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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, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   36-6169860
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
333 S. Wabash   60604
Chicago, Illinois  
(Zip Code)
(Address of principal executive offices)  
(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
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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
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 22, 2008, 270,716,622 shares of common stock were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2007 was approximately $1,438 million based on the closing price of $47.69 per share of the common stock on the New York Stock Exchange on June 30, 2007.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the CNA Financial Corporation Proxy Statement prepared for the 2008 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report.
 
 

 


 

             
Item       Page
Number       Number
PART I        
  Business     3  
 
           
  Risk Factors     9  
 
           
  Unresolved Staff Comments     16  
 
           
  Properties     16  
 
           
  Legal Proceedings     16  
 
           
  Submission of Matters to a Vote of Security Holders     16  
 
           
PART II        
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     17  
 
           
  Selected Financial Data     18  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     61  
 
           
  Financial Statements and Supplementary Data     66  
 
           
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     136  
 
           
  Controls and Procedures     136  
 
           
  Other Information     136  
 
           
PART III        
  Directors, Executive Officers and Corporate Governance     137  
 
           
  Executive Compensation     137  
 
           
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     138  
 
           
  Certain Relationships and Related Transactions, and Director Independence     138  
 
           
  Principal Accounting Fees and Services     138  
 
           
PART IV        
  Exhibits, Financial Statement Schedules     139  
 Investment Facilities and Services Agreement
 Amendment to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Acknowledgement to Investment Facilities and Services Agreement
 Fourth Amendment to the CNA Supplemental Executive Retirement Plan
 2008 Incentive Compensation Awards to Executive Officers
 Significant Subsidiaries
 Consent of Independent Registered Public Accounting Firm
 Certification of CEO
 Certification of CFO
 Written Statement of the CEO
 Written Statement of the CFO

 


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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 The Continental Insurance Company (CIC), organized in 1853, and 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, 2007.
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 commercial 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, commercial property and casualty insurance operations, is reported in two business segments: Standard Lines and Specialty Lines. Our non-core operations are managed in two business segments: Life & Group Non-Core and Corporate & 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 2,300 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 2006 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, quality 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 assessments are levied by the state departments of insurance to cover claims of insolvent insurers. Other insurance-related assessments are generally levied by state agencies to fund various organizations including disaster relief funds, rating bureaus, insurance departments, and workers’ compensation second injury funds, or by industry organizations that assist in the statistical analysis and ratemaking process.
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 in past years as well. 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. For example, some state legislatures are considering legislation addressing direct actions against insurers related to bad faith claims. As a result of this unpredictability in the law, insurance underwriting and rating are expected to continue to be difficult in commercial lines, professional liability and some specialty coverages and therefore could materially adversely affect our results of operations and equity.
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; federal regulation of insurance; and various tax proposals affecting 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 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, 2007 and 2006, 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, 2007, we had approximately 9,400 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)   2007     2006     2005  
Trade Ratios — GAAP basis (a)
                       
Loss and loss adjustment expense ratio
    77.7 %     75.7 %     89.4 %
Expense ratio
    30.0       30.0       31.2  
Dividend ratio
    0.2       0.3       0.3  
 
                 
 
                       
Combined ratio
    107.9 %     106.0 %     120.9 %
 
                 
 
                       
Trade Ratios — Statutory basis (preliminary) (a)
                       
Loss and loss adjustment expense ratio
    79.8 %     78.7 %     92.2 %
Expense ratio
    30.0       30.2       30.0  
Dividend ratio
    0.3       0.2       0.5  
 
                 
 
                       
Combined ratio
    110.1 %     109.1 %     122.7 %
 
                 
 
                       
Individual Life and Group Life Insurance Inforce
                       
Individual life
  $ 9,204     $ 9,866     $ 10,711  
Group life
    4,886       5,787       9,838  
 
                 
 
                       
Total
  $ 14,090     $ 15,653     $ 20,549  
 
                 
 
                       
Other Data — Statutory basis (preliminary) (b)
                       
Property and casualty companies’ capital and surplus (c)
  $ 8,511     $ 8,137     $ 6,940  
Life company’s capital and surplus
    471       687       627  
Property and casualty companies’ written premiums to surplus ratio
    0.8       0.9       1.0  
Life company’s capital and surplus-percent to total liabilities
    28.2 %     38.9 %     33.1 %
Participating policyholders-percent of gross life insurance inforce
    4.7 %     4.4 %     3.5 %
 
(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 policyholders’ dividends incurred to net earned premiums. The dividend ratio, using amounts determined in accordance with SAP, is the ratio of policyholders’ 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 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   2007   2006   2005
California
    9.1 %     9.6 %     9.0 %
Florida
    7.3       7.9       7.1  
New York
    6.8       7.3       7.9  
Texas
    5.9       5.9       5.7  
Illinois
    3.7       4.1       4.2  
New Jersey
    3.6       4.4       3.8  
Missouri
    3.4       3.0       2.8  
Pennsylvania
    3.2       3.4       4.2  
Massachusetts
    2.3       2.4       3.3  
All other states, countries or political subdivisions (a)
    54.7       52.0       52.0  
 
                       
 
                       
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 8.4%, 7.1% and 6.1% of our gross written premiums were derived from outside of the United States for the years ended December 31, 2007, 2006 and 2005. Premiums from any individual foreign country 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)   1997     1998     1999 (a)     2000     2001 (b)     2002 (c)     2003     2004     2005     2006     2007  
Originally reported gross reserves for unpaid claim and claim adjustment expenses
  $ 28,731     $ 28,506     $ 26,850     $ 26,510     $ 29,649     $ 25,719     $ 31,284     $ 31,204     $ 30,694     $ 29,459     $ 28,415  
Originally reported ceded recoverable
    5,056       5,182       6,091       7,333       11,703       10,490       13,847       13,682       10,438       8,078       6,945  
 
                                                                 
Originally reported net reserves for unpaid claim and claim adjustment expenses
  $ 23,675     $ 23,324     $ 20,759     $ 19,177     $ 17,946     $ 15,229     $ 17,437     $ 17,522     $ 20,256     $ 21,381     $ 21,470  
 
                                                                 
 
                                                                                       
Cumulative net paid as of:
                                                                                       
One year later
  $ 5,954     $ 7,321     $ 6,547     $ 7,686     $ 5,981     $ 5,373     $ 4,382     $ 2,651     $ 3,442     $ 8,713     $  
Two years later
    11,394       12,241       11,937       11,992       10,355       8,768       6,104       4,963       7,022              
Three years later
    14,423       16,020       15,256       15,291       12,954       9,747       7,780       7,825                    
Four years later
    17,042       18,271       18,151       17,333       13,244       10,870       10,085                          
Five years later
    18,568       20,779       19,686       17,775       13,922       12,814                                
Six years later
    20,723       21,970       20,206       18,970       15,493                                      
Seven years later
    21,649       22,564       21,231       20,297                                            
Eight years later
    22,077       23,453       22,373                                                  
Nine years later
    22,800       24,426                                                        
Ten years later
    23,491                                                              
 
                                                                                       
Net reserves re-estimated as of:
                                                                                       
End of initial year
  $ 23,675     $ 23,324     $ 20,759     $ 19,177     $ 17,946     $ 15,229     $ 17,437     $ 17,522     $ 20,256     $ 21,381     $ 21,470  
One year later
    23,904       24,306       21,163       21,502       17,980       17,650       17,671       18,513       20,588       21,601        
Two years later
    24,106       24,134       23,217       21,555       20,533       18,248       19,120       19,044       20,975              
Three years later
    23,776       26,038       23,081       24,058       21,109       19,814       19,760       19,631                    
Four years later
    25,067       25,711       25,590       24,587       22,547       20,384       20,425                          
Five years later
    24,636       27,754       26,000       25,594       22,983       21,076                                
Six years later
    26,338       28,078       26,625       26,023       23,603                                      
Seven years later
    26,537       28,437       27,009       26,585                                            
Eight years later
    26,770       28,705       27,541                                                  
Nine years later
    26,997       29,211                                                        
Ten years later
    27,317                                                              
 
                                                                 
Total net (deficiency) redundancy
  $ (3,642 )   $ (5,887 )   $ (6,782 )   $ (7,408 )   $ (5,657 )   $ (5,847 )   $ (2,988 )   $ (2,109 )   $ (719 )   $ (220 )   $  
 
                                                                 
 
                                                                                       
Reconciliation to gross re-estimated reserves:
                                                                                       
Net reserves re-estimated
  $ 27,317     $ 29,211     $ 27,541     $ 26,585     $ 23,603     $ 21,076     $ 20,425     $ 19,631     $ 20,975     $ 21,601     $  
Re-estimated ceded recoverable
    7,221       7,939       10,283       11,047       16,487       15,846       14,257       13,112       10,505       8,230        
 
                                                                 
Total gross re-estimated reserves
  $ 34,538     $ 37,150     $ 37,824     $ 37,632     $ 40,090     $ 36,922     $ 34,682     $ 32,743     $ 31,480     $ 29,831     $  
 
                                                                 
 
                                                                                       
Net (deficiency) redundancy related to:
                                                                                       
Asbestos claims
  $ (2,367 )   $ (2,125 )   $ (1,549 )   $ (1,485 )   $ (713 )   $ (712 )   $ (71 )   $ (17 )   $ (7 )   $ (6 )   $  
Environmental claims
    (541 )     (533 )     (533 )     (476 )     (129 )     (123 )     (51 )     (51 )     (1 )     (1 )      
 
                                                                 
Total asbestos and environmental
    (2,908 )     (2,658 )     (2,082 )     (1,961 )     (842 )     (835 )     (122 )     (68 )     (8 )     (7 )      
Other claims
    (734 )     (3,229 )     (4,700 )     (5,447 )     (4,815 )     (5,012 )     (2,866 )     (2,041 )     (711 )     (213 )      
 
                                                                 
Total net (deficiency) redundancy
  $ (3,642 )   $ (5,887 )   $ (6,782 )   $ (7,408 )   $ (5,657 )   $ (5,847 )   $ (2,988 )   $ (2,109 )   $ (719 )   $ (220 )   $  
 
                                                                 

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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 $1,055 million of reserves were transferred from CCC to CNAGLA.
 
(c)  
Effective October 31, 2002, we sold CNA Reinsurance Company Limited. As a result of the sale, net reserves were reduced by $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. The SEC also 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.

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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 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 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 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, 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 could be substantial and could

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materially adversely affect our results of operations, equity, business and insurer financial strength and debt ratings.
Loss reserves for asbestos and environmental pollution 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 and environmental pollution (which we refer to as A&E) claim and claim adjustment expenses are subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported claims are 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;
 
continuing aggressive tactics of plaintiffs’ lawyers;
 
the risks and lack of predictability inherent in major litigation;
 
changes in the volume of asbestos and environmental pollution claims;
 
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;
 
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 could materially adversely affect our results of operations, equity, business and insurer financial strength and debt ratings. Additional information on A&E claims 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.

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     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;
 
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. 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 unfavorable development, to reflect our revised estimates of the total cost of claims. We believe we could incur significant catastrophe losses in the future. Therefore, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted. 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.

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Our key assumptions used to determine reserves and deferred acquisition costs for our long term care product offerings could vary significantly from actual experience.
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 future health care cost trends. If actual experience differs from these assumptions, the deferred acquisition asset may not be fully realized and the reserves may not be adequate, requiring us to add to reserves, or take unfavorable development. Therefore, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
We continue to face exposure to losses arising from terrorist acts, despite the passage of the Terrorism Risk Insurance Program Reauthorization Act of 2007.
The Terrorism Risk Insurance Program Reauthorization Act of 2007 extended, until December 31, 2014, the program established within the U.S. Department of Treasury by the Terrorism Risk Insurance Act of 2002. This program requires insurers to offer terrorism coverage and the federal government to share in insured losses arising from acts of terrorism. Given the unpredictability of the nature, targets, severity and frequency of potential terrorist acts, this program does not provide complete protection for future losses derived from acts of terrorism. Further, the laws of certain states restrict our ability to mitigate this residual exposure. For example, some states mandate property insurance coverage of damage from fire following a loss, thereby prohibiting us from excluding terrorism exposure. In addition, some states generally prohibit us from excluding terrorism exposure from our primary workers’ compensation policies. Consequently, there is substantial uncertainty as to our ability to contain our terrorism exposure effectively since we continue to issue forms of coverage, in particular, workers’ compensation, that are exposed to risk of loss from a terrorism act. As a result, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
High levels of retained overhead expenses associated with business lines in run-off negatively impact our operating results.
During the past several 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 has decreased. 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, 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. Therefore, our financial results of operations could be materially adversely impacted. Additional information on reinsurance is included in 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, equity, business and insurer financial strength and debt ratings. Additional information on reinsurance is included in Note H to the Consolidated Financial Statements included under Item 8.

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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 important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries, as well as our public debt, are rated by rating agencies, namely, A.M. Best Company, Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. 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.
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, it is possible 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 or unprofitable market areas;
 
the required use of certain methods of accounting and reporting;
 
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 private or quasi-governmental insurers;
 
licensing of insurers and agents;
 
approval of policy forms;
 
limitations on the ability of our insurance subsidiaries to pay dividends to us; and
 
limitations on the ability to non-renew, cancel or change terms and conditions in policies.
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.

