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CNA FINANCIAL CORPORATION

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30,			December 31,
(In millions, except share data)	2005			2004
Assets
Investments:
Fixed maturity securities at fair value (amortized cost of $31,785 and $30,266)	$	32,429		$	31,327
Equity securities at fair value (cost of $423 and $320)		549			456
Limited partnership investments		1,618			1,549
Other invested assets		34			36
Short-term investments at cost, which approximates fair value		7,153			5,863

Total investments		41,783			39,231
Cash		86			95
Reinsurance receivables (less allowance for uncollectible receivables of $552 and $546)		14,098			15,342
Insurance receivables (less allowance for doubtful accounts of $474 and $502)		1,875			2,065
Accrued investment income		317			297
Receivables for securities sold		635			496
Deferred acquisition costs		1,234			1,268
Prepaid reinsurance premiums		914			1,128
Federal income taxes recoverable (includes $216 and $7 due from Loews Corporation)		212			—
Deferred income taxes		908			709
Property and equipment at cost (less accumulated depreciation of $563 and $524)		230			235
Goodwill and other intangible assets		145			162
Other assets		985			815
Separate account business		554			568

Total assets	$	63,976		$	62,411


Liabilities and Stockholders’ Equity
Liabilities:
Insurance reserves:
Claim and claim adjustment expense	$	31,435		$	31,523
Unearned premiums		4,343			4,522
Future policy benefits		6,181			5,883
Policyholders’ funds		1,588			1,725
Collateral on loaned securities and derivatives		2,006			918
Payables for securities purchased		1,540			288
Participating policyholders’ funds		56			63
Short term debt		52			531
Long term debt		1,699			1,726
Reinsurance balances payable		2,649			2,980
Other liabilities		2,196			2,231
Separate account business		554			568

Total liabilities		54,299			52,958


Commitments and contingencies (Notes G, H, J and L)
Minority interest		283			275

Stockholders’ equity:
Preferred stock (12,500,000 shares authorized) Series H Issue (no par value; $100,000 stated value; 7,500 shares issued; held by Loews Corporation)		750			750
Common stock ($2.50 par value; 500,000,000 shares authorized; 258,177,285 shares issued; and 255,962,718 and 255,953,958 shares outstanding)		645			645
Additional paid-in capital		1,701			1,701
Retained earnings		6,041			5,572
Accumulated other comprehensive income		384			650
Treasury stock (2,214,567 and 2,223,327 shares), at cost		(69	)		(69	)

		9,452			9,249
Notes receivable for the issuance of common stock		(58	)		(71	)

Total stockholders’ equity		9,394			9,178

Total liabilities and stockholders’ equity	$	63,976		$	62,411

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


Nine months ended September 30	2005			2004
(In millions)				Restated
				See Note R

Cash Flows from Operating Activities
Net income	$	469		$	142
Adjustments to reconcile net income to net cash flows provided by operating activities:
Bad debt provision for insurance and reinsurance receivables		73			70
Minority interest		16			19
Loss (gain) on disposal of property and equipment		(9	)		19
Deferred income tax provision		(37	)		(39	)
Realized investment gains/losses, net of participating policyholders’ and minority interests		(74	)		415
Equity method income		(190	)		(134	)
Amortization of bond (discount) premium		(84	)		(1	)
Depreciation		41			58
Changes in:
Receivables, net		1,361			(506	)
Deferred acquisition costs		34			150
Accrued investment income		(20	)		(56	)
Federal income taxes payable/recoverable		(211	)		472
Prepaid reinsurance premiums		214			440
Reinsurance balances payable		(331	)		(257	)
Insurance reserves		(106	)		488
Other, net		(105	)		(19	)
Net purchases of trading securities		(7	)		(2	)

