CAC). Loews Corporation (Loews) owned approximately 89% of the outstanding common stock of CNAF as of December 31, 2006.
The Company’s individual life insurance business, including its previously wholly-owned subsidiary Valley Forge Life Insurance Company (VFL), was sold on April 30, 2004 to Swiss Re Life & Health America Inc. (Swiss Re). The results of the individual life insurance business sold through the date of sale are included in the Consolidated Statement of Operations for the year ended December 31, 2004. See Note P for further information.
The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany amounts have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The amounts presented on the December 31, 2005 Consolidated Balance Sheet related to Insurance receivables and Other liabilities have been corrected from $1,866 million and $2,283 million to $2,096 million and $2,513 million, to conform to the 2006 presentation. The correction of $230 million relates to balances payable to insureds that were previously reflected as a deduction from insurance receivables and are currently reflected as liabilities. The balances are principally related to amounts deposited with the Company by customers, such as amounts related to the funding of deductible obligations.
Business
CNA’s core property and casualty insurance operations are reported in two business segments: Standard Lines and Specialty Lines. CNA’s non-core operations are managed in two segments: Life and Group Non-Core and Corporate and Other Non-Core.
CNA serves a wide variety of customers, including small, medium and large businesses; insurance companies; associations; professionals; and groups and individuals with a broad range of insurance and risk management products and services.
Core insurance products include property and casualty coverages. Non-core insurance products, which primarily have been sold or placed in run-off, include life and accident and health insurance; retirement products and annuities; and property and casualty reinsurance. CNA services include risk management, information services and claims administration. CNA’s products and services are marketed through independent agents, brokers, managing general agents and direct sales.
Insurance Operations
Premiums: Insurance premiums on property and casualty and accident and health insurance contracts are recognized in proportion to the underlying risk insured which principally are earned ratably over the duration of the policies after deductions for ceded insurance premiums. The reserve for unearned premiums on these contracts represents the portion of premiums written relating to the unexpired terms of coverage.
An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due currently or in the future from insureds, including amounts due from insureds related to losses under high deductible policies, management’s experience and current economic conditions.

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Property and casualty contracts that are retrospectively rated contain provisions that result in an adjustment to the initial policy premium depending on the contract provisions and loss experience of the insured during the experience period. For such contracts, the Company estimates the amount of ultimate premiums that the Company may earn upon completion of the experience period and recognizes either an asset or a liability for the difference between the initial policy premium and the estimated ultimate premium. The Company adjusts such estimated ultimate premium amounts during the course of the experience period based on actual results to date. The resulting adjustment is recorded as either a reduction of or an increase to the earned premiums for the period.
Premiums for life insurance products and annuities are recognized as revenue when due after deductions for ceded insurance premiums.
Claim and claim adjustment expense reserves: Claim and claim adjustment expense reserves, except reserves for structured settlements not associated with asbestos and environmental pollution and mass tort (APMT), workers’ compensation lifetime claims, accident and health claims and certain claims associated with discontinued operations, are not discounted and are based on 1) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations; 2) estimates of incurred but not reported losses; 3) estimates of losses on assumed reinsurance; 4) estimates of future expenses to be incurred in the settlement of claims; 5) estimates of salvage and subrogation recoveries and 6) estimates of amounts due from insureds related to losses under high deductible policies. Management considers current conditions and trends as well as past Company and industry experience in establishing these estimates. The effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance. Ceded claim and claim adjustment expense reserves are reported as a component of Reinsurance receivables in the Consolidated Balance Sheets. See Note Q for further information on claim and claim adjustment expense reserves for discontinued operations.
Claim and claim adjustment expense reserves are presented net of anticipated amounts due from insureds related to losses under high deductible policies of $2.5 billion and $2.8 billion as of December 31, 2006 and 2005. A portion of these amounts is supported by collateral. The Company also has an allowance for uncollectible deductible amounts, which is presented as a component of the allowance for doubtful accounts included in the Insurance receivables on the Consolidated Balance Sheets.
Structured settlements have been negotiated for certain property and casualty insurance claims. Structured settlements are agreements to provide fixed periodic payments to claimants. Certain structured settlements are funded by annuities purchased from CAC for which the related annuity obligations are reported in future policy benefits reserves. Obligations for structured settlements not funded by annuities are included in claim and claim adjustment expense reserves and carried at present values determined using interest rates ranging from 4.6% to 7.5% at December 31, 2006 and 2005. At December 31, 2006 and 2005, the discounted reserves for unfunded structured settlements were $814 million and $843 million, net of discount of $1,250 million and $1,309 million.
Workers’ compensation lifetime claim reserves are calculated using mortality assumptions determined through statutory regulation and economic factors. Accident and health claim reserves are calculated using mortality and morbidity assumptions based on Company and industry experience. Workers’ compensation lifetime claim reserves and accident and health claim reserves are discounted at interest rates that range from 3.5% to 6.5% at December 31, 2006 and 2005. At December 31, 2006 and 2005, such discounted reserves totaled $1,284 million and $1,238 million, net of discount of $416 million and $430 million.
Future policy benefits reserves: Reserves for long term care products are computed using the net level premium method, which incorporates actuarial assumptions as to interest rates, mortality, morbidity, persistency, withdrawals and expenses. Actuarial assumptions generally vary by plan, age at issue and policy duration, and include a margin for adverse deviation. Interest rates range from 6.0% to 8.6% at December 31, 2006 and 2005, and mortality, morbidity and withdrawal assumptions are based on Company and industry experience prevailing at the time of issue. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium paying period. The net reserves for traditional life insurance products (whole and term life products) including interest-sensitive contracts were ceded on a 100% indemnity reinsurance basis to Swiss Re in connection with the sale of the individual life insurance business. See Note P for further information.
Policyholders’ funds reserves: Policyholders’ funds reserves primarily include reserves for investment contracts without life contingencies. For these contracts, policyholder liabilities are equal to the accumulated policy account values, which consist of an accumulation of deposit payments plus credited interest, less withdrawals and amounts assessed through the end of the period.