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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 material 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 material 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 received 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 received subpoenas, interrogatories and inquiries from and have produced documents and/or provided information to: (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 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.
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. We have also provided the SEC with 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.
Our investment portfolio, which is a key component of our overall profitability, may suffer reduced returns or losses, in the event of changing interest rates or adverse credit conditions in the capital markets.
Investment returns are an important part of our overall profitability. General economic conditions, 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, including the short and long-term effects of losses produced or threatened in relation to sub-prime residential mortgage-backed securities, and many other factors beyond our control can adversely affect the returns and the overall value of our investments and the realization of

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investment income. In addition, any defaults in the payments due to us for our investments, especially with respect to fixed maturity securities, could reduce our investment income and could cause us to incur investment losses. Further, we invest a portion of our assets in equity securities and limited partnerships, which may be subject to greater volatility than our fixed income investments. In some cases, 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 all 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. Therefore, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
We have incurred and may incur further investment losses and may incur underwriting losses, relating to the sub-prime crisis and the related credit crisis.
We face sub-prime valuation and credit exposure risks within our investment portfolio through our holdings in corporate asset-backed structured securities and collateralized mortgage obligations (CMOs) which are typically collateralized with residential mortgages. During the course of 2007, the market value of some of these securities decreased as a result of the increase in delinquency rates on the underlying mortgages and a decrease in the value of the homes held as collateral for the investment. This deterioration of the collateral underlying the securities caused downgrades by rating agencies, decreased liquidity, and led to some securities going into default and has led to a material adverse impact on financial markets generally. The potential for higher delinquency and default rates may continue to adversely impact our sub-prime market valuations. In addition, the process of validating fair values provided by third parties for securities that are not regularly traded requires significant judgment on our part. Accordingly, we may conclude that other-than-temporary write downs of these securities are required or we may experience unanticipated losses in other sectors of our overall investment portfolio. Consequently, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
We provide management and professional liability insurance and surety bonds to businesses engaged in finance, professional services and real estate. Many of these businesses have exposure directly or indirectly to the sub-prime crisis and the related credit crisis. As a result, we may experience unanticipated underwriting losses with respect to these lines of business. Consequently, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
We face intense competition in our industry and may be adversely affected by the cyclical nature of the property and casualty business.
All aspects of the insurance industry are highly competitive and we must continuously allocate resources to refine and improve our insurance products and services. We compete with a large number of stock and mutual insurance companies and other entities for both distributors and customers. 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. 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. As a result, our premium levels, expense ratio, results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
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 A&E 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, equity, business and insurer financial strength and debt ratings.
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.

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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 CCC, a wholly-owned subsidiary of CNAF, 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
4267 Meridian Parkway, Aurora, Illinois
  70,004   Data Center
1249 South River Road, Cranbury, New Jersey
  67,853   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
We lease the office space described above except for the Chicago, Illinois building, the Reading, Pennsylvania building and the Aurora, Illinois 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 and is traded on the Philadelphia Stock Exchange, under the symbol CNA.
As of February 22, 2008, we had 270,716,622 shares of common stock outstanding. Approximately 89% of our outstanding common stock is owned by Loews. We had 1,965 stockholders of record as of February 22, 2008 according to the records maintained by our transfer agent.
The table below shows the high and low sales prices for our common stock based on the New York Stock Exchange Composite Transactions.
Common Stock Information
                                                 
    2007   2006
                    Dividends                   Dividends
    High   Low   Declared   High   Low   Declared
Quarter:
                                               
First
  $ 44.29     $ 39.09     $     $ 33.60     $ 29.88     $  
Second
    51.96       42.96       0.10       33.20       30.90        
Third
    49.18       37.12       0.10       36.04       33.05        
Fourth
    41.84       32.26       0.15       40.32       36.19        
The following graph compares the total return of our common stock, the Standard & Poor’s (S&P) 500 Index and the S&P 500 Property & Casualty Insurance Index for the five year period from December 31, 2002 through December 31, 2007. The graph assumes that the value of the investment in our common stock and for each index was $100 on December 31, 2002 and that dividends were reinvested.
Stock Price Performance Graph
                                                 
Company / Index   2002   2003   2004   2005   2006   2007
CNA Financial Corporation
    100.00       94.14       104.49       127.85       157.50       132.85  
S&P 500 Index
    100.00       128.68       142.69       149.70       173.34       182.86  
S&P 500 Property & Casualty Insurance Index
    100.00       126.41       139.58       160.68       181.36       156.04  
(PERFORMANCE 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)   2007     2006     2005     2004     2003  
Results of Operations:
                                       
Revenues
  $ 9,885     $ 10,376     $ 9,862     $ 9,924     $ 11,715  
 
                             
Income (loss) from continuing operations
  $ 857     $ 1,137     $ 243     $ 446     $ (1,419 )
Income (loss) from discontinued operations, net of tax
    (6 )     (29 )     21       (21 )     2  
 
                             
Net income (loss)
  $ 851     $ 1,108     $ 264     $ 425     $ (1,417 )
 
                             
 
                                       
Basic Earnings (Loss) Per Share:
                                       
Income (loss) from continuing operations
  $ 3.15     $ 4.17     $ 0.68     $ 1.49     $ (6.52 )
Income (loss) from discontinued operations
    (0.02 )     (0.11 )     0.08       (0.09 )     0.01  
 
                             
 
                                       
Basic earnings (loss) per share available to common stockholders
  $ 3.13     $ 4.06     $ 0.76     $ 1.40     $ (6.51 )
 
                             
 
                                       
Diluted Earnings (Loss) Per Share:
                                       
Income (loss) from continuing operations
  $ 3.15     $ 4.16     $ 0.68     $ 1.49     $ (6.52 )
Income (loss) from discontinued operations
    (0.02 )     (0.11 )     0.08       (0.09 )     0.01  
 
                             
 
                                       
Diluted earnings (loss) per share available to common stockholders
  $ 3.13     $ 4.05     $ 0.76     $ 1.40     $ (6.51 )
 
                             
 
                                       
Dividends declared per common share
  $ 0.35     $     $     $     $  
 
                             
 
                                       
Financial Condition:
                                       
Total investments
  $ 41,762     $ 44,096     $ 39,695     $ 39,231     $ 38,100  
Total assets
    56,732       60,283       59,016       62,496       68,296  
Insurance reserves
    40,222       41,080       42,436       43,653       45,494  
Long and short term debt
    2,157       2,156       1,690       2,257       1,904  
Stockholders’ equity
    10,150       9,768       8,950       8,974       8,735  
 
                                       
Book value per share
  $ 37.36     $ 36.03     $ 31.26     $ 31.63     $ 30.95  
 
                                       
Statutory Surplus (preliminary):
                                       
Property and casualty companies (a)
  $ 8,511     $ 8,137     $ 6,940     $ 6,998     $ 6,170  
Life company(ies)
    471       687       627       1,177       707  
 
(a)  
Surplus includes the property and casualty companies’ equity ownership of the life 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
  20
Critical Accounting Estimates
  22
Reserves — Estimates and Uncertainties
  24
Reinsurance
  29
Restructuring
  30
Segment Results
  30
Standard Lines
  31
Specialty Lines
  33
Life & Group Non-Core
  36
Corporate & Other Non-Core
  37
Asbestos and Environmental Pollution (A&E) Reserves
  38
Investments
  45
Net Investment Income
  45
Net Realized Investment Gains (Losses)
  46
Valuation and Impairment of Investments
  49
Asset-Backed and Sub-prime Mortgage Exposure
  52
Short Term Investments
  53
Liquidity and Capital Resources
  54
Cash Flows
  54
Commitments, Contingencies, and Guarantees
  55
Off-Balance Sheet Arrangements
  55
Dividends
  56
Share Repurchase Program
  56
Regulatory Matters
  56
Ratings
  56
Accounting Pronouncements
  57
Forward-Looking Statements
  58

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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)   2007     2006     2005  
Revenues
                       
Net earned premiums
  $ 7,484     $ 7,603     $ 7,569  
Net investment income
    2,433       2,412       1,892  
Other revenues
    279       275       411  
 
                 
 
                       
Total operating revenues
    10,196       10,290       9,872  
 
                 
 
                       
Claims, Benefits and Expenses
                       
Net incurred claims and benefits
    5,995       6,025       6,975  
Policyholders’ dividends
    14       22       24  
Amortization of deferred acquisition costs
    1,520       1,534       1,543  
Other insurance related expenses
    733       757       829  
Restructuring and other related charges
          (13 )      
Other expenses
    401       401       329  
 
                 
 
                       
Total claims, benefits and expenses
    8,663       8,726       9,700  
 
                 
 
                       
Operating income from continuing operations before income tax and minority interest
    1,533       1,564       172  
Income tax (expense) benefit on operating income
    (425 )     (450 )     105  
Minority interest
    (48 )     (44 )     (24 )
 
                 
 
                       
Net operating income from continuing operations
    1,060       1,070       253  
 
                       
Realized investment gains (losses), net of participating policyholders’ and minority interests
    (311 )     86       (10 )
Income tax (expense) benefit on realized investment gains (losses)
    108       (19 )      
 
                 
 
                       
Income from continuing operations
    857       1,137       243  
 
                       
Income (loss) from discontinued operations, net of income tax (expense) benefit of $0, $7 and $(2)
    (6 )     (29 )     21  
 
                 
 
                       
Net income
  $ 851     $ 1,108     $ 264  
 
                 
 
                       
Basic Earnings per Share
                       
 
                       
Income from continuing operations
  $ 3.15     $ 4.17     $ 0.68  
Income (loss) from discontinued operations
    (0.02 )     (0.11 )     0.08  
 
                 
 
                       
Basic earnings per share available to common stockholders
  $ 3.13     $ 4.06     $ 0.76  
 
                 
 
                       
Diluted Earnings per Share
                       
 
                       
Income from continuing operations
  $ 3.15     $ 4.16     $ 0.68  
Income (loss) from discontinued operations
    (0.02 )     (0.11 )     0.08  
 
                 
 
                       
Diluted earnings per share available to common stockholders
  $ 3.13     $ 4.05     $ 0.76  
 
                 
 
                       
Weighted Average Outstanding Common Stock and Common Stock Equivalents
                       
 
                       
Basic
    271.5       262.1       256.0  
 
                 
Diluted
    271.8       262.3       256.0  
 
                 

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2007 Compared with 2006
Net income decreased $257 million in 2007 as compared with 2006. This decrease was primarily due to decreased net realized investment results.
Net realized investment results decreased by $270 million in 2007 compared with 2006. This decrease was primarily driven by higher impairment losses. 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 in 2007 decreased $10 million as compared with 2006. The decrease in net operating income primarily related to the after-tax loss of $108 million related to the settlement of the IGI contingency as discussed in the Life & Group Non-core segment discussion of this MD&A and decreased current accident year underwriting results in our Standard and Specialty Lines segments. The decreased net operating income was partially offset by favorable net prior year development in 2007 as compared to unfavorable net prior year development in 2006 and increased net investment income. The increased net investment income included a decline of net investment income in the trading portfolio of $93 million, a significant portion of which was offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio.
Favorable net prior year development of $73 million was recorded in 2007 related to our Standard Lines, Specialty Lines and Corporate & Other Non-core segments. This amount consisted of $38 million of favorable claim and allocated claim adjustment expense reserve development and $35 million of favorable premium development. Unfavorable net prior year development of $172 million was recorded in 2006 related to our Standard Lines, Specialty Lines and Corporate & Other Non-core segments. This amount consisted of $233 million of unfavorable claim and allocated claim adjustment expense reserve development and $61 million of favorable premium development. Further information on Net Prior Year Development for 2007 and 2006 is included in Note F of the Consolidated Financial Statements included under Item 8.
Net earned premiums decreased $119 million in 2007 as compared with 2006, including a $178 million decrease related to Standard Lines and a $73 million increase related to Specialty Lines. See the Segment Results section of this MD&A for further discussion.
Results from discontinued operations improved $23 million in 2007 as compared to 2006. The loss in 2007 was primarily driven by unfavorable net prior year development. Results in 2006 reflected a $29 million impairment loss related to the 2007 sale of a portion of the run-off business. Further information on this impairment loss is included in Note P of the Consolidated Financial Statement included under Item 8.
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 lower 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 $172 million was recorded in 2006 related to our Standard Lines, Specialty Lines and Corporate & Other Non-Core segments. This amount consisted of $233 million of unfavorable claim and allocated claim adjustment expense reserve development and $61 million of favorable premium development. Unfavorable net prior year development of $812 million was recorded in 2005 related to our Standard Lines, Specialty Lines and Corporate & Other Non-Core segments. This amount consisted of $897 million of unfavorable claim and allocated claim adjustment expense reserve development and $85 million

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of favorable premium development. 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 a $44 million increase related to the Specialty Lines segment and a $39 million increase related to the Standard Lines segment. Net earned premiums for the Life & 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 reflected a $29 million impairment loss related to the 2007 sale of a portion of the run-off business. The 2006 results were also 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.
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, payout annuities and long term care products and are estimated using actuarial estimates about mortality, morbidity and persistency 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.