Total adjustments		565			1,117

Net cash flows provided by operating activities		1,034			1,259


Cash Flows from Investing Activities
Purchases of fixed maturity securities		(46,570	)		(44,581	)
Proceeds from fixed maturity securities:
Sales		42,235			35,641
Maturities, calls and redemptions		3,895			3,756
Purchases of equity securities		(360	)		(365	)
Proceeds from sales of equity securities		290			528
Change in short-term investments		(1,161	)		3,689
Change in collateral on loaned securities and derivatives		1,088			(326	)
Change in other investments		17			(79	)
Purchases of property and equipment		(28	)		(32	)
Dispositions		12			647
Other, net		42			(27	)

Net cash flows used by investing activities		(540	)		(1,149	)


Cash Flows from Financing Activities
Principal payments on debt		(507	)		(537	)
Proceeds from issuance of surplus notes		—			346
Returns and deposits of policyholder account balances on investment contracts		—			10
Other		4			3

Net cash flows used by financing activities		(503	)		(178	)


Net change in cash		(9	)		(68	)
Cash, beginning of period		95			139

Cash, end of period	$	86		$	71


Supplemental Disclosures of Cash Flow Information:
Cash paid (received):
Interest	$	86		$	67
Federal income taxes		289			(534	)

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. CNA’s property and casualty and the remaining life and group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company (CIC) and Continental Assurance Company (CAC). Loews Corporation (Loews) owned approximately 91% of the outstanding common stock and 100% of the Series H preferred stock of CNAF as of September 30, 2005.

The Company’s individual life insurance business, including its previously wholly owned subsidiary Valley Forge Life Insurance Company (VFL), was sold on April 30, 2004 to Swiss Re Life & Health America, Inc. (Swiss Re). The results of the individual life insurance business sold through the date of sale are included in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2004. See Note O for further information.

The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in CNAF’s Form 10-K/A filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2004. Certain amounts applicable to prior periods have been conformed to the current period presentation.

The interim financial data as of September 30, 2005 and for the three and nine months ended September 30, 2005 and 2004 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the Company’s results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated.

Note B. Accounting Pronouncements

In December of 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 153, Exchanges of Non-Monetary Assets – an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 amends the definition of “exchange” or “exchange transaction” and expands the list of transactions that would not meet the definition of non-monetary transfer. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. Adoption of this standard did not have a significant impact on the results of operations or equity of the Company.

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

Note C. Earnings (Loss) Per Share

Earnings (loss) per share available to common stockholders is based on weighted-average outstanding shares. Basic and diluted earnings (loss) per share are computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock or common stock equivalents outstanding for the period. The weighted average number of shares outstanding for computing basic and diluted earnings per share was 256.0 million for the three and nine months ended September 30, 2005 and 2004.

The Series H Cumulative Preferred Stock Issue (Series H Issue) is held by Loews and accrues cumulative dividends at an initial rate of 8% per year, compounded annually. As of September 30, 2005, the Company had $179 million of undeclared but accumulated dividends. The Series H Issue dividend amounts for the three and nine months ended September 30, 2005 and 2004 have been subtracted from Net Income (Loss) to determine net income (loss) available to common stockholders.

Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Since the net results available to common stockholders for the three months ended September 30, 2005 and 2004, were losses, after deducting undeclared preferred stock dividends, no potentially dilutive common shares were included in the computation of diluted loss per share. For the nine months ended September 30, 2005 and 2004, approximately one million shares attributable to the exercise of outstanding options were excluded from the calculation of diluted earnings per share because the exercise price of these options was greater than the average market price of CNA common stock.

Earnings (Loss) Per Share


Period ended September 30	Three Months						Nine Months
(In millions, except per share amounts)	2005			2004			2005			2004

Net income (loss)	$	3		$	(27	)	$	469		$	142
Less: undeclared preferred stock dividend		(17	)		(16	)		(52	)		(48	)


Net income (loss) available to common stockholders	$	(14	)	$	(43	)	$	417		$	94


Weighted average outstanding common stock and common stock equivalents		256.0			256.0			256.0			256.0
Effect of dilutive securities, employee stock options		—			—			—			—


Adjusted weighted average outstanding common stock and common stock equivalents assuming conversions		256.0			256.0			256.0			256.0


Basic and diluted earnings (loss) per share available to common stockholders	$	(0.06	)	$	(0.16	)	$	1.63		$	0.37

The Company applies the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, in accounting for its stock-based compensation plan. Under the recognition and measurement principles of APB 25, no stock-based compensation cost has been recognized, as the exercise price of the granted options equaled the market price of the underlying stock at the grant date.