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Guaranty fund and other insurance-related assessments: Liabilities for guaranty fund and other insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated, and when the event obligating the entity to pay an imposed or probable assessment has occurred. Liabilities for guaranty funds and other insurance-related assessments are not discounted and are included as part of Other liabilities in the Consolidated Balance Sheets. As of December 31, 2006 and 2005, the liability balances were $189 million and $185 million. As of December 31, 2006 and 2005, included in other assets were $7 million and $10 million of related assets for premium tax offsets. The related asset is limited to the amount that is able to be assessed on future premium collections from business written or committed to be written.
Reinsurance: Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported as receivables in the Consolidated Balance Sheets. The cost of reinsurance is primarily accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. The ceding of insurance does not discharge the primary liability of the Company. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, management’s experience and current economic conditions. The expenses incurred related to uncollectible reinsurance receivables are presented as a component of Insurance claims and policyholders’ benefits in the Consolidated Statements of Operations.
Reinsurance contracts that do not effectively transfer the underlying economic risk of loss on policies written by the Company are recorded using the deposit method of accounting, which requires that premium paid or received by the ceding company or assuming company be accounted for as a deposit asset or liability. At December 31, 2006 and 2005, the Company had approximately $104 million and $171 million recorded as deposit assets and $71 million and $111 million recorded as deposit liabilities.
Income on reinsurance contracts accounted for under the deposit method is recognized using an effective yield based on the anticipated timing of payments and the remaining life of the contract. When the estimate of timing of payments changes, the effective yield is recalculated to reflect actual payments to date and the estimated timing of future payments. The deposit asset or liability is adjusted to the amount that would have existed had the new effective yield been applied since the inception of the contract. This adjustment is reflected in other revenue or other operating expense as appropriate.
Participating insurance: Policyholder dividends are accrued using an estimate of the amount to be paid based on underlying contractual obligations under policies and applicable state laws. When limitations exist on the amount of net income from participating life insurance contracts that may be distributed to shareholders, the share of net income on those policies that cannot be distributed to shareholders is excluded from stockholders’ equity by a charge to operations and the establishment of a corresponding liability.
Deferred acquisition costs: Acquisition costs include commissions, premium taxes and certain underwriting and policy issuance costs which vary with and are related primarily to the acquisition of business. Such costs related to property and casualty business are deferred and amortized ratably over the period the related premiums are earned.
Deferred acquisition costs related to accident and health insurance are amortized over the premium-paying period of the related policies using assumptions consistent with those used for computing future policy benefits reserves for such contracts. Assumptions as to anticipated premiums are made at the date of policy issuance or acquisition and are consistently applied during the lives of the contracts. Deviations from estimated experience are included in results of operations when they occur. For these contracts, the amortization period is typically the estimated life of the policy.
Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. Deferred acquisition costs are recorded net of ceding commissions and other ceded acquisition costs. The Company evaluates deferred acquisition costs for recoverability. Adjustments, if necessary, are recorded in current results of operations.
Investments in life settlement contracts and related revenue recognition: The Company has purchased investments in life settlement contracts. Under a life settlement contract, CNA obtains the rights of being the owner and beneficiary to an underlying life insurance policy. The carrying value of each contract at purchase and at the end of each reporting period is equal to the cash surrender value of the policy. Amounts paid to purchase these contracts that are in excess of the cash surrender value, at the date of purchase, were expensed immediately.