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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. Further information on our reinsurance program is included in Note H of the Consolidated Financial Statements included under Item 8.
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 amortized cost 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 realized 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 2007 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 6.00% and 5.875% were the appropriate discount rates as of December 31, 2007 to calculate our accrued pension and postretirement liabilities, respectively. Accordingly, the 6.00% and 5.875% rates will also be used to determine our 2008 pension and postretirement expense. At December 31, 2006, the discount rates used to calculate our accrued pension and postretirement liabilities were 5.750% and 5.625%, respectively.
Further information on our pension and postretirement benefit obligations is included in Note J of the Consolidated Financial Statements included under Item 8.

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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 (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.
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 directors and officers (D&O) and errors and omissions (E&O) 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.
Our experience has been that establishing reserves for casualty coverages relating to asbestos and environmental pollution (A&E) claim and claim adjustment expenses are subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported A&E claims are 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 A&E claims;

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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 A&E claims.
It is also not possible to predict changes in the legal and legislative environment and the impact on the future development of A&E 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 A&E, 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 A&E, 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 A&E 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 A&E 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. See the A&E Reserves section of this MD&A and Note F of the Consolidated Financial Statements included under Item 8 for additional information relating to A&E claims and reserves.
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

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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 & 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,
 
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

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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 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 A&E.
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. 

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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 traditional 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 primarily due to the three most recent 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 & Other Non-Core, the carried reserve is slightly higher than the actuarial point estimate. For A&E exposures, we feel it is prudent, based on the history of developments in this area and the volatility associated with the reserves, to be above the point estimate 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.  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 $450 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 $400 million. Our net reserves for Standard Lines workers’ compensation were approximately $4.5 billion at December 31, 2007.
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 13%, we estimate that our net reserves would increase by approximately $300 million. If the estimated incurred development factor for general liability decreases by 9%, we estimate that our net reserves would decrease by approximately $200 million. Our net reserves for Standard Lines general liability were approximately $3.5 billion at December 31, 2007.
Within Specialty Lines, we believe a material deviation to our net reserves is reasonably possible for professional liability and related business in the U.S. Specialty Lines group. This business includes

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professional liability coverages provided to various professional firms, including architects, realtors, small and mid-sized accounting firms, law firms and technology firms. This business also includes D&O, employment practices, fiduciary and fidelity coverages as well as insurance products serving the healthcare delivery system. The most significant factor affecting reserve estimates for this business is claim severity. Claim severity 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 increases by 7%, we estimate that the net reserves would increase by approximately $300 million. If the estimated claim severity decreases by 2%, we estimate that net reserves would decrease by approximately $100 million. Our net reserves for this business were approximately $4.4 billion at December 31, 2007.
Within Corporate & 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 A&E.
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 22%, 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 22%, we estimate that our net reserves would decrease by approximately $150 million. Our net reserves for CNA Re were approximately $1.0 billion at December 31, 2007.
For A&E, the most significant factor affecting reserve estimates is overall account size trend. Overall account size trend for A&E 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 A&E increases by 4 points, we estimate that our A&E net reserves would increase by approximately $350 million. If the estimated overall account size trend for A&E decreases by 4 points, we estimate that our A&E net reserves would decrease by approximately $250 million. Our net reserves for A&E were approximately $1.6 billion at December 31, 2007.
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 $93 million and $79 million in 2007 and 2006, neither of which included reinstatement premiums. Currently, the 2008 catastrophe reinsurance program will cost us $55 million before the impact of any reinstatement premiums.
The terms of our 2008 catastrophe programs are different than those of our 2007 programs. The Corporate Property Catastrophe treaty provides coverage for the accumulation of losses between $300 million and $900 million arising out of a single catastrophe occurrence in the United States, its territories and possessions, and Canada. Our co-participation is 35% of the first $100 million layer of the coverage provided and 5% of the remaining layers. Additional protection above $900 million may be purchased in either the traditional reinsurance or financial markets prior to June 1, 2008 depending on market conditions.

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Further information on our reinsurance program is included in Note H of the Consolidated Financial Statements included under Item 8.
Restructuring
In 2001, we finalized and approved a plan related to restructuring the property and casualty segments and Life & Group Non-Core segment, discontinuation of our 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 was no longer required as we had 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.
Segment Results
The following discusses the results of continuing operations for our operating segments.
CNA’s core property and casualty commercial insurance operations are reported in two business segments: Standard Lines and Specialty Lines. As a result of our realignment of management responsibilities in the fourth quarter of 2007, we have revised our property and casualty segments as if the current segment changes occurred as of the beginning of the earliest period presented. Standard Lines includes standard property and casualty coverages sold to small businesses and middle market entities and organizations in the U.S. primarily through an independent agency distribution system. Standard Lines also includes commercial insurance and risk management products sold to large corporations in the U.S. primarily through insurance brokers. Specialty Lines provides a broad array of professional, financial and specialty property and casualty products and services, including excess and surplus lines, primarily through insurance brokers and managing general underwriters. Specialty Lines also includes insurance coverages sold globally through our foreign operations (CNA Global). Previously, excess and surplus lines and CNA Global were included in Standard Lines.
Standard Lines previously included other revenues and expenses related to claim services provided by CNA ClaimPlus, Inc. to other units within the Standard Lines segment because these revenues and expenses were eliminated at the consolidated level. These amounts are now eliminated within Standard Lines for all periods presented.
Our property and casualty field structure consists of 33 branch locations across the country organized into 2 territories. 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, billing and collection activities, 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 14 claim office locations around the country handling the more complex claims.
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) any 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 our Standard Lines and Specialty Lines segments, we utilize the loss ratio, the expense ratio, the dividend ratio, and the combined 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.

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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 primarily to small, middle-market and large businesses and organizations domestically. The Standard Lines operating model focuses on underwriting performance, relationships with selected distribution sources and understanding customer needs. Property products provide standard and excess property coverages, as well as marine coverage, and boiler and machinery. Casualty products provide standard casualty insurance products such as workers’ compensation, general and product liability and commercial auto coverage through traditional products. Most insurance programs are provided on a guaranteed cost basis; however, we have the capability to offer specialized, loss-sensitive insurance programs to those customers viewed as higher risk and less predictable in exposure.
These property and casualty products are offered as part of our Business and Commercial insurance groups. Our Business insurance group serves our smaller commercial accounts and the Commercial insurance group serves our middle markets and our larger risks. In addition, Standard Lines provides total risk management services relating to claim and information services to the large commercial insurance marketplace, through a wholly-owned subsidiary, CNA ClaimPlus, Inc., a third party administrator.
The following table details results of operations for Standard Lines.
Results of Operations
                         
Years ended December 31   2007     2006     2005  
(In millions)                        
Net written premiums
  $ 3,267     $ 3,598     $ 3,473  
Net earned premiums
    3,379       3,557       3,518  
Net investment income
    878       840       632  
Net operating income (loss)
    602       446       (87 )
Net realized investment gains (losses), after-tax
    (97 )     48       19  
Net income (loss)
    505       494       (68 )
 
                       
Ratios
                       
Loss and loss adjustment expense
    67.4 %     72.5 %     90.3 %
Expense
    32.5       31.6       32.7  
Dividend
    0.2       0.5       0.6  
 
                 
 
                       
Combined
    100.1 %     104.6 %     123.6 %
 
                 
2007 Compared with 2006
Net written premiums for Standard Lines decreased $331 million in 2007 as compared with 2006, primarily due to decreased production. The decreased production reflects our disciplined participation in the current competitive market. The competitive market conditions are expected to put ongoing pressure on premium and income levels, and the expense ratio. Net earned premiums decreased $178 million in 2007 as compared with 2006, consistent with the decreased premiums written.
Standard Lines averaged rate decreases of 4% for 2007, as compared to flat rates for 2006 for the contracts that renewed during those periods. Retention rates of 79% and 81% were achieved for those contracts that were available for renewal in each period.
Net income increased $11 million in 2007 as compared with 2006. This increase was primarily attributable to improved net operating income, offset by decreased 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 income increased $156 million in 2007 as compared with 2006. This increase was primarily driven by favorable net prior year development in 2007 as compared to unfavorable net prior year development in 2006 and increased net investment income. These favorable impacts were partially offset by decreased current accident year underwriting results including increased catastrophe losses. Catastrophe losses were $48 million after-tax in 2007, as compared to $35 million after-tax in 2006.

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The combined ratio improved 4.5 points in 2007 as compared with 2006. The loss ratio improved 5.1 points primarily due to favorable net prior year development in 2007 as compared to unfavorable net prior year development in 2006. This favorable impact was partially offset by higher current accident year loss ratios primarily related to the decline in rates.
The dividend ratio improved 0.3 points in 2007 as compared with 2006 due to favorable dividend development in the workers’ compensation line of business.
The expense ratio increased 0.9 points in 2007 as compared with 2006, primarily reflecting the impact of declining earned premiums.
Favorable net prior year development of $123 million was recorded in 2007, including $104 million of favorable claim and allocated claim adjustment expense reserve development and $19 million of favorable premium development. Unfavorable net prior year development of $150 million, including $208 million of unfavorable claim and allocated claim adjustment expense reserve development and $58 million of favorable premium development, was recorded in 2006. Further information on Standard Lines Net Prior Year Development for 2007 and 2006 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, 2007 and 2006 for Standard Lines.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2007     2006  
(In millions)                
Gross Case Reserves
  $ 5,988     $ 5,826  
Gross IBNR Reserves
    6,060       6,691  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 12,048     $ 12,517  
 
           
Net Case Reserves
  $ 4,750     $ 4,571  
Net IBNR Reserves
    5,170       5,543  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 9,920     $ 10,114  
 
           
2006 Compared with 2005
Net written premiums for Standard Lines increased $125 million in 2006 as compared with 2005. This increase was primarily driven by favorable new business, rate and retention in the property products. Net earned premiums increased $39 million in 2006 as compared with 2005, consistent with the increased premiums written.
Standard Lines averaged flat rates for 2006, as compared to decreases of 2% for 2005 for the contracts that renewed during those periods. Retention rates of 81% and 76% were achieved for those contracts that were up for renewal in each period.
Net results increased $562 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 $533 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 19.0 points in 2006 as compared with 2005. The loss ratio improved 17.8 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 1.5 and 13.9 points related to the impact of catastrophes.

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The expense ratio improved 1.1 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 $150 million was recorded in 2006, including $208 million of unfavorable claim and allocated claim adjustment expense reserve development and $58 million of favorable premium development. Unfavorable net prior year development of $403 million, including $433 million of unfavorable claim and allocated claim adjustment expense reserve development and $30 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 $255 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 $152 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 $40 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.
SPECIALTY LINES
Business Overview
Specialty Lines provides professional, financial and specialty property and casualty products and services, both domestically and abroad, 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 companies. Product offerings also include surety and fidelity bonds, and vehicle warranty services.
Specialty Lines includes the following business groups:
U.S. Specialty Lines provides management and professional liability insurance and risk management services and other specialized property and casualty coverages, 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. U.S. Specialty Lines also provides 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 U.S. Specialty Lines are distributed through brokers, agents and managing general underwriters.
U.S. 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.
Also included in U.S. Specialty Lines is Excess and Surplus (E&S). 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 brokers.
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 62% of CNA Surety.
Warranty provides vehicle warranty service contracts that protect individuals from the financial burden associated with mechanical breakdown.