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

Note D. Investments

The significant components of net investment income are presented in the following table.

Net Investment Income


Period ended September 30	Three Months						Nine Months
(In millions)	2005			2004			2005			2004

Fixed maturity securities	$	393		$	396		$	1,167		$	1,189
Short term investments		42			14			103			39
Limited partnerships		72			26			189			131
Equity securities		6			3			18			11
Income (loss) from trading portfolio (a)		41			(21	)		25			13
Interest on funds withheld and other deposits		(50	)		(54	)		(139	)		(157	)
Other		5			4			16			15


Gross investment income		509			368			1,379			1,241
Investment expense		(9	)		(8	)		(34	)		(25	)


Net investment income	$	500		$	360		$	1,345		$	1,216

(a) The change in net unrealized gains (losses) on trading securities, included in net investment income, was $3 million and $(4) million for the three and nine months ended September 30, 2005 and $(4) million and $(2) million for the three and nine months ended September 30, 2004.

The components of realized investment results for available-for-sale securities are presented in the following table.

Realized Investment Gains (Losses)


Period ended September 30	Three Months						Nine Months
(In millions)	2005			2004			2005			2004

Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds	$	2		$	4		$	(10	)	$	13
Corporate and other taxable bonds		9			(35	)		(36	)		(2	)
Tax-exempt bonds		4			42			38			23
Asset-backed bonds		7			9			18			44
Redeemable preferred stock		—			6			10			11


Total fixed maturity securities		22			26			20			89
Equity securities		6			10			45			187
Derivative securities		53			(105	)		34			(88	)
Short term investments		1			—			1			—
Other, including disposition of businesses net of participating policyholders’ interest		(15	)		10			(28	)		(594	)

Realized investment gains (losses) before allocation to participating policyholders’ and minority interests		67			(59	)		72			(406	)
Allocated to participating policyholders’ and minority interest		—			(3	)		2			(9	)


Realized investment gains (losses)	$	67		$	(62	)	$	74		$	(415	)

Realized investment gains were $67 million for the three months ended September 30, 2005 as compared to realized investment losses of $62 million for the three months ended September 30, 2004. The increase in realized gains was primarily driven by favorable results in derivative securities and improved results in corporate and other taxable bonds, partially offset by less favorable results from tax-exempt bonds. Impairment losses of $17 million and $19 million were recorded for the three months ended September 30, 2005 and 2004.

Realized investment gains were $74 million for the nine months ended September 30, 2005 as compared to realized investment losses of $415 million for the nine months ended September 30, 2004. The improvement in the realized

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

investment results was due primarily to a $622 million pretax loss on the sale of the individual life insurance business in 2004. This improvement was partially offset by reduced gains for equities securities, which was largely attributable to the 2004 gain of $162 million pretax on the disposition of Canary Wharf. Impairment losses of $71 million were recorded for the nine months ended September 30, 2005 across various sectors, including an impairment loss of $34 million related to loans made under a credit facility to a national contractor. See Note P for further details. Impairment losses were $19 million for other-than-temporary declines in fair value for fixed maturity and equity securities for the nine months ended September 30, 2004.

