Claim and Claim Adjustment Expense Reserves

The Company's property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (IBNR) as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company's results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $50 million and $205 million for the three and nine months ended September 30, 2011. Catastrophe losses in 2011 related primarily to domestic storms, Hurricane Irene and the Japanese event. The Company reported catastrophe losses, net of reinsurance, of $12 million and $100 million for the three and nine months ended September 30, 2010 for events occurring in those periods.

A&EP Reserves

On August 31, 2010, CCC together with several of the Company's insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company's legacy A&EP liabilities were ceded to NICO.

Under the terms of the NICO transaction, effective January 1, 2010 the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion (Loss Portfolio Transfer). Included in the $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves was approximately $90 million of net claim and allocated claim adjustment expense reserves relating to the Company's discontinued operations. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third party reinsurance contracts. The NICO aggregate reinsurance limit also covers credit risk on the existing third party reinsurance related to these liabilities.

The Company paid NICO a reinsurance premium of $2 billion and transferred to NICO billed third party reinsurance receivables related to A&EP claims with a net book value of $215 million (net of an allowance of $100 million for uncollectible reinsurance receivables on billed third party reinsurance receivables, as discussed further below). As of August 31, 2010, NICO deposited approximately $2.2 billion in a collateral trust account as security for its obligations to the Company. This $2.2 billion will be reduced by the amount of net A&EP claim and allocated claim adjustment expense payments. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO's performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third party reinsurers related to the Company's A&EP claims.

The following table displays the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statement of Operations.

Impact on Condensed Consolidated Statement of Operations



(In millions)	2010
Other operating expenses	$	529
Income tax benefit	185
Loss from continuing operations, included in the Corporate & Other Non-Core segment	(344		)
Loss from discontinued operations	(21		)
Net loss attributable to CNA	$	(365	)

In connection with the transfer of billed third party reinsurance receivables related to A&EP claims and the coverage of credit risk afforded under the terms of the Loss Portfolio Transfer, the Company reduced its allowance for uncollectible reinsurance receivables on billed third party reinsurance receivables and ceded claim and allocated claim adjustment expense reserves by $200 million. This reduction is reflected in Other operating expenses presented above.

Net Prior Year Development

The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Corporate & Other Non-Core.

Net Prior Year Development



Three months ended September 30, 2011
(In millions)	CNA Specialty			CNA Commercial			Corporate & Other Non-Core		Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(5	)	$	(42	)	$	11	$	(36	)
Pretax (favorable) unfavorable premium development	(26		)	(11		)	1		(36		)
Total pretax (favorable) unfavorable net prior year development	$	(31	)	$	(53	)	$	12	$	(72	)

Net Prior Year Development



Three months ended September 30, 2010
(In millions)	CNA Specialty			CNA Commercial			Corporate & Other Non-Core		Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(65	)	$	(26	)	$	2	$	(89	)
Pretax (favorable) unfavorable premium development	(2		)	(2		)	—		(4		)
Total pretax (favorable) unfavorable net prior year development	$	(67	)	$	(28	)	$	2	$	(93	)

Net Prior Year Development



Nine months ended September 30, 2011
(In millions)	CNA Specialty			CNA Commercial			Corporate & Other Non-Core		Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(72	)	$	(99	)	$	5	$	(166	)
Pretax (favorable) unfavorable premium development	(34		)	21			—		(13		)
Total pretax (favorable) unfavorable net prior year development	$	(106	)	$	(78	)	$	5	$	(179	)

Net Prior Year Development



Nine months ended September 30, 2010
(In millions)	CNA Specialty			CNA Commercial			Corporate & Other Non-Core			Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(215	)	$	(229	)	$	5		$	(439	)
Pretax (favorable) unfavorable premium development	(5		)	54			(3		)	46
Total pretax (favorable) unfavorable net prior year development	$	(220	)	$	(175	)	$	2		$	(393	)

For the three and nine months ended September 30, 2011, favorable premium development was recorded for CNA Specialty primarily due to changes in estimates of exposures in medical professional liability tail coverages.

For the nine months ended September 30, 2011, unfavorable premium development for CNA Commercial was recorded due to a further reduction of ultimate premium estimates relating to retrospectively rated policies, partially offset by premium adjustments on auditable policies due to increased exposures.

For the nine months ended September 30, 2010, unfavorable premium development for CNA Commercial was recorded due to a change in ultimate premium estimates relating to retrospectively rated policies and return premium on auditable policies due to reduced exposures.

CNA Specialty

The following table provides further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the CNA Specialty segment for the three and nine months ended September 30, 2011 and 2010.



Periods ended September 30	Three Months						Nine Months
(In millions)	2011			2010			2011			2010
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
Medical Professional Liability	$	(18	)	$	4		$	(52	)	$	(44	)
Other Professional Liability	1			(28		)	(20		)	(116		)
Surety	1			(38		)	(2		)	(49		)
Warranty	—			—			(12		)	—
Other	11			(3		)	14			(6		)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(5	)	$	(65	)	$	(72	)	$	(215	)

Three Month Comparison

2011

Favorable development for medical professional liability was primarily due to favorable case incurred emergence in nurses and physicians in accident years 2008 and prior.