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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 Specialty Lines.
Results of Operations
                         
Years ended December 31   2007     2006     2005  
(In millions)                        
Net written premiums
  $ 3,506     $ 3,431     $ 3,372  
Net earned premiums
    3,484       3,411       3,367  
Net investment income
    621       554       416  
Net operating income
    619       635       382  
Net realized investment gains (losses), after-tax
    (53 )     25       2  
Net income
    566       660       384  
 
                       
Ratios
                       
Loss and loss adjustment expense
    62.8 %     60.4 %     68.3 %
Expense
    26.7       27.4       27.4  
Dividend
    0.2       0.1       0.1  
 
                 
 
                       
Combined
    89.7 %     87.9 %     95.8 %
 
                 
2007 Compared with 2006
Net written premiums for Specialty Lines increased $75 million in 2007 as compared with 2006. Premiums written were unfavorably impacted by decreased production as compared with the same period in 2006. The decreased production reflects our disciplined participation in the current competitive market. The competitive market conditions are expected to put ongoing pressure on premium and income levels, and the expense ratio. This unfavorable impact was more than offset by decreased ceded premiums. The U.S. Specialty Lines reinsurance structure was primarily quota share reinsurance through April 2007. We elected not to renew this coverage upon its expiration. With our current diversification in the previously reinsured lines of business and our management of the gross limits on the business written, we did not believe the cost of renewing the program was commensurate with its projected benefit. Net earned premiums increased $73 million as compared with the same period in 2006, consistent with the increased net premiums written.
Specialty Lines averaged rate decreases of 3% for 2007, as compared to decreases of 1% for 2006 for the contracts that renewed during those periods. Retention rates of 83% and 85% were achieved for those contracts that were up for renewal in each period.
Net income decreased $94 million in 2007 as compared with 2006. This decrease was primarily attributable to decreases in 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 income decreased $16 million in 2007 as compared with 2006. This decrease was primarily driven by decreased current accident year underwriting results and less favorable net prior year development. These decreases were partially offset by increased net investment income and favorable experience in the warranty line of business.
The combined ratio increased 1.8 points in 2007 as compared with 2006. The loss ratio increased 2.4 points, primarily due to higher current accident year losses related to the decline in rates and less favorable net prior year development as discussed below.
The expense ratio improved 0.7 points in 2007 as compared with 2006. This improvement was primarily due to a favorable change in estimate related to dealer profit commissions in the warranty line of business.
Favorable net prior year development of $36 million was recorded in 2007, including $25 million of favorable claim and allocated claim adjustment expense reserve development and $11 million of favorable premium development. Favorable net prior year development of $66 million, including $61 million of favorable claim and allocated claim adjustment expense reserve development and $5 million of favorable premium

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development, was recorded in 2006. Further information on Specialty Lines Net Prior Year Development for 2007 and 2006 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, 2007 and 2006 for Specialty Lines.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2007     2006  
(In millions)                
Gross Case Reserves
  $ 2,585     $ 2,635  
Gross IBNR Reserves
    5,818       5,311  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 8,403     $ 7,946  
 
           
 
               
Net Case Reserves
  $ 2,090     $ 2,013  
Net IBNR Reserves
    4,527       4,010  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 6,617     $ 6,023  
 
           
2006 Compared with 2005
Net written premiums for Specialty Lines increased $59 million in 2006 as compared with 2005. This increase was primarily due to improved production across certain lines of business. Net earned premiums increased $44 million in 2006 as compared with 2005, consistent with the increased premium written.
Specialty Lines averaged rate decreases of 1% for 2006, as compared to increases of 1% for 2005 for the contracts that renewed during those periods. Retention rates of 85% and 84% were achieved for those contracts that were up for renewal in each period.
Net income increased $276 million in 2006 as compared with 2005. This increase was attributable to increases in net operating income and net 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 $253 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. The 2005 results also 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 R of the Consolidated Financial Statements included under Item 8.
The combined ratio improved 7.9 points in 2006 as compared with 2005. The loss ratio improved 7.9 points, due to decreased net prior year development as discussed below and improved current accident year impacts. 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.
Favorable net prior year development of $66 million was recorded in 2006, including $61 million of favorable claim and allocated claim adjustment expense reserve development and $5 million of favorable premium development. Unfavorable net prior year development of $103 million, including $173 million of unfavorable claim and allocated claim adjustment expense reserve development and $70 million of favorable 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.

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LIFE & GROUP NON-CORE
Business Overview
The Life & 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 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 indexed group annuity contracts, while considered non-core, continue to be actively marketed.
The following table summarizes the results of operations for Life & Group Non-Core.
Results of Operations
                         
Years ended December 31   2007   2006   2005
(In millions)                        
Net earned premiums
  $ 618     $  641     $  704  
Net investment income
    622       698       593  
Net operating loss
    (159 )     (14 )     (51 )
Net realized investment losses, after-tax
    (36 )     (33 )     (19 )
Net loss
    (195 )     (47 )     (70 )
2007 Compared with 2006
Net earned premiums for Life & Group Non-Core decreased $23 million in 2007 as compared with 2006. The 2007 and 2006 net earned premiums relate primarily to the group and individual long term care businesses.
The net loss increased $148 million in 2007 as compared with 2006. The increase in net loss was primarily due to the after-tax loss of $108 million related to the settlement of the IGI contingency. The IGI contingency related to reinsurance arrangements with respect to personal accident insurance coverages provided between 1997 and 1999 which were the subject of arbitration proceedings. We reached agreement in 2007 to settle the arbitration matter for a one-time payment of $250 million, which resulted in an incurred loss, net of reinsurance, of $167 million pretax. The decreased net investment income included a decline of net investment income in the trading portfolio of $92 million, a significant portion of which was offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio. The trading portfolio supports our pension deposit business, which experienced a decline in net results of $33 million in 2007 compared to 2006. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
2006 Compared with 2005
Net earned premiums for Life & Group Non-Core decreased $63 million in 2006 as compared with 2005.
Net loss decreased $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 loss 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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CORPORATE & OTHER NON-CORE
Overview
Corporate & Other Non-Core primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re. This segment also includes the results related to the centralized adjusting and settlement of A&E claims.
The following table summarizes the results of operations for the Corporate & Other Non-Core segment, including intrasegment eliminations.
Results of Operations
                         
Years ended December 31   2007   2006   2005
(In millions)                        
Net investment income
  $ 312     $  320     $  251  
Revenues
     298       355       376  
Net operating income (loss)
    (2 )     3       9  
Net realized investment gains (losses), after-tax
    (17 )     27       (12 )
Net income (loss)
    (19 )     30       (3 )
2007 Compared with 2006
Revenues decreased $57 million in 2007 as compared with 2006. Revenues were unfavorably impacted by decreased 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 results decreased $49 million in 2007 as compared with 2006. The decrease in net results was primarily due to decreased revenues as discussed above, increased current accident year losses related to certain mass torts and an increase in interest costs on corporate debt. In addition, the 2006 results included a release of a restructuring accrual. These unfavorable impacts were partially offset by a change in estimate related to federal taxes and lower expenses.
Unfavorable net prior year development of $86 million was recorded during 2007, including $91 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $5 million of favorable premium development. Unfavorable net prior year development of $88 million was recorded in 2006, including $86 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $2 million of unfavorable premium development. Further information on Corporate & Other Non-Core’s Net Prior Year Development for 2007 and 2006 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, 2007 and 2006 for Corporate & Other Non-Core.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2007     2006  
(In millions)                
Gross Case Reserves
  $ 2,159     $ 2,511  
Gross IBNR Reserves
    2,951       3,528  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 5,110     $ 6,039  
 
           
 
               
Net Case Reserves
  $ 1,328     $ 1,453  
Net IBNR Reserves
    1,787       1,999  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 3,115     $ 3,452  
 
           

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2006 Compared with 2005
Revenues decreased $21 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 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 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 certain 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 development and $15 million of unfavorable premium development. Further information on Corporate & 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.
During 2005, we commuted several significant reinsurance contracts that resulted in unfavorable development of $118 million, which is included in the development above. These commutations resulted in unfavorable impacts of $71 million after-tax in 2005. These contracts contained interest crediting provisions and maintenance charges. Interest charges associated with the reinsurance contracts commuted were $13 million after-tax in 2005. There will be no further interest crediting charges or other charges related to these commuted contracts in future periods.
A&E Reserves
Our property and casualty insurance subsidiaries have actual and potential exposures related to asbestos and environmental pollution (A&E) claims.
Establishing reserves for A&E 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 A&E, 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 A&E claim and claim adjustment expenses.
In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported A&E 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 A&E claims which cannot now be anticipated; the potential for increases and decreases in costs to defend A&E claims; the possibility of expanding theories of liability against our policyholders in A&E matters; possible exhaustion of underlying umbrella and excess coverage; and future developments pertaining to our ability to recover reinsurance for A&E claims.
Due to the inherent uncertainties in estimating claim and claim adjustment expense reserves for A&E and due to the significant uncertainties described related to A&E 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

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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 A&E 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 A&E claims to evaluate the adequacy of our A&E 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 A&E claim and claim adjustment expense reserves and net prior year development is included in Note F of the Consolidated Financial Statements included under Item 8.
The following table provides data related to our A&E claim and claim adjustment expense reserves.
A&E Reserves
                                 
    December 31, 2007     December 31, 2006  
            Environmental             Environmental  
    Asbestos     Pollution     Asbestos     Pollution  
(In millions)                                
Gross reserves
  $ 2,352     $ 367     $ 2,635     $ 427  
Ceded reserves
    (1,030 )     (125 )     (1,183 )     (142 )
 
                       
 
                               
Net reserves
  $ 1,322     $ 242     $ 1,452     $ 285  
 
                       
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.
Despite the decrease in new claim filings in recent years, there are several factors, 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 plaintiff attorneys named additional defendants to new and existing asbestos bodily injury lawsuits, we experienced an increase in the total number of policyholders with current asbestos claims. 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.

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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. Claim payments are contingent on presentation of adequate documentation showing exposure during the policy periods and other documentation supporting the demand for claim payment. Coverage in place agreements may have annual payment caps. Coverage in place agreements are evaluated based on claims filings trends and severities.
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 resolving large accounts a significant management priority. Small accounts are defined as active accounts with $100 thousand or less of cumulative paid losses. Approximately 81% and 83% of our total active asbestos accounts are classified as small accounts at December 31, 2007 and 2006.
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.

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The tables below depict our overall pending asbestos accounts and associated reserves at December 31, 2007 and 2006. On February 2, 2007, we paid $31 million to the Owens Corning Fibreboard Trust pursuant to our 1993 settlement with Fibreboard.
Pending Asbestos Accounts and Associated Reserves
                                 
            Net Paid Losses     Net Asbestos     Percent of  
    Number of     in 2007     Reserves     Asbestos  
    Policyholders     (In millions)     (In millions)     Net Reserves  
December 31, 2007                                
Policyholders with settlement agreements
                               
Structured settlements
    14     $ 29     $ 151       11 %
Wellington
    3       1       12       1  
Coverage in place
    34       38       100       8  
 
                       
 
                               
Total with settlement agreements
    51       68       263       20  
 
                       
 
                               
Other policyholders with active accounts
                               
Large asbestos accounts
    233       45       237       18  
Small asbestos accounts
    1,005       15       93       7  
 
                       
 
                               
Total other policyholders
    1,238       60       330       25  
 
                       
 
                               
Assumed reinsurance and pools
          8       133       10  
Unassigned IBNR
                596       45  
 
                       
 
                               
Total
    1,289     $ 136     $ 1,322       100 %
 
                       
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
    38       (18 )     132       9  
 
                       
 
                               
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 %
 
                       
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

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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.
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
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 has been 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.

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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. Claim payments are contingent on presentation of adequate documentation of damages during the policy periods and other documentation supporting the demand for claim 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. Approximately 73% and 75% of our total active pollution accounts are classified as small accounts at December 31, 2007 and 2006.
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, 2007 and 2006.
Pending Environmental Pollution Accounts and Associated Reserves
                                 
                    Net        
                    Environmental     Percent of  
            Net Paid Losses     Pollution     Environmental  
    Number of     in 2007     Reserves     Pollution Net  
December 31, 2007   Policyholders     (In millions)     (In millions)     Reserve  
Policyholders with settlement agreements
                               
Structured settlements
    10     $ 9     $ 6       2 %
Coverage in place
    18       8       14       6  
 
                       
Total with settlement agreements
    28       17       20       8  
 
                       
 
                               
Other policyholders with active accounts
                               
Large pollution accounts
    112       17       53       22  
Small pollution accounts
    298       9       42       17  
 
                       
Total other policyholders
    410       26       95       39  
 
                       
 
                               
Assumed reinsurance and pools
          1       31       13  
Unassigned IBNR
                96       40  
 
                       
 
                               
Total
    438     $ 44     $ 242       100 %
 
                       
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 and pools
          1       32       11  
Unassigned IBNR
                126       44  
 
                       
 
                               
Total
    490     $ 51     $ 285       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   2007     2006     2005  
(In millions)                        
Fixed maturity securities
  $ 2,047     $ 1,842     $ 1,608  
Short term investments
    186       248       147  
Limited partnerships
    183       288       254  
Equity securities
    25       23       25  
Income from trading portfolio (a)
    10       103       47  
Interest on funds withheld and other deposits
    (1 )     (68 )     (166 )
Other
    36       18       20  
 
                 
 
                       
Gross investment income
    2,486       2,454       1,935  
Investment expense
    (53 )     (42 )     (43 )
 
                 
 
                       
Net investment income
  $ 2,433     $ 2,412     $ 1,892  
 
                 
 
(a)  
The change in net unrealized losses on trading securities included in net investment income was $15 million and $7 million for the years ended December 31, 2007 and 2005. There was no change in net unrealized gains (losses) on trading securities included in net investment income for the year ended December 31, 2006.
Net investment income increased by $21 million for 2007 compared with 2006. The improvement was primarily driven by an increase in the overall invested asset base and a reduction of interest expense on funds withheld and other deposits as discussed further below. These increases were substantially offset by decreases in limited partnership income and results from the trading portfolio. The decreased income from the trading portfolio was largely offset by a corresponding decrease 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 $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 as discussed further below. 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.
During 2006 and 2005, we commuted several significant finite reinsurance contracts which contained interest crediting provisions. The pretax interest expense on funds withheld related to these significant commuted contracts was $14 million and $84 million for the years ended December 31, 2006 and 2005, and was reflected as a component of Net investment income in our Consolidated Statements of Operations. The 2005 amount included interest charges associated with the contract commuted in 2006. As of December 31, 2006, no further interest expense was due on the funds withheld on the commuted contracts. See Note H of the Consolidated Financial Statements included under Item 8 for additional information related to interest costs on funds withheld and other deposits.
The bond segment of the investment portfolio yielded 5.8%, 5.6% and 4.9% for the years ended December 31, 2007, 2006 and 2005.