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities


	Cost or		Gross		Gross Unrealized Losses				Net
	Amortized		Unrealized		Less than		Greater than		Unrealized
September 30, 2005	Cost		Gains		12 Months		12 Months		Gain/(Loss)
(In millions)

Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies	$	3,182	$	124	$	18	$	1	$	105
Asset-backed securities		10,616		42		102		14		(74	)
States, municipalities and political subdivisions – tax-exempt		8,945		181		44		7		130
Corporate securities		5,722		326		70		14		242
Other debt securities		2,697		255		14		2		239
Redeemable preferred stock		212		4		2		—		2
Options embedded in convertible debt securities		1		—		—		—		—


Total fixed maturity securities available-for-sale		31,375		932		250		38		644

Total fixed maturity securities trading		410		—		—		—		—


Equity securities available-for-sale:
Common stock		171		112		2		—		110
Non-redeemable preferred stock		210		16		—		—		16


Total equity securities available-for-sale		381		128		2		—		126


Total equity securities trading		42		—		—		—		—


Total fixed maturity and equity securities	$	32,208	$	1,060	$	252	$	38	$	770

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


	Cost or		Gross		Gross Unrealized Losses				Net
	Amortized		Unrealized		Less than		Greater than		Unrealized
December 31, 2004	Cost		Gains		12 Months		12 Months		Gain
(In millions)

Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies	$	4,233	$	126	$	13	$	—	$	113
Asset-backed securities		7,706		105		19		4		82
States, municipalities and political subdivisions – tax-exempt		8,699		189		28		3		158
Corporate securities		6,093		477		52		5		420
Other debt securities		2,769		295		11		—		284
Redeemable preferred stock		142		6		—		2		4
Options embedded in convertible debt securities		234		—		—		—		—


Total fixed maturity securities available-for-sale		29,876		1,198		123		14		1,061


Total fixed maturity securities trading		390		—		—		—		—


Equity securities available-for-sale:
Common stock		148		112		—		—		112
Non-redeemable preferred stock		126		24		—		—		24


Total equity securities available-for-sale		274		136		—		—		136


Total equity securities trading		46		—		—		—		—


Total fixed maturity and equity securities	$	30,586	$	1,334	$	123	$	14	$	1,197

Note E. Derivative Financial Instruments

A summary of the recognized gains (losses) related to derivative financial instruments follows.

Derivative Financial Instruments Recognized Gains (Losses)


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

General account
Swaps	$	52		$	3		$	32		$	26
Futures purchased		31			(25	)		5			3
Futures sold, not yet purchased		1			(107	)		1			(113	)
Forwards		—			(2	)		1			(1	)
Forwards sold, not yet purchased		—			(1	)		—			4
Commitments to purchase government and municipal securities		—			—			—			(12	)
Equity warrants		—			—			—			1
Options purchased		(1	)		(1	)		(2	)		(1	)
Options written		1			—			2			2
Collateralized debt obligation liabilities		—			1			—			5
Options embedded in convertible debt securities		(6	)		(48	)		(33	)		(33	)


Total	$	78		$	(180	)	$	6		$	(119	)

A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments follows. 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.

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

Note F. Income Taxes

CNA and its eligible subsidiaries (CNA Tax Group) are included in the consolidated Federal income tax return of Loews and its eligible subsidiaries.

The Loews consolidated Federal income tax returns have been settled with the Internal Revenue Service (IRS) through 2001 as the tax returns for 1998-2001, including related carryback claims and prior claims for refund, were approved by the Joint Committee on Taxation in the second quarter of 2005. As a result, the Company has recorded a Federal income tax benefit of $36 million and net refund interest of $79 million, net of tax, in the second quarter of 2005. The tax benefit related primarily to the release of Federal income tax reserves.

The Company has paid Loews $37 million related to the net tax deficiency for the 1998-2001 tax returns and has received from Loews $121 million related to net refund interest. The net refund interest is included in Other Revenues on the Condensed Consolidated Statements of Operations and is reflected in the Corporate and Other Non-Core segment.

The Federal income tax returns for 2002 through 2004 are currently under examination by the IRS. The Company believes the outcome of this examination will not have a material effect on the financial condition or results of operations of the Company.