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Periodic maintenance costs, such as premiums, necessary to keep the underlying policy inforce are expensed as incurred and are included in other operating expenses. Revenue is recognized and included in Other revenue in the Consolidated Statements of Operations when the life insurance policy underlying the life settlement contract matures. See the Accounting Pronouncements section of this note for further discussion of Financial Accounting Standards Board (FASB) Staff Position No. 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors.
Separate Account Business
Separate account assets and liabilities represent contract holder funds related to investment and annuity products, which are segregated into accounts with specific underlying investment objectives. The assets and liabilities of these contracts are legally segregated and reported as assets and liabilities of the separate account business. Substantially all assets of the separate account business are carried at fair value. Separate account liabilities are carried at contract values. Net income accruing to the Company related to separate accounts is primarily included within Other revenue on the Consolidated Statements of Operations.
Investments
Valuation of investments: CNA classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity securities as either available-for-sale or trading, and as such, they are carried at fair value. Changes in fair value of trading securities are reported within net investment income. The amortized cost of fixed maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, which are included in net investment income. Changes in fair value related to available-for-sale securities are reported as a component of other comprehensive income. Investments are written down to fair value and losses are recognized in Realized investment gains (losses) on the Consolidated Statements of Operations when a decline in value is determined to be other-than-temporary.
For asset-backed securities included in fixed maturity securities, the Company recognizes income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments are reflected in net investment income.
The Company’s limited partnership investments are recorded at fair value and typically reflect a reporting lag of up to three months. Fair value represents CNA’s equity in the partnership’s net assets as determined by the General Partner. Changes in fair value, which represents changes in partnership’s net assets, are recorded within net investment income. The majority of the limited partnerships invest in a substantial number of securities that are readily marketable. The Company is primarily a passive investor in such partnerships and does not have influence over the partnerships’ management, who are committed to operate them according to established guidelines and strategies. These strategies may include the use of leverage and hedging techniques that potentially introduce more volatility and risk to the partnerships. In accordance with FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R), the Company has consolidated three limited partnerships, which were previously accounted for using the equity method.
Other invested assets include certain derivative securities and real estate investments. Investments in derivative securities are carried at fair value with changes in fair value reported as a component of realized gains or losses or other comprehensive income, depending on their hedge designation. Changes in the fair value of derivative securities which are not designated as hedges, are reported as a component of realized gains or losses. Real estate investments are carried at the lower of cost or market value. Short term investments are generally carried at cost, which approximates fair value.
Realized investment gains and losses: All securities sold resulting in investment gains and losses are recorded on the trade date, except for bank loan participations which are recorded on the date that the legal agreements are finalized. Realized investment gains and losses are determined on the basis of the cost or amortized cost of the specific securities sold.
Equity in unconsolidated affiliates: CNA uses the equity method of accounting for investments in companies in which its ownership interest of the voting shares of an investee company enables CNA to influence the operating or