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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   2007     2006     2005  
(In millions)                        
Fixed maturity securities:
                       
U.S. Government bonds
  $ 86     $ 62     $ (33 )
Corporate and other taxable bonds
    (183 )     (98 )     (86 )
Tax-exempt bonds
    3       53       12  
Asset-backed bonds
    (343 )     (9 )     14  
Redeemable preferred stock
    (41 )     (3 )     3  
 
                 
 
                       
Total fixed maturity securities
    (478 )     5       (90 )
Equity securities
    117       16       38  
Derivative securities
    32       18       49  
Short term investments
    7       (5 )      
Other
    9       53       (10 )
 
                 
 
                       
Realized investment gains (losses) before allocation to participating policyholders’ and minority interests
    (313 )     87       (13 )
Allocated to participating policyholders’ and minority interests
    2       (1 )     3  
 
                 
Realized investment gains (losses), net of participating policyholders’ and minority interests
    (311 )     86       (10 )
 
                       
Income tax (expense) benefit
    108       (19 )      
 
                 
 
                       
Net realized investment gains (losses), net of participating policyholders’ and minority interests
  $ (203 )   $ 67     $ (10 )
 
                 
Net realized investment results decreased by $270 million for 2007 compared with 2006. The decrease in net realized investment results was primarily driven by an increase in other-than-temporary impairment (OTTI) losses related to securities for which we did not assert an intent to hold until an anticipated recovery in value. For 2007, OTTI losses of $481 million were recorded primarily within asset-backed bonds and corporate and other taxable bonds sectors. The judgment as to whether an impairment is other-than-temporary incorporates many factors including the likelihood of a security recovering to cost, our intent and ability to hold the security until recovery, general market conditions, specific sector views and significant changes in expected cash flows. The Impairment Committee’s decision to record an OTTI loss is primarily based on whether the security’s fair value is likely to recover to its amortized cost in light of all of the factors considered over the expected holding period. Current factors and market conditions that contributed to recording impairments included significant credit spread widening in fixed income sectors and market disruptions surrounding sub-prime residential mortgage concerns. In some instances, an OTTI loss was recorded because, in the Impairment Committee’s judgment, recovery to cost is not likely. The majority of the OTTI losses recorded in 2007 were due to our lack of intent to hold until an anticipated recovery of cost or maturity. For 2007, 9% of the OTTI losses were taken on common and preferred stocks and 41% were taken on below investment grade securities. Further information on our OTTI process is set forth in Note B of the Consolidated Financial Statements included under Item 8.
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 OTTI losses for which we did not assert an intent to hold until an anticipated recovery in value. OTTI losses of $112 million were recorded in 2006 primarily in the corporate and other taxable bonds sector. Other realized investment gains 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. 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 were classified as fixed maturities. For additional information on loans to the national contractor, see Note R of the Consolidated Financial Statements.

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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.
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 investments for asset/liability management purposes.
The segregated investments support liabilities primarily in the Life & Group Non-Core segment including annuities, structured benefit settlements and long term care products. The remaining investments are managed to support the Standard Lines, Specialty Lines and Corporate & Other Non-Core segments.
The effective durations of fixed maturity securities, short term investments and interest rate derivatives are presented in the table below. Short term investments are net of securities lending collateral and account payable and receivable amounts for securities purchased and sold, but not yet settled. The segregated investments had an effective duration of 10.7 years and 9.8 years at December 31, 2007 and 2006. The remaining interest sensitive investments had an effective duration of 3.3 years and 3.2 years at December 31, 2007 and 2006. The overall effective duration was 5.1 years and 4.7 years at December 31, 2007 and 2006.
Effective Durations
                                 
    December 31, 2007     December 31, 2006  
            Effective Duration             Effective Duration  
    Fair Value     (In years)     Fair Value     (In years)  
(In millions)                                
Segregated investments
  $ 9,211       10.7     $ 8,524       9.8  
 
Other interest sensitive investments
    29,406       3.3       30,178       3.2  
 
                       
 
                               
Total
  $ 38,617       5.1     $ 38,702       4.7  
 
                       
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 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 Standard and Poor’s 500 Index futures in a notional amount equal to the contract liability relating to Life & Group Non-Core indexed group annuity contracts. We provided collateral to satisfy margin deposits on exchange-traded derivatives totaling $35 million as of December 31, 2007. For over-the-counter derivative transactions we utilize International Swaps and Derivatives Association Master Agreements that specify certain limits over which collateral is exchanged. As of December 31, 2007, we provided $29 million of cash as collateral for over-the-counter derivative instruments.
We classify our fixed maturity and 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. See Note A of the Consolidated Financial Statements included under Item 8 for additional information on the valuation of investments.

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The following table provides further detail of pretax gross realized investment gains and losses, which include OTTI losses, on available-for-sale fixed maturity and equity securities.
Realized Investment Gains (Losses)
                         
Years ended December 31   2007     2006     2005  
(In millions)                        
Net realized investment gains (losses) on fixed maturity and equity securities:
                       
Fixed maturity securities:
                       
Gross realized gains
  $ 486     $ 382     $ 361  
Gross realized losses
    (964 )     (377 )     (451 )
 
                 
 
                       
Net realized investment gains (losses) on fixed maturity securities
    (478 )     5       (90 )
 
                 
 
                       
Equity securities:
                       
Gross realized gains
    146       24       73  
Gross realized losses
    (29 )     (8 )     (35 )
 
                 
 
                       
Net realized investment gains on equity securities
    117       16       38  
 
                 
 
                       
Net realized investment gains (losses) on fixed maturity and equity securities
  $ (361 )   $ 21     $ (52 )
 
                 
The following table provides details of the largest realized investment 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 securities had been in an unrealized loss position prior to sale. The period of time that the securities 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 Investment Losses from Securities Sold at a Loss
Year ended December 31, 2007
                         
    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.
  $ 12,815     $ 98       0-6  
 
                       
Mortgage backed pass through securities sold based on view of interest rate changes.
    394       9       0-6  
 
                       
Issuer provides financing to residential real estate markets and commercial consumers including originators and developers in various markets. The losses were due to the continued deterioration in the real estate markets.
    80       9       0-12  
 
                       
Bank and financial issuer that came under pressure due to mortgage market disruption.
    36       5       0-6  
 
                       
State specific general obligation municipal bonds sold to reduce exposure due to change in outlook.
    513       5       0-6  
 
                   
 
  $ 13,838     $ 126          
 
                   
 
(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 General Account Investments
                                 
December 31   2007     %     2006     %  
(In millions)                                
Fixed maturity securities available-for-sale:
                               
U.S. Treasury securities and obligations of government agencies
  $ 687       2 %   $ 5,138       12 %
Asset-backed securities
    11,409       27       13,677       31  
States, municipalities and political subdivisions – tax-exempt
    7,675       18       5,146       12  
Corporate securities
    8,952       22       7,132       16  
Other debt securities
    4,299       10       3,642       8  
Redeemable preferred stock
    1,058       3       912       2  
 
                       
 
                               
Total fixed maturity securities available-for-sale
    34,080       82       35,647       81  
 
                       
 
                               
Fixed maturity securities trading:
                               
U.S. Treasury securities and obligations of government agencies
    5             2        
Asset-backed securities
    31             55        
Corporate securities
    123             133       1  
Other debt securities
    18             14        
 
                       
 
                               
Total fixed maturity securities trading
    177             204       1  
 
                       
 
                               
Equity securities available-for-sale:
                               
Common stock
    452       1       452       1  
Preferred stock
    116             145        
 
                       
 
                               
Total equity securities available-for-sale
    568       1       597       1  
 
                       
 
                               
Total equity securities trading
                60        
 
                       
 
Short term investments available-for-sale
    4,497       11       5,538       13  
Short term investments trading
    180       1       172        
Limited partnerships
    2,214       5       1,852       4  
Other investments
    46             26        
 
                       
 
                               
Total general account investments
  $ 41,762       100 %   $ 44,096       100 %
 
                       
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 amortized cost 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 net unrealized gain of $74 million at December 31, 2007 compared with a net unrealized gain of $966 million at December 31, 2006. The unrealized position at December 31, 2007 was comprised of a net unrealized loss of $131 million for fixed maturities, a net unrealized gain of $202 million for equity securities and a net unrealized gain of $3 million for short term securities. 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. 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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The following table provides the composition of fixed maturity securities available-for-sale in a gross unrealized loss position at December 31, 2007 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
    6 %     3 %
Due after one year through five years
    43       40  
Due after five years through ten years
    22       23  
Due after ten years
    29       34  
 
           
 
               
Total
    100 %     100 %
 
           
Our non-investment grade fixed maturity securities available-for-sale as of December 31, 2007 that were in a gross unrealized loss position had a fair value of $1,708 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, 2007 and 2006.
Unrealized Loss Aging for Non-investment Grade Securities
                                                 
            Fair Value as a Percentage of Amortized Cost        
                                            Gross  
    Estimated                                     Unrealized  
December 31, 2007   Fair Value     90-99%     80-89%     70-79%     <70%     Loss  
(In millions)                                                
Fixed maturity securities:
                                               
0-6 months
  $ 1,549     $ 57     $ 16     $ 3     $     $ 76  
7-12 months
    125       7       1                   8  
13-24 months
    26       1       1       1       1       4  
Greater than 24 months
    8             2                   2  
 
                                   
 
                                               
Total non-investment grade
  $ 1,708     $ 65     $ 20     $ 4     $ 1     $ 90  
 
                                   
Unrealized Loss Aging for Non-investment Grade Securities
                                                 
            Fair Value as a Percentage of Amortized Cost        
                                            Gross  
    Estimated                                     Unrealized  
December 31, 2006   Fair Value     90-99%     80-89%     70-79%     <70%     Loss  
(In millions)                                                
Fixed maturity securities:
                                               
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  
 
                                   
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, 2007 or 2006. 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 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 amortized cost 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

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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, 2007 that were in a gross unrealized loss position had a fair value of $102 million and gross unrealized losses of $12 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 cost 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 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 and further credit spread widening, could have an adverse material impact on our results of operations or equity.
Within our overall investment portfolio, $3,810 million of our securities are rated AAA as a result of insurance from six different mono-line insurers. Insured municipal bonds are $3,602 million of this total and represent 47% of our total municipal bond holdings. The underlying average credit quality of the municipal bonds would be A+ without the benefit of the insurance. Should the insurance be deemed worthless, we do not believe there would be a material impact to our results of operations or financial condition.
The general account portfolio consists primarily of high quality bonds, 89% and 91% of which were rated as investment grade (rated BBB- or higher) at December 31, 2007 and 2006. The following table summarizes the ratings of our general account bond portfolio at carrying value.
General Account Bond Ratings
                                 
December 31   2007     %     2006     %  
(In millions)                                
U.S. Government and affiliated agency securities
  $ 816       3 %   $ 5,285       15 %
Other AAA rated
    16,728       50       16,311       47  
AA and A rated
    6,326       19       5,222       15  
BBB rated
    5,713       17       4,933       14  
Non-investment grade
    3,616       11       3,188       9  
 
                       
 
                               
Total
  $ 33,199       100 %   $ 34,939       100 %
 
                       
At December 31, 2007 and 2006, approximately 95% and 96% 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 internally.
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   2007     %     2006     %  
(In millions)                                
U.S. Government and affiliated agency securities
  $       %   $       %
Other AAA rated
    122       29       111       26  
AA and A rated
    224       54       242       56  
BBB rated
    73       17       75       17  
Non-investment grade
                6       1  
 
                       
 
                               
Total
  $ 419       100 %   $ 434       100 %
 
                       
At December 31, 2007 and 2006, 97% and 100% 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 internally.
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, according to our analysis, are below investment

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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, 2007 was $320 million, which represents 0.8% of our total investment portfolio. These securities were in a net unrealized gain position of $173 million at December 31, 2007. Of these securities, 94% were priced by independent third party sources.
Asset-Backed and Sub-prime Mortgage Exposure
Asset-Backed Distribution
                                                         
    Security Type                      
                                            Percent     Percent  
                                            of Total     of Total  
December 31, 2007   MBS     CMO     ABS     CDO     Total     Security Type     Investments  
(In millions)                                                        
U.S. Government Agencies
  $ 1,212     $ 1,460     $     $     $ 2,672       23.4 %     6.4 %
AAA
          5,297       2,063       27       7,387       64.5       17.7  
AA
          35       309       80       424       3.7       1.0  
A
          56       206       222       484       4.2       1.2  
BBB
          13       396       20       429       3.8       1.0  
Non-investment grade and equity tranches
          1       28       15       44       0.4       0.1  
 
                                         
Total Fair Value
  $ 1,212     $ 6,862     $ 3,002     $ 364     $ 11,440       100.0 %     27.4 %
 
                                         
Total Amortized Cost
  $ 1,217     $ 6,975     $ 3,146     $ 469     $ 11,807                  
 
                                             
 
                                                       
Percent of total fair value by security type
    11 %     60 %     26 %     3 %     100 %                
 
                                                       
Sub-prime (included above)
                                                       
Fair Value
  $     $ 13     $ 1,064     $ 28     $ 1,105       9.7 %     2.6 %
Amortized Cost
  $     $ 13     $ 1,162     $ 39     $ 1,214       10.3 %     2.9 %
 
                                                       
Alt-A (included above)
                                                       