Note G. Legal Proceedings and Contingent Liabilities

Insurance Brokerage Antitrust Litigation

On August 1, 2005, CNAF and several of its insurance subsidiaries were joined as defendants, along with other insurers and brokers, in multidistrict litigation pending in the United States District Court for the District of New Jersey, In re Insurance Brokerage Antitrust Litigation, Civil No. 04-5184 (FSH). The plaintiffs in this litigation allege improprieties in the payment of contingent commissions to brokers and bid rigging in connection with the sale of various lines of insurance. The plaintiffs further allege the existence of a conspiracy and assert claims for federal and state antitrust law violations, for violations of the federal Racketeer Influenced and Corrupt Organizations Act and for recovery under various state common law theories. This litigation is in its early stages. The Company intends to vigorously contest and defend against plaintiffs’ claims.

Global Crossing Limited Litigation

CCC has been named as a defendant in an action brought by the bankruptcy estate of Global Crossing Limited (Global Crossing) in the United States Bankruptcy Court for the Southern District of New York. In the Complaint, served on CCC on May 24, 2005, plaintiff seeks unspecified monetary damages from CCC and the other defendants for alleged fraudulent transfers and alleged breaches of fiduciary duties arising from actions taken by Global Crossing while CCC was a shareholder of Global Crossing. CCC believes it has meritorious defenses to this action and intends to defend the case vigorously.

Numerous unresolved factual and legal issues remain that are critical to the final result, the outcome of which cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. However, based on facts and circumstances presently known in the opinion of management an unfavorable outcome will not materially affect the equity of the Company, although results of operations may be adversely affected.

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

IGI Contingency

In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an arrangement with IOA Global, Ltd. (IOA), an independent managing general agent based in Philadelphia, Pennsylvania, to develop and manage a book of accident and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies, Ltd. (IGI), a personal accident reinsurance managing general underwriter, was appointed to underwrite and market the book under the supervision of IOA. Between April 1, 1997 and December 1, 1999, IGI underwrote a number of reinsurance arrangements with respect to personal accident insurance worldwide (the IGI Program). Under various arrangements, CNA Re Ltd. both assumed risks as a reinsurer and also ceded a substantial portion of those risks to other companies, including other CNA insurance subsidiaries and ultimately to a group of reinsurers participating in a reinsurance pool known as the Associated Accident and Health Reinsurance Underwriters (AAHRU) Facility. CNA’s group operations business unit participated as a pool member in the AAHRU Facility in varying percentages between 1997 and 1999.

A portion of the premiums assumed under the IGI Program related to United States workers compensation “carve-out” business. Some of these premiums were received from John Hancock Mutual Life Insurance Company (John Hancock) under four excess of loss reinsurance treaties (the Treaties) issued by CNA Re Ltd. While John Hancock has indicated that it is not able to accurately quantify its potential exposure to its cedents on business which is retroceded to CNA, John Hancock has reported $199 million of paid and unpaid losses, under these Treaties. John Hancock is disputing portions of its assumed obligations resulting in these reported losses, and has advised CNA that it is, or has been, involved in multiple arbitrations with its own cedents, in which proceedings John Hancock is seeking to avoid and/or reduce risks that would otherwise arguably be ceded to CNA through the Treaties. John Hancock has further informed CNA that it has settled several of these disputes, but has not provided CNA with details of the settlements. To the extent that John Hancock is successful in reducing its liabilities in these disputes, that development may have an impact on the recoveries it is seeking under the Treaties from CNA.

As indicated, CNA arranged substantial reinsurance protection to manage its exposures under the IGI Program, including the United States workers compensation carve-out business ceded from John Hancock and other reinsurers. While certain reinsurers of CNA, including participants in the AAHRU Facility, disputed their liabilities under the reinsurance contracts with respect to the IGI Program, those disputes have been resolved and substantial reinsurance coverage exists for those exposures.