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financial decisions of the investee company, but CNA’s interest in the investee does not require consolidation. CNA’s proportionate share of equity in net income of these unconsolidated affiliates is reported in other revenues.
Securities lending activities: CNA lends securities to unrelated parties, primarily major brokerage firms. Borrowers of these securities must deposit collateral with CNA of at least 102% of the fair value of the securities loaned if the collateral is cash or securities. CNA maintains effective control over all loaned securities and, therefore, continues to report such securities as Fixed maturity securities in the Consolidated Balance Sheets.
Cash collateral received on these transactions is invested in short term investments with an offsetting liability recognized for the obligation to return the collateral. Non-cash collateral, such as securities or letters of credit, received by the Company are not reflected as assets of the Company as there exists no right to sell or repledge the collateral. The fair value of collateral held and included in short term investments was $2,851 million and $767 million at December 31, 2006 and 2005. The fair value of non-cash collateral was $385 million and $138 million at December 31, 2006 and 2005.
Derivative Financial Instruments
All investments in derivatives are recorded at fair value. A derivative is typically defined as an instrument whose value is “derived” from an underlying instrument, index or rate, has a notional amount, requires little or no initial investment and can be net settled. Derivatives include, but are not limited to, the following types of financial instruments: interest rate swaps, interest rate caps and floors, put and call options, warrants, futures, forwards, commitments to purchase securities, credit default swaps and combinations of the foregoing. Derivatives embedded within non-derivative instruments (such as call options embedded in convertible bonds) must be separated from the host instrument when the embedded derivative is not clearly and closely related to the host instrument.
The Company’s derivatives are reported as other invested assets or other liabilities. Embedded derivative instruments subject to bifurcation are reported together with the host contract, at fair value. If certain criteria are met, a derivative may be specifically designated as a hedge of exposures to changes in fair value, cash flows or foreign currency exchange rates. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative, the nature of any hedge designation thereon and whether the derivative was transacted in a designated trading portfolio.
The Company’s accounting for changes in the fair value of general account derivatives is as follows:
     
Nature of Hedge Designation   Derivative’s Change in Fair Value Reflected In:
No hedge designation
  Realized investment gains or losses
 
   
Fair value designation
  Realized investment gains or losses, along with the change in fair value of the hedged asset or liability that is attributable to the hedged risk
 
   
Cash flow designation
  Other comprehensive income, with subsequent reclassification to earnings when the hedged transaction, asset or liability impacts earnings
 
   
Foreign currency designation
  Consistent with fair value or cash flow above, depending on the nature of the hedging relationship
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative for which hedge accounting has been designated is not (or ceases to be) highly effective, the Company discontinues hedge accounting prospectively.
Separate account investments held in designated trading portfolios are carried at fair value with changes therein reflected in investment income. Hedge accounting on derivatives in these separate accounts is generally not applicable.

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The Company uses derivatives in the normal course of business, primarily in an attempt to reduce its exposure to market risk (principally interest rate risk, equity stock price risk and foreign currency risk) stemming from various assets and liabilities and credit risk (the ability of an obligor to make timely payment of principal and/or interest). The Company’s principal objective under such risk strategies is to achieve the desired reduction in economic risk, even if the position will not receive hedge accounting treatment.
The Company’s use of derivatives is limited by statutes and regulations promulgated by the various regulatory bodies to which it is subject, and by its own derivative policy. The derivative policy limits the authorization to initiate derivative transactions to certain personnel. Derivatives entered into for hedging, regardless of the choice to designate hedge accounting, shall have a maturity that effectively correlates to the underlying hedged asset or liability. The policy prohibits the use of derivatives containing greater than one-to-one leverage with respect to changes in the underlying price, rate or index. The policy also prohibits the use of borrowed funds, including funds obtained through securities lending, to engage in derivative transactions.
Credit exposure associated with non-performance by the counterparties to derivative instruments is generally limited to the uncollateralized fair value of the asset related to the instruments recognized in the Consolidated Balance Sheets. The Company attempts to mitigate the risk of non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives to multiple counterparties. The Company generally requires that all over-the-counter derivative contracts be governed by an International Swaps and Derivatives Association (ISDA) Master Agreement, and exchanges collateral under the terms of these agreements with its derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty.
The Company has exposure to economic losses due to interest rate risk arising from changes in the level of, or volatility of, interest rates. The Company attempts to mitigate its exposure to interest rate risk through portfolio management, which includes rebalancing its existing portfolios of assets and liabilities, as well as changing the characteristics of investments to be purchased or sold in the future. In addition, various derivative financial instruments are used to modify the interest rate risk exposures of certain assets and liabilities. These strategies include the use of interest rate swaps, interest rate caps and floors, options, futures, forwards and commitments to purchase securities. These instruments are generally used to lock interest rates or market values, to shorten or lengthen durations of fixed maturity securities or investment contracts, or to hedge (on an economic basis) interest rate risks associated with investments and variable rate debt. The Company has used these types of instruments as designated hedges against specific assets or liabilities on an infrequent basis.
The Company is exposed to equity price risk as a result of its investment in equity securities and equity derivatives. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities, or instruments that derive their value from such securities. CNA attempts to mitigate its exposure to such risks by limiting its investment in any one security or index. The Company may also manage this risk by utilizing instruments such as options, swaps, futures and collars to protect appreciation in securities held. CNA uses derivatives in one of its separate accounts to mitigate equity price risk associated with its indexed group annuity contracts by purchasing Standard & Poor’s 500® (S&P 500®) index futures contracts in a notional amount equal to the contract holder liability.
The Company has exposure to credit risk arising from the uncertainty associated with a financial instrument obligor’s ability to make timely principal and/or interest payments. The Company attempts to mitigate this risk by limiting credit concentrations, practicing diversification, and frequently monitoring the credit quality of issuers and counterparties. In addition the Company may utilize credit derivatives such as credit default swaps to modify the credit risk inherent in certain investments. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments. The Company infrequently designates these types of instruments as hedges against specific assets.
Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the fair value of financial instruments denominated in a foreign currency. The Company’s foreign transactions are primarily denominated in British pounds, Euros and Canadian dollars. The Company typically manages this risk via asset/liability currency matching and through the use of foreign currency forwards. The Company has infrequently designated these types of instruments as hedges against specific assets or liabilities.
The contractual or notional amounts for derivatives are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential for gain or loss on these instruments. Interest rates, equity prices and foreign currency exchange rates affect the fair value of derivatives. The fair values generally