Fair Value
  $     $ 1,142     $ 3     $ 51     $ 1,196       10.5 %     2.9 %
Amortized Cost
  $     $ 1,187     $ 3     $ 52     $ 1,242       10.5 %     3.0 %
Included in our fixed maturity securities at December 31, 2007 were $11,440 million of asset-backed securities, at fair value, which represents 27% of total invested assets. Structured security types within this category consist of approximately 11% in mortgage-backed securities (MBS), 60% in collateralized mortgage obligations (CMO), 26% in corporate asset-backed obligations (ABS), and 3% in collateralized debt obligations (CDO). Of the total asset-backed securities, 88% were U.S. Government Agency issued or AAA rated. The majority of our asset-backed securities are actively traded in liquid markets. We obtain fair values for a majority of these securities from a third party pricing service. Of the total invested assets, $1,105 million or 2.6% have exposure to sub-prime residential mortgage (sub-prime) collateral, as measured by the original deal structure, while 2.9% have exposure to Alternative A (Alt A) collateral. Of the securities with sub-prime exposure, approximately 98% were rated as investment grade, while 99% of the Alt A securities were rated investment grade. In addition to sub-prime exposure in fixed maturity securities, there is exposure of approximately $30 million through other investments, including limited partnerships. We have mitigated a portion of our sub-prime exposure through an economic hedge position in Credit Default Swaps (CDS) from which we recognized net gains of $40 million for the year ended December 31, 2007.
All asset-backed securities in an unrealized loss position are reviewed as part of the ongoing OTTI process and resulted in OTTI losses of $202 million for the year ended December 31, 2007. Included in this OTTI loss was $163 million related to securities with sub-prime and Alt A exposure. The Company’s review of these securities includes an analysis of cash flow modeling under various default scenarios, the seniority of the specific tranche within the deal structure, the composition of the collateral and the actual default experience. Given current market conditions and the specific facts and circumstances related to our individual sub-prime and Alt A exposures, we believe that all remaining unrealized losses are temporary in nature. Continued deterioration in these markets beyond current expectations may cause us to reconsider and record additional OTTI losses.

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Short Term Investments
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   2007     2006  
(In millions)                
Short term investments available-for-sale:
               
Commercial paper
  $ 3,040     $ 923  
U.S. Treasury securities
    577       1,093  
Money market funds
    72       196  
Other, including collateral held related to securities lending
    808       3,326  
 
           
 
               
Total short term investments available-for-sale
    4,497       5,538  
 
           
 
               
Short term investments trading:
               
Commercial paper
    35       43  
U.S. Treasury securities
          2  
Money market funds
    139       127  
Other
    6        
 
           
 
               
Total short term investments trading
    180       172  
 
           
 
               
Total short term investments
  $ 4,677     $ 5,710  
 
           
The fair value of collateral held related to securities lending, included in other short term investments, was $53 million and $2,851 million at December 31, 2007 and 2006.

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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 2007, net cash provided by operating activities was $1,239 million as compared to $2,250 million in 2006. Cash provided by operating activities was unfavorably impacted by decreased net sales of trading securities to fund policyholder withdrawals of investment contract products issued by us. 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 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.
Cash flows from investing activities include the purchase and sale of available-for-sale 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 $1,082 million, $1,646 million, and $1,316 million for 2007, 2006, and 2005. 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. In 2007, net cash flows provided by investing activities-discontinued operations included $65 million of cash proceeds related to the sale of the United Kingdom discontinued operations business.
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 2007, 2006 and 2005, net cash used for financing activities was $185 million, $605 million, and $837 million. The decrease in cash used by financing activities is primarily related to decreased policyholder fund withdrawals in 2007 as compared to 2006, which are reflected as Return of investment contract account balances on the Consolidated Statements of Cash Flows included under Item 8.
We believe that our present cash flows from operations, investing activities and financing activities, including cash dividends from CNAF subsidiaries, are sufficient to fund our working capital and debt obligation needs.
We have an effective shelf registration statement under which we may issue debt or equity securities.

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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.
A summary of our commitments as of December 31, 2007 is presented in the following table.
Contractual Commitments
                                         
December 31, 2007   Total     Less than 1 year     1-3 years     3-5 years     More than 5 years  
(In millions)                                        
Debt (a)
  $ 3,175     $ 486     $ 235     $ 680     $ 1,774  
Lease obligations
    247       44       79       63       61  
Claim and claim expense reserves (b)
    30,259       6,733       9,194       4,767       9,565  
Future policy benefits reserves (c)
    11,388       180       346       332       10,530  
Policyholder funds reserves (c)
    882       436       342       3       101  
Guaranteed payment contracts (d)
    31       14       17              
 
                             
 
                                       
Total
  $ 45,982     $ 7,893     $ 10,213     $ 5,845     $ 22,031  
 
                             
 
(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, 2007. See the Reserves – Estimates and Uncertainties section of this MD&A for further information. Claim and claim adjustment expense reserves of $16 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, 2007. Future policy benefit reserves of $843 million and policyholder fund reserves of $42 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, 2007, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $873 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, 2007, 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, 2007 and 2006, we have recorded approximately $27 million and $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.

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Dividends
In 2007, we paid dividends of $0.35 per share of our common stock. On February 6, 2008, our Board of Directors declared a quarterly dividend of $0.15 per share, payable March 20, 2008 to shareholders of record on February 25, 2008. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition, business needs, and regulatory constraints.
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.
Share Repurchase Program
Our Board of Directors has approved a Share Repurchase Program to purchase, in the open market or through privately negotiated transactions, our outstanding common stock, as our management deems appropriate. No shares of common stock were purchased during 2007 or 2006. On February 12, 2008, we began repurchasing shares pursuant to the Board of Directors resolutions. As of February 22, 2008, we had repurchased a total of 945,656 shares at an average price of $27.42 (including commission) per share. Share repurchases may continue.
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. The remaining phase of this multi-year plan has been completed with the December 31, 2007 merger of Transcontinental Insurance Company, a New York domiciled insurer, into its parent company, National Fire Insurance Company of Hartford, which is a CCC subsidiary.
Along with other companies in the industry, we received subpoenas, interrogatories and inquiries from and have produced documents and/or provided information to: (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.
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. We have also provided the SEC with 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.
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 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.

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The table below reflects the various group ratings issued by A.M. Best Company (A.M. Best), Fitch Ratings (Fitch), Moody’s and S&P for the property and casualty and life companies. The table also includes the ratings for CNAF senior debt and The Continental Corporation (Continental) senior debt.
                 
    Insurance Financial Strength    
    Ratings   Debt Ratings
    Property &            
    Casualty   Life   CNAF   Continental
    CCC   CAC   Senior   Senior
    Group       Debt   Debt
A.M. Best
  A   A-   bbb   Not rated
Fitch
  A   Not rated   BBB   BBB
Moody’s
  A3   Not rated   Baa3   Baa3
S&P
  A-   BBB+   BBB-   BBB-
The following rating agency actions were taken with respect to CNA from January 1, 2007 through February 15, 2008:
   
On October 5, 2007, Fitch Ratings upgraded the senior debt ratings of CNAF and Continental to BBB, the financial strength ratings of CNA’s property/casualty insurance subsidiaries to A and withdrew the A- insurance financial strength rating of Continental Assurance Company (CAC).
 
   
On November 2, 2007, Moody’s affirmed CNA’s ratings and stable outlook.
 
   
On December 18, 2007, A.M. Best affirmed CNA’s ratings and stable outlook.
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, it is possible 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
Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements (SFAS 157)
In September 2006, the Financial Accounting Standards Board (FASB) issued 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. The adoption of SFAS 157 is not expected to have a material impact on our results of operations or financial condition.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)
In February 2007, the FASB issued SFAS 159, which provides companies with an option to report selected financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS 159 helps to mitigate accounting-induced earnings volatility by enabling companies to report related assets and liabilities at

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fair value, which may reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.
SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new Statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157 and SFAS 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not intend to select the fair value option for any assets and liabilities currently held, and therefore SFAS 159 is not expected to have an impact on our financial condition or results of operations upon adoption.
SFAS No.160, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (SFAS 160)
In December 2007, the FASB issued SFAS 160, which provides accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that an ownership interest in a subsidiary should be reported as equity in the consolidated financial statements, requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and provides for expanded disclosures in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this standard in 2009 is not expected to have a material impact on our financial condition or results of operations.
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. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally 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 and environmental pollution and other 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, including the short and long term effects of losses produced or threatened in relation to sub-prime residential mortgage-backed securities (sub-prime);
 
 
the effects of corporate bankruptcies and accounting errors on capital markets, and on the markets for D&O and E&O coverages;
 
 
changes in foreign or domestic political, social and economic conditions;

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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;
 
 
regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;
 
 
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, 2014 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, construction defect claims and exposure to liabilities due to claims made by insureds and others relating to lead-based paint and other mass torts;
 
 
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

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and approved, whether it will contain funding requirements in excess of our established loss reserves or carried loss reserves;
 
 
the sufficiency of our loss reserves and the possibility of future increases in reserves;
 
 
regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries imposed by state regulatory agencies and minimum risk-based capital standards established by the National Association of Insurance Commissioners;
 
 
the risks and uncertainties associated with our loss reserves as outlined in the Critical Accounting Estimates and the Reserves – Estimates and Uncertainties sections of this MD&A;
 
 
the level of success in integrating acquired businesses and operations, and in consolidating, or selling existing ones;
 
 
the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices; and
 
 
the actual closing of contemplated transactions and agreements.
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, 2007 and 2006 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, 2007 and 2006, with all other variables held constant.
Equity price risk was measured assuming an instantaneous 10% and 25% decline in the Standard & Poor’s 500 Index (S&P 500) from its level at December 31, 2007 and 2006, with all other variables held constant. Our equity holdings were assumed to be highly and positively correlated with the S&P 500. At December 31, 2007, a 10% and 25% decrease in the S&P 500 would result in a $217 million and $542 million decrease compared to a $265 million and $662 million decrease at December 31, 2006, in the market value of our equity investments.
Of these amounts, under the 10% and 25% scenarios, $5 million and $11 million at December 31, 2007 and $4 million and $10 million at December 31, 2006 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, 2007 and December 31, 2006, 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 S&P 500.
Market Risk Scenario 1
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 31, 2007   Value     Rate Risk     Risk     Risk  
(In millions)                                
General account:
                               
Fixed maturity securities available-for-sale
  $ 34,080     $ (1,900 )   $ (111 )   $ (42 )
Fixed maturity securities trading
    177       (2 )     (1 )     (1 )
Equity securities available-for-sale
    568             (1 )     (57 )
Short term investments available-for-sale
    4,497       (4 )     (42 )      
Short term investments trading
    180                    
Limited partnerships
    2,214       1             (43 )
Other invested assets
    7                    
Interest rate swaps
    36       33              
Equity index futures trading
          1             (69 )
Other derivative securities
    3       (3 )     8        
 
                       
 
                               
Total general account
    41,762       (1,874 )     (147 )     (212 )
 
                       
 
                               
Separate accounts:
                               
Fixed maturity securities
    419       (20 )            
Equity securities
    45                   (5 )
Short term investments
    6                    
 
                       
 
                               
Total separate accounts
    470       (20 )           (5 )
 
                       
 
                               
Total securities
  $ 42,232     $ (1,894 )   $ (147 )   $ (217 )
 
                       
 
                               
Debt (carrying value)
  $ 2,157     $ (107 )   $     $  
 
                       

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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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The following tables present the estimated effects on the fair value of our financial instruments at December 31, 2007 and December 31, 2006, 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 S&P 500.
Market Risk Scenario 2
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 31, 2007   Value     Rate Risk     Risk     Risk  
(In millions)                                
General account:
                               
Fixed maturity securities available-for-sale
  $ 34,080     $ (2,789 )   $ (221 )   $ (106 )
Fixed maturity securities trading
    177       (3 )     (1 )     (3 )
Equity securities available-for-sale
    568             (2 )     (142 )
Short term investments available-for-sale
    4,497       (6 )     (85 )      
Short term investments trading
    180                    
Limited partnerships
    2,214       1             (109 )
Other invested assets
    7                    
Interest rate swaps
    36       48              
Equity index futures trading
          2             (171 )
Other derivative securities
    3             (8 )      
 
                       
 
                               
Total general account
    41,762       (2,747 )     (317 )     (531 )
 
                       
 
                               
Separate accounts:
                               
Fixed maturity securities
    419       (30 )            
Equity securities
    45                   (11 )
Short term investments
    6                    
 
                       
 
                               
Total separate accounts
    470       (30 )           (11 )
 
                       
 
                               
Total securities
  $ 42,232     $ (2,777 )   $ (317 )   $ (542 )
 
                       
 
                               
Debt (carrying value)
  $ 2,157     $ (156 )   $     $  
 
                       

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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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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CNA Financial Corporation
Consolidated Statements of Operations
                         
Years ended December 31   2007     2006     2005  
(In millions, except per share data)                        
Revenues
                       
Net earned premiums
  $ 7,484     $ 7,603     $ 7,569  
Net investment income
    2,433       2,412       1,892  
Realized investment gains (losses), net of participating policyholders’ and minority interests
    (311 )     86       (10 )
Other revenues
    279       275       411  
 