Other includes standard property and casualty coverages provided to CNA Specialty customers. Unfavorable development for other coverages was primarily due to increased frequency of large claims in auto and workers' compensation coverages in accident years 2009 and 2010.

2010

Favorable development for other professional liability was recorded in errors & omissions and directors & officers' coverages primarily due to reviews of large claims in accident years 2007 and prior.

Favorable development for surety coverages was primarily due to a decrease in the estimated loss on a large national contractor in accident year 2005 and lower than expected claim emergence in accident years 2007 and prior.

Nine Month Comparison

2011

Favorable development for medical professional liability was primarily due to favorable case incurred emergence in nurses, physicians, and primary institutions in accident years 2008 and prior.

Favorable development for other professional liability was driven by better than expected loss emergence in the life agents coverages.

Favorable development in warranty was driven by favorable policy year experience on an aggregate stop loss policy covering the Company's non-insurance warranty subsidiary.

2010

Overall, favorable development for medical professional liability was primarily due to lower than expected frequency of large losses, primarily in accident years 2007 and prior. Additionally, unfavorable development in accident years 2008 and 2009 was due to increased frequency of large losses related to medical products.

Overall, favorable development for other professional liability was recorded primarily in accident years 2007 and prior in errors & omissions and directors & officers' coverages due to several factors, including reduced frequency of large claims and the result of reviews of large claims. Additionally, unfavorable development for other professional liability was recorded in accident years 2008 and 2009 in employment practices liability and errors & omissions coverages, driven by the economic recession and higher unemployment.

CNA Commercial

The following table provides further detail of the development recorded for the CNA Commercial segment for the three and nine months ended September 30, 2011 and 2010.



Periods ended September 30	Three Months						Nine Months
(In millions)	2011			2010			2011			2010
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
Commercial Auto	$	(2	)	$	(1	)	$	(36	)	$	(71	)
General Liability	4			(29		)	26			(71		)
Workers Compensation	3			39			39			39
Property and Other	(47		)	(35		)	(128		)	(126		)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(42	)	$	(26	)	$	(99	)	$	(229	)

Three Month Comparison

2011

Overall, unfavorable development for workers' compensation was related to increased medical severity and higher adjusting and other payments in accident years 2008 and subsequent. Additionally, favorable development for workers' compensation was due to reduced indemnity severity in accident years 2002 and prior.

Favorable development for property and other coverages was due to decreased frequency of large losses in accident year 2010 and favorable loss emergence related to non-catastrophe claims in accident years 2010 and prior.

2010

Overall, favorable development for general liability coverages was primarily due to better than expected loss emergence in accident years 2006 and prior in the small and middle markets business. Additionally, unfavorable development for other liability coverages was primarily due to increased frequency in accident years 2004 and prior in excess workers' compensation.

Unfavorable development for workers' compensation was related to increased severity of indemnity losses relative to expectations on claims related to Defense Base Act contractors, primarily in accident years 2008 and prior.

Favorable development was recorded for property and other coverages. Favorable property and marine development primarily reflects decreased claim frequency in accident years 2008 and 2009, and lower than expected severity for marine excess liability in accident years 2005 and prior.

Nine Month Comparison

2011

Favorable development for commercial auto coverages was due to lower than expected severity on bodily injury claims in accident years 2006 and prior.

The unfavorable development in the general liability coverages was primarily due to two large claim outcomes on umbrella claims in accident year 2001.

Unfavorable development for workers' compensation was related to increased medical severity and higher adjusting and other payments in accident years 2008 and subsequent.

Favorable development for property and other coverages was due to decreased frequency of large losses in commercial multi-peril coverages primarily in accident year 2010, a favorable settlement on an individual equipment breakdown claim in accident year 2003, favorable loss emergence related to catastrophe claims in accident year 2008 and favorable loss emergence related to non-catastrophe claims in accident years 2010 and prior.

2010

Favorable development for commercial auto coverages was primarily due to decreased frequency and severity trends in accident years 2009 and prior.

Overall, favorable development for general liability and umbrella coverages was primarily due to better than expected loss emergence in accident years 2006 and prior. Additionally, unfavorable development was primarily driven by increased claim frequency in accident years 2004 and prior for excess workers' compensation and in accident years 2008 and 2009 for a portion of the Company's primary casualty surplus lines coverages.

Favorable development was recorded for property and other coverages. Favorable catastrophe development was due to favorable incurred loss emergence, primarily in accident years 2008 and 2009. Favorable non-catastrophe development was due to lower than expected severity in accident years 2009 and prior. Favorable marine development primarily reflects decreased claim frequency in accident years 2008 and 2009, and lower than expected severity for marine excess liability in accident years 2005 and prior.