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represent the estimated amounts that CNA would expect to receive or pay upon termination of the contracts at the reporting date. Dealer quotes are available for substantially all of CNA’s derivatives. For derivative instruments not actively traded, fair values are estimated using values obtained from independent pricing services, costs to settle or quoted market prices of comparable instruments.
The Company is required to provide collateral for all exchange-traded futures and options contracts. These margin requirements are determined by the individual exchanges based on the fair value of the open positions and are in the custody of the exchange. Collateral may also be required for over-the-counter contracts such as interest rate swaps, credit default swaps and currency forwards per the ISDA agreements in place. The fair value of collateral provided was $58 million at December 31, 2006 and consisted primarily of cash. The fair value of the collateral at December 31, 2005 was $66 million and consisted primarily of U.S. Treasury Bills, which the Company had access to subject to replacement and therefore remained recorded as a component of Short term investments on the Consolidated Balance Sheets.
Income Taxes
The Company and its eligible subsidiaries (CNA Tax Group) are included in the consolidated federal income tax return of Loews and its eligible subsidiaries. The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is based on the estimated useful lives of the various classes of property and equipment and is determined principally on the straight-line method. Furniture and fixtures are depreciated over seven years. Office equipment is depreciated over five years. The estimated lives for data processing equipment and software range from three to five years. Leasehold improvements are depreciated over the corresponding lease terms.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived intangible assets of $142 million and $146 million as of December 31, 2006 and 2005 primarily represents the excess of purchase price over the fair value of the net assets of acquired entities and businesses. The balance at December 31, 2006 and 2005 primarily related to Specialty Lines. During 2006, the Company determined that goodwill and other intangible assets of approximately $4 million was impaired related to the Standard Lines segment. Goodwill and indefinite-lived intangible assets are tested for impairment annually or when certain triggering events require such tests.
Earnings per Share Data
Earnings per share available to common stockholders is based on weighted average outstanding shares. Basic earnings per share excludes dilution and is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
The Series H Cumulative Preferred Stock Issue (Series H Issue) was held by Loews and accrued cumulative dividends at an initial rate of 8% per year, compounded annually. In August 2006, the Company repurchased the Series H Issue from Loews for approximately $993 million, a price equal to the liquidation preference. The Series H Issue dividend amounts through the repurchase date for the years ended December 31, 2006, 2005 and 2004 have been subtracted from Income from Continuing Operations to determine income from continuing operations available to common stockholders.
Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the years ended December 31, 2006, 2005 and 2004, approximately one million shares attributable to exercises under stock-based employee compensation plans were excluded from the calculation of diluted earnings per share because they were antidilutive.