                 
 
                       
Total revenues
    9,885       10,376       9,862  
 
                 
 
                       
Claims, Benefits and Expenses
                       
Insurance claims and policyholders’ benefits
    6,009       6,047       6,999  
Amortization of deferred acquisition costs
    1,520       1,534       1,543  
Other operating expenses
    994       1,027       1,034  
Restructuring and other related charges
          (13 )      
Interest
    140       131       124  
 
                 
 
                       
Total claims, benefits and expenses
    8,663       8,726       9,700  
 
                 
 
                       
Income before income tax and minority interest
    1,222       1,650       162  
Income tax (expense) benefit
    (317 )     (469 )     105  
Minority interest
    (48 )     (44 )     (24 )
 
                 
 
                       
Income from continuing operations
    857       1,137       243  
Income (loss) from discontinued operations, net of income tax (expense) benefit of $0, $7 and $(2)
    (6 )     (29 )     21  
 
                 
 
                       
Net Income
  $ 851     $ 1,108     $ 264  
 
                 
 
                       
Basic Earnings Per Share
                       
 
                       
Income from continuing operations
  $ 3.15     $ 4.17     $ 0.68  
Income (loss) from discontinued operations
    (0.02 )     (0.11 )     0.08  
 
                 
 
                       
Basic earnings per share available to common stockholders
  $ 3.13     $ 4.06     $ 0.76  
 
                 
 
                       
Diluted Earnings Per Share
                       
 
                       
Income from continuing operations
  $ 3.15     $ 4.16     $ 0.68  
Income (loss) from discontinued operations
    (0.02 )     (0.11 )     0.08  
 
                 
 
                       
Diluted earnings per share available to common stockholders
  $ 3.13     $ 4.05     $ 0.76  
 
                 
 
                       
Weighted Average Outstanding Common Stock and Common Stock Equivalents
                       
 
                       
Basic
    271.5       262.1       256.0  
 
                 
Diluted
    271.8       262.3       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   2007     2006  
(In millions, except share data)                
Assets
               
Investments:
               
Fixed maturity securities at fair value (amortized cost of $34,388 and $35,135)
  $ 34,257     $ 35,851  
Equity securities at fair value (cost of $366 and $408)
    568       657  
Limited partnership investments
    2,214       1,852  
Other invested assets
    46       26  
Short term investments
    4,677       5,710  
 
           
Total investments
    41,762       44,096  
Cash
    94       84  
Reinsurance receivables (less allowance for uncollectible receivables of $461 and $469)
    8,228       9,478  
Insurance receivables (less allowance for doubtful accounts of $312 and $368)
    1,972       2,108  
Accrued investment income
    330       313  
Receivables for securities sold and collateral
    142       303  
Deferred acquisition costs
    1,161       1,190  
Prepaid reinsurance premiums
    270       342  
Deferred income taxes
    1,198       855  
Property and equipment at cost (less accumulated depreciation of $596 and $571)
    378       277  
Goodwill and other intangible assets
    142       142  
Other assets
    579       592  
Separate account business
    476       503  
 
           
Total assets
  $ 56,732     $ 60,283  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Insurance reserves:
               
Claim and claim adjustment expenses
  $ 28,588     $ 29,636  
Unearned premiums
    3,598       3,784  
Future policy benefits
    7,106       6,645  
Policyholders’ funds
    930       1,015  
Collateral on loaned securities and derivatives
    63       2,851  
Payables for securities purchased
    353       221  
Participating policyholders’ funds
    45       50  
Short term debt
    350        
Long term debt
    1,807       2,156  
Federal income taxes payable (includes $5 and $38 due to Loews Corporation)
    2       40  
Reinsurance balances payable
    401       539  
Other liabilities
    2,478       2,740  
Separate account business
    476       503  
 
           
Total liabilities
    46,197       50,180  
 
           
 
               
Commitments and contingencies (Notes B, F, G, I and K)
               
Minority interest
    385       335  
 
               
Stockholders’ equity:
               
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; and 271,662,278 and 271,108,480 shares outstanding)
    683       683  
Additional paid-in capital
    2,169       2,166  
Retained earnings
    7,285       6,486  
Accumulated other comprehensive income
    103       549  
Treasury stock (1,377,965 and 1,931,763 shares), at cost
    (39 )     (58 )
 
           
 
    10,201       9,826  
Notes receivable for the issuance of common stock
    (51 )     (58 )
 
           
Total stockholders’ equity
    10,150       9,768  
 
           
Total liabilities and stockholders’ equity
  $ 56,732     $ 60,283  
 
           
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   2007     2006     2005  
(In millions)                        
Cash Flows from Operating Activities:
                       
Net income
  $ 851     $ 1,108     $ 264  
Adjustments to reconcile net income to net cash flows provided by operating activities:
                       
(Income) loss from discontinued operations
    6       29       (21 )
Loss (gain) on disposal of property and equipment
    1             (1 )
Minority interest
    48       44       24  
Deferred income tax provision
    (99 )     173       (220 )
Trading securities activity
    (12 )     374       164  
Realized investment (gains) losses, net of participating policyholders’ and minority interests
    311       (86 )     10  
Undistributed earnings of equity method investees
    (99 )     (170 )     (45 )
Net amortization of bond (discount) premium
    (252 )     (274 )     (153 )
Depreciation
    64       48       54  
Changes in:
                       
Receivables, net
    1,386       2,427       3,531  
Accrued investment income
    (17 )     (1 )     (15 )
Deferred acquisition costs
    29       7       71  
Prepaid reinsurance premiums
    72       (2 )     788  
Federal income taxes recoverable/payable
    (38 )     102       (62 )
Insurance reserves
    (830 )     (771 )     (943 )
Reinsurance balances payable
    (138 )     (1,097 )     (1,344 )
Other assets
    42       142       (16 )
Other liabilities
    (80 )     306       55  
Other, net
    7       (98 )     75  
 
                 
 
                       
Total adjustments
    401       1,153       1,952  
 
                 
 
                       
Net cash flows provided by operating activities-continuing operations
  $ 1,252     $ 2,261     $ 2,216  
 
                 
Net cash flows used by operating activities-discontinued operations
  $ (13 )   $ (11 )   $ (47 )
 
                 
Net cash flows provided by operating activities-total
  $ 1,239     $ 2,250     $ 2,169  
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Purchases of fixed maturity securities
  $ (73,157 )   $ (48,757 )   $ (62,990 )
Proceeds from fixed maturity securities:
                       
Sales
    69,012       42,433       55,611  
Maturities, calls and redemptions
    4,744       4,310       4,579  
Purchases of equity securities
    (236 )     (340 )     (482 )
Proceeds from sales of equity securities
    340       221       316  
Change in short term investments
    1,347       (1,331 )     1,627  
Change in collateral on loaned securities
    (2,788 )     2,084       (151 )
Change in other investments
    (168 )     (195 )     86  
Purchases of property and equipment
    (160 )     (131 )     (45 )
Dispositions
    14       8       57  
Other, net
    (69 )     16       56  
 
                 
 
                       
Net cash flows used by investing activities-continuing operations
  $ (1,121 )   $ (1,682 )   $ (1,336 )
 
                 
Net cash flows provided by investing activities-discontinued operations, including proceeds from disposition
  $ 39     $ 36     $ 20  
 
                 
Net cash flows used by investing activities-total
  $ (1,082 )   $ (1,646 )   $ (1,316 )
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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    2007     2006     2005  
Cash Flows from Financing Activities:
                       
Dividends paid to stockholders
  $ (95 )   $     $  
Proceeds from the issuance of long term debt
          759        
Principal payments on debt
          (294 )     (568 )
Return of investment contract account balances
    (122 )     (589 )     (281 )
Receipts of investment contract account balances
    3       4       7  
Payment to repurchase Series H Issue preferred stock
          (993 )      
Proceeds from the issuance of common stock
          499        
Stock options exercised
    18       10       2  
Other, net
    11       (1 )     3  
 
                 
 
                       
Net cash flows used by financing activities-continuing operations
  $ (185 )   $ (605 )   $ (837 )
 
                 
Net cash flows provided by financing activities-discontinued operations
  $     $     $  
 
                 
Net cash flows used by financing activities-total
  $ (185 )   $ (605 )   $ (837 )
 
                 
 
                       
Effect of foreign exchange rate changes on cash-continuing operations
    5              
 
                       
Net change in cash
    (23 )     (1 )     16  
Net cash transactions from continuing operations to discontinued operations
    59       14       (42 )
Net cash transactions from discontinued operations to continuing operations
    (59 )     (14 )     42  
 
                       
Cash, beginning of year
    124       125       109  
 
                 
 
                       
Cash, end of year
  $ 101     $ 124     $ 125  
 
                 
 
                       
Cash-continuing operations
  $ 94     $ 84     $ 96  
Cash-discontinued operations
    7       40       29  
 
                 
Cash-total
  $ 101     $ 124     $ 125  
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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CNA Financial Corporation
Consolidated Statements of Stockholders’ Equity
                         
Years ended December 31   2007     2006     2005  
(In millions)                        
Preferred Stock
                       
Balance, beginning of period
  $     $ 750     $ 750  
Repurchase of Series H Issue
          (750 )      
 
                 
 
                       
Balance, end of period
                750  
 
                 
 
                       
Common Stock
                       
Balance, beginning of period
    683       645       645  
Issuance of common stock
          38        
 
                 
 
                       
Balance, end of period
    683       683       645  
 
                 
 
                       
Additional Paid-in Capital
                       
Balance, beginning of period
    2,166       1,701       1,701  
Issuance of common stock and other
    3       465        
 
                 
 
                       
Balance, end of period
    2,169       2,166       1,701  
 
                 
 
                       
Retained Earnings
                       
Balance, beginning of period
    6,486       5,621       5,357  
Adjustment to initially apply FSP 85-4-1, net of tax
    38              
Adjustment to initially apply FIN 48
    5              
 
                 
Adjusted balance, beginning of period
    6,529       5,621       5,357  
Dividends paid to stockholders
    (95 )            
Liquidation preference in excess of par value on Series H Issue
          (243 )      
Net income
    851       1,108       264  
 
                 
 
                       
Balance, end of period
    7,285       6,486       5,621  
 
                 
 
                       
Accumulated Other Comprehensive Income (Loss)
                       
Balance, beginning of period
    549       359       661  
Other comprehensive income (loss)
    (446 )     236       (302 )
Adjustment to initially apply SFAS 158, net of tax
          (46 )      
 
                 
 
                       
Balance, end of period
    103       549       359  
 
                 
 
                       
Treasury Stock
                       
Balance, beginning of period
    (58 )     (67 )     (69 )
Stock options exercised
    19       9       2  
 
                 
 
                       
Balance, end of period
    (39 )     (58 )     (67 )
 
                 
 
                       
Notes Receivable for the Issuance of Common Stock
                       
Balance, beginning of period
    (58 )     (59 )     (71 )
Decrease in notes receivable for the issuance of common stock
    7       1       12  
 
                 
 
                       
Balance, end of period
    (51 )     (58 )     (59 )
 
                 
 
                       
Total Stockholders’ Equity
  $ 10,150     $ 9,768     $ 8,950  
 
                 
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 & 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, 2007.
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.
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 & Group Non-Core and Corporate & Other Non-Core. In the fourth quarter of 2007, the Company revised its property and casualty segments. See Note N for further discussion.
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 commercial 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 insurance contracts are recognized in proportion to the underlying risk insured which principally are earned ratably over the duration of the policies. Premiums on accident and health insurance contracts are earned ratably over the policy year in which they are due. 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.
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.
Claim and claim adjustment expense reserves: Claim and claim adjustment expense reserves, except reserves for structured settlements not associated with asbestos and environmental pollution (A&E), workers’ compensation lifetime claims, accident and health claims and certain claims associated with discontinued

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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 P 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 $2.2 billion and $2.5 billion as of December 31, 2007 and 2006. A significant 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, 2007 and 2006. At December 31, 2007 and 2006, the discounted reserves for unfunded structured settlements were $786 million and $814 million, net of discount of $1.2 billion and $1.3 billion.
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 3.0% to 6.5% at December 31, 2007 and 2006. At December 31, 2007 and 2006, such discounted reserves totaled $1.4 billion and $1.3 billion, net of discount of $438 million and $416 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, 2007 and 2006, 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.
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.
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, 2007 and 2006, the liability balances were $178 million and $189 million. As of December 31, 2007 and 2006, included in other assets were $6 million and $7 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 or over

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the reinsurance contract period. 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, 2007, the Company had $40 million recorded as deposit assets and $117 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.
The Company evaluates deferred acquisition costs for recoverability. Adjustments, if necessary, are recorded in current results of operations. 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. Unamortized deferred acquisition costs relating to contracts that have been substantially changed by a modification in benefits, features, rights or coverages are no longer deferred and are included as a charge to operations in the period during which the contract modification occurred.
Investments in life settlement contracts and related revenue recognition:
Prior to 2002, the Company purchased investments in life settlement contracts. Under a life settlement contract, the Company obtained the ownership and beneficiary rights of an underlying life insurance policy. In March 2006, the Financial Accounting Standards Board (FASB) issued FASB Staff Position Technical Bulletin 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 policies. 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 must be

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made on an instrument-by-instrument basis and is irrevocable. The Company adopted FSP 85-4-1 on January 1, 2007.
The Company elected to account for its investments in life settlement contracts using the fair value method and the initial impact upon adoption of FSP 85-4-1 under the fair value method was an increase to retained earnings of $38 million, net of tax.
Under the fair value method, each life settlement contract is carried at its fair value at the end of each reporting period. The change in fair value, life insurance proceeds received and periodic maintenance costs, such as premiums, necessary to keep the underlying policy in force, are recorded in Other revenues on the Consolidated Statement of Operations for the year ended December 31, 2007. Amounts presented related to prior years were accounted for under the previous accounting guidance, FTB 85-4, where the carrying value of life settlement contracts was the cash surrender value, and revenue was recognized and included in Other revenues on the Consolidated Statement of Operations when the life insurance policy underlying the life settlement contract matured. Under the previous accounting guidance, maintenance expenses were expensed as incurred and included in Other operating expenses on the Consolidated Statement of Operations. The Company’s investments in life settlement contracts of $115 million at December 31, 2007 are included in Other assets on the Consolidated Balance Sheet. The cash receipts and payments related to life settlement contracts are included in Cash flows from operating activities on the Consolidated Statements of Cash Flows for all periods presented.
The fair value of each life insurance policy is determined as the present value of the anticipated death benefits less anticipated premium payments for that policy. These anticipated values are determined using mortality rates and policy terms that are distinct for each insured. The discount rate used reflects current risk-free rates at applicable durations and the risks associated with assessing the current medical condition of the insured, the potential volatility of mortality experience for the portfolio and longevity risk. The Company used its own experience to determine the fair value of its portfolio of life settlement contracts. The mortality experience of this portfolio of life insurance policies may vary by quarter due to its relatively small size. 
The following table details the values for life settlement contracts.
                         