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The computation of earnings per share is as follows:
Earnings Per Share
                         
Years ended December 31   2006     2005     2004  
(In millions, except per share amounts)                        
Income from continuing operations
  $ 1,137     $ 243     $ 446  
Less: undeclared preferred stock dividend through repurchase date
    (46 )     (70 )     (65 )
 
                 
 
                       
Income from continuing operations available to common stockholders
  $ 1,091     $ 173     $ 381  
 
                 
 
                       
Weighted average outstanding common stock and common stock equivalents
    262.1       256.0       256.0  
Effect of dilutive securities, employee stock options
    0.2              
 
                 
Adjusted weighted average outstanding common stock and common stock equivalents assuming conversions
    262.3       256.0       256.0  
 
                 
 
                       
Basic earnings per share from continuing operations available to common stockholders
  $ 4.17     $ 0.68     $ 1.49  
 
                 
Diluted earnings per share from continuing operations available to common stockholders
  $ 4.16     $ 0.68     $ 1.49  
 
                 
The following table illustrates the effect on net income and earnings per share data if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123) to stock-based employee compensation under the Company’s stock-based compensation plans for the years ended 2005 and 2004.
Pro Forma Effect of SFAS 123 on Results
                 
Years ended December 31   2005     2004  
(In millions, except per share amounts)                
Income from continuing operations
  $ 243     $ 446  
Less: undeclared preferred stock dividend
    (70 )     (65 )
 
           
 
Income from continuing operations available to common stockholders
    173       381  
 
Income (loss) from discontinued operations, net of tax
    21       (21 )
 
           
 
Net income available to common stockholders
    194       360  
 
Less: Total stock-based compensation cost determined under the fair value method, net of tax
    (2 )     (2 )
 
           
 
Pro forma net income available to common stockholders
  $ 192     $ 358  
 
           
 
Basic and diluted earnings per share, as reported
  $ 0.76     $ 1.40  
 
           
 
Basic and diluted earnings per share, pro forma
  $ 0.75     $ 1.39  
 
           
Supplementary Cash Flow Information
Cash payments made for interest were $109 million, $139 million and $123 million for the years ended December 31, 2006, 2005 and 2004. Cash payments made for federal income taxes were $173 million and $164 million for the years ended December 31, 2006 and 2005. Cash refunds received for federal income taxes amounted to $627 million for the year ended December 31, 2004.
Accounting Pronouncements
In May of 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correction (SFAS 154). This standard is a replacement of Accounting Policy Board Opinion No. 20, Accounting Changes, and FASB Standard No. 3, Reporting Accounting Changes in Interim Financial Statements. Under the new standard, any voluntary changes in accounting principles should be adopted via a retrospective application of the accounting principle in the financial statements presented in addition to obtaining an opinion from the auditors that the new principle is

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preferred. In addition, adoption of a change in accounting principle required by the issuance of a new accounting standard would also require retroactive restatement, unless the new standard includes explicit transition guidelines. SFAS 154 was effective for fiscal years beginning after December 15, 2005 and was adopted by the Company as of January 1, 2006. Adoption of SFAS 154 did not have an impact on the results of operations or equity of the Company.
In November of 2005, the FASB issued FASB Staff Position (FSP) No. 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (FSP 115-1), as applicable to debt and equity securities that are within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115) and equity securities that are accounted for using the cost method specified in Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FSP 115-1 nullified certain requirements of The Emerging Issues Task Force Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1), which provided guidance on determining whether an impairment is other-than-temporary. FSP 115-1 replaced guidance set forth in EITF 03-1 with references to existing other-than-temporary impairment guidance and clarified that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. FSP 115-1 carried forward the requirements in EITF 03-1 regarding required disclosures in the financial statements and requires additional disclosure related to factors considered in reaching the conclusion that the impairment is not other-than-temporary. In addition, in periods subsequent to the recognition of an other-than-temporary impairment loss for debt securities, the discount or reduced premium would be amortized over the remaining life of the security based on future estimated cash flows. FSP 115-1 was effective for reporting periods beginning after December 15, 2005 and was adopted by the Company as of January 1, 2006. Adoption of this standard increased income by approximately $3 million for the year ended December 31, 2006 related to the amortization of discount or reduced premium resulting from previously impaired securities. The Company has included the required additional disclosures in Note B.
In December of 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), that amends SFAS 123, as originally issued in May of 1995. SFAS 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). After the effective date of this standard, entities are not permitted to use the intrinsic value method specified in APB 25 to measure compensation expense and generally are required to measure compensation expense using a fair-value based method. The Company applied the modified prospective transition method. The modified prospective method requires a company to (a) record compensation expense for all awards it grants, modifies, repurchases or cancels after the date it adopts the standard and (b) record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123R was effective for the Company as of January 1, 2006. The Company applied the alternative transition method in calculating its pool of excess tax benefits available to absorb future tax deficiencies as provided by FSP FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. Adoption of SFAS 123R decreased net income by $2 million for the year ended December 31, 2006. Prior to 2006, the Company applied the intrinsic value method under APB 25, and related interpretations, in accounting for its stock-based compensation plan. Under the recognition and measurement principles of APB 25, no stock-based compensation cost was recognized, as the exercise price of the granted options equaled the market price of the underlying stock at the grant date.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132(R)) (SFAS 158). SFAS 158 requires a company who sponsors one or more single-employer defined benefit plans to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 requires a company to measure benefit plan assets and obligations as of the date of the company’s fiscal year-end statement of financial position. SFAS 158 also requires a company to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The requirement to recognize the funded status of a benefit plan and the disclosure requirements were adopted by the Company as of December 31, 2006. The requirement to measure plan assets and benefit

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obligations as of the date of the fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Adoption of SFAS 158 decreased equity by $46 million at December 31, 2006. The Company has included the required additional disclosures in Note J.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires registrants to use a dual approach to include both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement in a company’s financial statements and the related financial statement disclosures. If either approach results in quantifying a misstatement that is material, then a registrant shall adjust the financial statements. SAB 108 provides transition guidance for correcting errors existing in prior years. SAB 108 does not change the requirements for the correction of an error discovered in prior year financial statements. Errors discovered in prior year financial statements shall continue to be accounted for in accordance with SFAS No. 154, Accounting Changes and Error Correction. SAB 108 was adopted by the Company as of December 31, 2006. Adoption of SAB 108 did not have an impact on the results of operations or financial condition of the Company.
In March 2006, the FASB issued FSP No. 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors (FSP 85-4-1). A life settlement contract for purposes of FSP 85-4-1 is a contract between the owner of a life insurance policy (the policy owner) and a third-party investor (investor). The previous accounting guidance, FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance (FTB 85-4), required the purchaser of life insurance contracts to account for the life insurance contract at its cash surrender value. Because life insurance contracts are purchased in the secondary market at amounts in excess of the policies’ cash surrender values, the application of guidance in FTB 85-4 created a loss upon acquisition of the policy. FSP 85-4-1 provides initial and subsequent measurement guidance and financial statement presentation and disclosure guidance for investments by third-party investors in life settlement contracts. FSP 85-4-1 allows an investor to elect to account for its investments in life settlement contracts using either the investment method or the fair value method. The election shall be made on an instrument-by-instrument basis and is irrevocable. FSP 85-4-1 is effective for fiscal years beginning after June 15, 2006. The Company has elected to account for its investment in life settlement contracts using the fair value method and the initial expected impact upon adoption under the fair value method will be an increase to retained earnings as of January 1, 2007 of approximately $38 million.
In July 2006, FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN 48 is effective for fiscal years beginning after December 15, 2006. The impact on retained earnings as of January 1, 2007 from the adoption of FIN 48 is expected to be approximately $5 million.

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Note B. Investments
The significant components of net investment income are presented in the following table.
Net Investment Income
                         
Years ended December 31   2006     2005     2004  
(In millions)                        
Fixed maturity securities
  $ 1,842     $ 1,608     $ 1,571  
Short term investments
    248       147       56  
Limited partnerships
    288       254       212  
Equity securities
    23       25       14  
Income from trading portfolio (a)
    103       47       110  
Interest on funds withheld and other deposits
    (68 )     (166 )     (261 )
Other
    18       20       18  
 
                 
 
                       
Gross investment income
    2,454       1,935       1,720  
Investment expenses
    (42 )     (43 )     (40 )
 
                 
 
                       
Net investment income
  $ 2,412     $ 1,892     $ 1,680  
 
                 
 
(a)  
There was no change in net unrealized gains (losses) on trading securities included in net investment income for the year ended December 31, 2006. The change in net unrealized gains (losses) on trading securities included in net investment income was $(7) million and $2 million for the years ended December 31, 2005 and 2004.