            Fair Value of Life Settlement     Face Amount of Life Insurance  
    Number of Life Settlement     Contracts     Policies  
December 31, 2007   Contracts     (In millions)     (In millions)  
Estimated maturity during:
                       
2008
    80     $ 16     $ 53  
2009
    80       14       52  
2010
    80       13       51  
2011
    80       11       51  
2012
    80       10       51  
Thereafter
    1,008       51       490  
 
                 
Total
    1,408     $ 115     $ 748  
 
                 
The Company uses an actuarial model to estimate the aggregate face amount of life insurance that is expected to mature in each future year and the corresponding fair value. This model projects the likelihood of the insured’s death for each in force policy based upon the Company’s estimated mortality rates. The number of life settlement contracts presented in the table above is based upon the average face amount of in force policies estimated to mature in each future year.
The increase in fair value recognized for the year ended December 31, 2007 on contracts still being held was $12 million. The gain recognized during the year ended December 31, 2007 on contracts that matured was $38 million.
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 primarily carried at contract values. Fee income accruing to the Company related to separate accounts is primarily included within Other revenue on the Consolidated Statements of Operations.

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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. Interest income on lower rated beneficial interests in securitized financial assets is determined using the prospective yield method.
The Company’s carrying value of investments in limited partnerships is its share of the net asset value of each partnership, as determined by the General Partner, and typically reflects a reporting lag of up to three months. Changes in net asset values are accounted for under the equity method and recorded within net investment income. 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 one limited partnership.
The carrying value of limited partnerships as of December 31, 2007 and 2006 was $2.2 billion and $1.9 billion. As of December 31, 2007 and 2006, the Company had 85 and 70 active limited partnership investments. The number of limited partnerships held and the strategies employed provide diversification to the limited partnership portfolio and the overall invested asset portfolio. Of the limited partnerships held, 91% or $2.0 billion in carrying value at December 31, 2007 and 91% or $1.7 billion at December 31, 2006 employ strategies that generate returns through investing in a substantial number of securities that are readily marketable while engaging in various risk management techniques primarily in fixed and public equity markets. Some of these limited partnership investment strategies may include low levels of leverage and hedging that potentially introduce more volatility and risk to the partnership returns. Limited partnerships representing 6% or $133 million at December 31, 2007 and 5% or $98 million at December 31, 2006 were invested in private equity. The remaining 3% or $71 million at December 31, 2007 and 4% or $69 million at December 31, 2006 were invested in various other partnerships including real estate. The ten largest limited partnership positions held totaled $1.2 billion and $1.1 billion as of December 31, 2007 and 2006. Based on the most recent information available regarding the Company’s percentage ownership of the individual limited partnerships, the carrying value and related income reflected in the Company’s 2007 and 2006 Consolidated Financial Statements represents approximately 4% and 4% of the aggregate partnership equity and 2% and 5% of the changes in partnership equity for all limited partnership investments.
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 amortized 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.
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 received by the Company, is 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 $53 million and $2.9 billion at December 31, 2007 and 2006. The fair value of non-cash collateral was $273 million and $385 million at December 31, 2007 and 2006.
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

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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.
Derivatives held in designated trading portfolios are carried at fair value with changes therein reflected in investment income. These derivatives are generally not designated as hedges.
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

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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 to mitigate equity price risk associated with its indexed group annuity contracts by purchasing Standard & Poor’s 500 Index (S&P 500) 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 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 Company does not offset its net derivative positions against the fair value of the collateral provided. The fair value of collateral provided, consisting primarily of cash, was $64 million at December 31, 2007 and $58 million at December 31, 2006.
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

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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.
Pension and Postretirement Benefits
Pursuant to Statement of Financial Accounting Standards (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)), which the Company adopted on December 31, 2006, the Company recognizes the overfunded or underfunded status of its defined benefit plans as an asset or liability in the Consolidated Balance Sheets and recognizes changes in that funded status in the year in which the changes occur through Other comprehensive income. The Company measures its benefit plan assets and obligations at December 31 in the Consolidated Balance Sheets.
Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), the Company records compensation expense for all awards it grants, modifies, repurchases or cancels. On January 1, 2006, the Company adopted SFAS 123R using the modified prospective method. Under this method, the Company is required to record compensation expense for the unvested portion of previously granted awards that remained outstanding as of January 1, 2006 over the remaining portion of the service period. For stock-based awards granted on or after January 1, 2006, the Company records stock-based compensation expense primarily on a straight-line basis over the requisite service period, generally four years. Prior to 2006, the Company applied the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), 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.
Foreign Currency
Foreign currency translation gains and losses are reflected in Stockholders’ equity as a component of Accumulated other comprehensive income. The Company’s foreign subsidiaries’ balance sheet accounts are translated at the exchange rates in effect at each year end and income statement accounts are translated at the average exchange rates. Foreign currency transaction losses of $10 million, $7 million and $26 million were included in determining net income for the years ended December 31, 2007, 2006 and 2005.
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 as of December 31, 2007 and 2006 primarily represent the excess of purchase price over the fair value of the net assets of acquired entities and businesses. The balance at December 31, 2007 and 2006 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. For the years ended December 31, 2007, 2006 and 2005, less than 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 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 and 2005 have been subtracted from Income from Continuing Operations to determine income from continuing operations available to common stockholders.

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The computation of earnings per share is as follows:
Earnings Per Share
                         
Years ended December 31   2007     2006     2005  
(In millions, except per share amounts)                        
Income from continuing operations
  $ 857     $ 1,137     $ 243  
Less: undeclared preferred stock dividend through repurchase date
          (46 )     (70 )
 
                 
 
                       
Income from continuing operations available to common stockholders
  $ 857     $ 1,091     $ 173  
 
                 
 
                       
Weighted average outstanding common stock and common stock equivalents
    271.5       262.1       256.0  
Effect of dilutive securities, employee stock options and appreciation rights
    0.3       0.2        
 
                 
Adjusted weighted average outstanding common stock and common stock equivalents assuming conversions
    271.8       262.3       256.0  
 
                 
 
                       
Basic earnings per share from continuing operations available to common stockholders
  $ 3.15     $ 4.17     $ 0.68  
 
                 
Diluted earnings per share from continuing operations available to common stockholders
  $ 3.15     $ 4.16     $ 0.68  
 
                 
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 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 year ended December 31, 2005.
Pro Forma Effect of SFAS 123 on Results
         
Year ended December 31   2005  
(In millions, except per share amounts)        
Income from continuing operations
  $ 243  
Less: undeclared preferred stock dividend
    (70 )
 
     
 
       
Income from continuing operations available to common stockholders
    173  
 
       
Income from discontinued operations, net of tax
    21  
 
     
 
       
Net income available to common stockholders
    194  
Less: Total stock-based compensation cost determined under the fair value method, net of tax
    (2 )
 
     
 
       
Pro forma net income available to common stockholders
  $ 192  
 
     
 
       
Basic and diluted earnings per share, as reported
  $ 0.76  
 
     
 
       
Basic and diluted earnings per share, pro forma
  $ 0.75  
 
     
Supplementary Cash Flow Information
Cash payments made for interest were $142 million, $109 million and $139 million for the years ended December 31, 2007, 2006 and 2005. Cash payments made for federal income taxes were $420 million, $173 million and $164 million for the years ended December 31, 2007, 2006 and 2005.
Accounting Pronouncements
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48)
In June 2006, the FASB issued 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

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being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. The adoption of FIN 48 as of January 1, 2007 increased retained earnings by $5 million.
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140 (SFAS 155)
In February 2006, the FASB issued 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 155 also resolves issues addressed in SFAS 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155 eliminates 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 also allows 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. 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. SFAS 155 was 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 adoption of SFAS 155 as of January 1, 2007 had no impact on the results of operations or financial condition of the Company.
SFAS 133 Implementation Issue No. B40, Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (Issue B40)
In January 2007, the FASB released Issue B40 which was applied upon adoption of SFAS 155. 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. There were no securities impacted by the adoption of Issue B40 in conjunction with SFAS 155.
Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1)
In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued 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 was adopted by the Company as of January 1, 2007 and had no impact on the results of operations or financial condition of the Company.

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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   2007     2006     2005  
(In millions)                        
Fixed maturity securities
  $ 2,047     $ 1,842     $ 1,608  
Short term investments
    186       248       147  
Limited partnerships
    183       288       254  
Equity securities
    25       23       25  
Income from trading portfolio (a)
    10       103       47  
Interest on funds withheld and other deposits
    (1 )     (68 )     (166 )
Other
    36       18       20  
 
                 
 
                       
Gross investment income
    2,486       2,454       1,935  
Investment expenses
    (53 )     (42 )     (43 )
 
                 
 
                       
Net investment income
  $ 2,433     $ 2,412     $ 1,892  
 
                 
 
(a)  
The change in net unrealized losses on trading securities included in net investment income was $15 million and $7 million for the years ended December 31, 2007 and 2005. There was no change in net unrealized gains (losses) on trading securities included in net investment income for the year ended December 31, 2006.

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Net realized investment gains (losses) are presented in the following table.
Net Realized Investment Gains (Losses)
                         
Years ended December 31   2007     2006     2005  
(In millions)                        
Net realized investment gains (losses):
                       
Fixed maturity securities:
                       
Gross realized gains
  $ 486     $ 382     $ 361  
Gross realized losses
    (964 )     (377 )     (451 )
 
                 
 
                       
Net realized investment gains (losses) on fixed maturity securities
    (478 )     5       (90 )
 
                 
 
                       
Equity securities:
                       
Gross realized gains
    146       24       73  
Gross realized losses
    (29 )     (8 )     (35 )
 
                 
 
                       
Net realized investment gains on equity securities
    117       16       38  
 
                 
 
                       
Other
    48       66       39  
 
                 
 
                       
Net realized investment gains (losses) before allocation to participating policyholders’ and minority interests
    (313 )     87       (13 )
Allocated to participating policyholders’ and minority interests
    2       (1 )     3  
 
                 
 
                       
Net realized investment gains (losses)
  $ (311 )   $ 86     $ (10 )
 
                 
Net change in unrealized appreciation (depreciation) in investments is presented in the following table.
Net Change in Unrealized Appreciation (Depreciation)
                         
Years ended December 31   2007     2006     2005  
(In millions)                        
Net change in unrealized appreciation (depreciation) in general account investments:
                       
Fixed maturity securities
  $ (847 )   $ 98     $ (443 )
Equity securities
    (47 )     78       34  
Other
    2       2       (1 )
 
                 
 
                       
Total net change in unrealized appreciation (depreciation) in general account investments
    (892 )     178       (410 )
Net change in unrealized appreciation on other
    1       (10 )     (12 )
Allocated to participating policyholders’ and minority interests
    3       4       18  
Deferred income tax (expense) benefit
    315       (58 )     158  
 
                 
 
                       
Net change in unrealized appreciation (depreciation) in investments
  $ (573 )   $ 114     $ (246 )
 
                 
Realized investment losses included $741 million, $173 million and $107 million of other-than-temporary impairment (OTTI) losses for the years ended December 31, 2007, 2006 and 2005. The 2007 OTTI losses were recorded primarily in the asset-backed bonds and corporate and other taxable bonds sectors. The 2006 and 2005 OTTI losses were recorded across various sectors. The increase in OTTI losses for 2007 was primarily driven by credit issue related OTTI losses on securities for which the Company did not assert an intent to hold until an a