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Net realized investment gains (losses) and net change in unrealized appreciation (depreciation) in investments were as follows:
Net Investment Appreciation
                         
Years ended December 31   2006     2005     2004  
(In millions)                        
Net realized investment gains (losses):
                       
Fixed maturity securities:
                       
Gross realized gains
  $ 382     $ 361     $ 704  
Gross realized losses
    (377 )     (451 )     (457 )
 
                 
 
                       
Net realized gains (losses) on fixed maturity securities
    5       (90 )     247  
 
                 
 
                       
Equity securities:
                       
Gross realized gains
    24       73       225  
Gross realized losses
    (8 )     (35 )     (23 )
 
                 
 
                       
Net realized gains on equity securities
    16       38       202  
 
                 
 
                       
Other, including disposition of businesses net of participating policyholders’ interest
    66       39       (688 )
 
                 
 
                       
Net realized investment gains (losses) before allocation to participating policyholders’ and minority interests
    87       (13 )     (239 )
Allocation to participating policyholders’ and minority interests
    (1 )     3       (9 )
 
                 
 
                       
Net realized investment gains (losses)
    86       (10 )     (248 )
 
                 
 
                       
Net change in unrealized appreciation (depreciation) in general account investments:
                       
Fixed maturity securities
    98       (443 )     (53 )
Equity securities
    78       34       (98 )
Other
    2       (1 )      
 
                 
 
                       
Total net change in unrealized appreciation (depreciation) in general account investments
    178       (410 )     (151 )
Net change in unrealized depreciation on other
    (10 )     (12 )     (70 )
Allocation to participating policyholders’ and minority interests
    4       18       19  
Deferred income tax (expense) benefit
    (58 )     158       55  
 
                 
 
                       
Net change in unrealized appreciation (depreciation) in investments
    114       (246 )     (147 )
 
                 
 
                       
Net realized gains (losses) and change in unrealized appreciation (depreciation) in investments
  $ 200     $ (256 )   $ (395 )
 
                 
Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that changes in these risk factors in the near term could have an adverse material impact on the Company’s results of operations or equity.
The Company’s investment policies emphasize high credit quality and diversification by industry, issuer and issue. Assets supporting interest rate sensitive liabilities are segmented within the general account to facilitate asset/liability duration management.
Realized investment losses included $173 million, $107 million and $93 million of other-than-temporary impairment (OTTI) losses for the years ended December 31, 2006, 2005 and 2004. The 2006, 2005 and 2004 OTTI losses were recorded across various sectors. The increase in OTTI losses for 2006 was primarily driven by an increase in interest rate related OTTI losses on securities for which the Company did not assert an intent to hold until an anticipated recovery in value. The 2005 and 2004 OTTI losses included $34 million and $56 million related to loans made under a credit facility to a national contractor, that are classified as fixed maturity securities. See Note S for additional information on loans to the national contractor.

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The following tables provide a summary of fixed maturity and equity securities investments.
Summary of Fixed Maturity and Equity Securities
                                         
    Cost or     Gross     Gross Unrealized Losses     Estimated  
    Amortized     Unrealized     Less than     Greater than     Fair  
December 31, 2006   Cost     Gains     12 Months     12 Months     Value  
(In millions)                                        
Fixed maturity securities available-for-sale:
                                       
U.S. Treasury securities and obligations of government agencies
  $ 5,056     $ 86     $ 3     $ 1     $ 5,138  
Asset-backed securities
    13,821       28       20       152       13,677  
States, municipalities and political subdivisions – tax-exempt
    4,915       237       1       5       5,146  
Corporate securities
    6,811       338       8       9       7,132  
Other debt securities
    3,443       207       7       1       3,642  
Redeemable preferred stock
    885       28       1             912  
 
                             
 
                                       
Total fixed maturity securities available-for-sale
    34,931       924       40       168       35,647  
 
                             
 
                                       
Total fixed maturity securities trading
    204                         204  
 
                             
 
                                       
Equity securities available-for-sale:
                                       
Common stock
    214       239       1             452  
Preferred stock
    134       11                   145  
 
                             
 
                                       
Total equity securities available-for-sale
    348       250       1             597  
 
                             
 
                                       
Total equity securities trading
    60                         60  
 
                             
 
                                       
Total
  $ 35,543     $ 1,174     $ 41     $ 168     $ 36,508  
 
                             

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Summary of Fixed Maturity and Equity Securities
                                         
    Cost or     Gross     Gross Unrealized Losses     Estimated  
    Amortized     Unrealized     Less than     Greater than     Fair  
December 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     $ 1,469  
Asset-backed securities
    12,986       43       137       33       12,859  
States, municipalities and political subdivisions – tax-exempt
    9,054       193       31       7       9,209  
Corporate securities
    5,906       322       52       11       6,165  
Other debt securities
    2,830