In addition, CNA has instituted arbitration proceedings against John Hancock in which CNA is seeking rescission of the Treaties as well as access to and the right to inspect the books and records relating to the Treaties. Based on information known at this time, CNA believes it has strong grounds to successfully challenge its alleged exposure derived from John Hancock through the ongoing arbitration proceedings. CNA has also undertaken legal action seeking to avoid portions of the remaining exposure arising out of the IGI Program.

CNA has established reserves for its estimated exposure under the IGI Program, other than that derived from John Hancock, and an estimate for recoverables from retrocessionaires. CNA has not established any reserve for any exposure derived from John Hancock because, as indicated, CNA believes the contract will be rescinded. Although the results of the Company’s various loss mitigation strategies with respect to the entire IGI Program to date support the recorded reserves, the estimate of ultimate losses is subject to considerable uncertainty due to the complexities described above. As a result of these uncertainties, the results of operations in future periods may be adversely affected by potentially significant reserve additions. However, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. Management does not believe that any such reserve additions would be material to the equity of the Company, although results of operations may be adversely affected. The Company’s position in relation to the IGI Program was unaffected by the sale of CNA Re Ltd. in 2002.

California Wage and Hour Litigation

Ernestine Samora, et al. v. CCC, Case No. BC 242487, Superior Court of California, County of Los Angeles, California and Brian Wenzel v. Galway Insurance Company, Superior Court of California, County of Orange No. BC01CC08868 are purported class actions on behalf of present and former CNA employees asserting they worked

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

hours for which they should have been compensated at a rate of one and one-half times their base hourly wage over a four-year period. Plaintiffs seek “overtime compensation,” “penalty wages,” and “other statutory penalties” without specifying any particular amounts. The Company has denied the material allegations of the amended complaint and intends to vigorously contest the claims.

Numerous unresolved factual and legal issues remain that are critical to the final result, the outcome of which cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. However, based on facts and circumstances presently known in the opinion of management, an unfavorable outcome would not materially adversely affect the equity of the Company, although results of operations may be adversely affected.

Voluntary Market Premium Litigation

CNA, along with dozens of other insurance companies, is currently a defendant in nine cases, including eight purported class actions, brought by large policyholders. The complaints differ in some respects, but generally allege that the defendants, as part of an industry-wide conspiracy, included improper charges in their retrospectively rated and other loss-sensitive insurance programs. Among the claims asserted are violations of state antitrust laws, breach of contract, fraud and unjust enrichment. In one federal court case, Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance Co., 202 F.R.D. 480 (S.D. Tex. 2001), rev’d, 319 F.3d 205 (5th Cir. 2003), cert. denied, 72 USLW 3235 (U.S. Oct 6, 2003), the United States Court of Appeals for the Fifth Circuit reversed a decision by the District Court for the Southern District of Texas certifying a multi-state class. The Company intends to vigorously contest these claims.

Asbestos, Environmental Pollution and Mass Tort (APMT) Reserves

CNA is also a party to litigation and claims related to APMT cases arising in the ordinary course of business. See Note H for further discussion.

Other Litigation

CNA is also a party to other litigation arising in the ordinary course of business. Based on the facts and circumstances currently known, such other litigation will not, in the opinion of management, materially affect the results of operations or equity of CNA.

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

Note H. Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to settle 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, CNA’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 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 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.

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 level of catastrophe losses experienced in any period cannot be predicted and can be material to the results of operations and/or equity of the Company. Catastrophe losses, net of reinsurance, were $437 million and $258 million for the three months ended September 30, 2005 and 2004 and $443 million and $271 million for the nine months ended September 30, 2005 and 2004. The catastrophe losses in 2005 related primarily to Hurricanes Katrina, Dennis, Ophelia and Rita. The 2005 loss estimate was developed after consideration of reported claims, the insured values of properties in the affected areas, modeled losses, industry loss estimates and the Company’s reinsurance coverage. Because of the nature of the four hurricanes, the estimate involves significant judgment due in part to the limited ability to access portions of the affected area, legal and regulatory uncertainties, the complexity of factors contributing to the losses and the preliminary nature of the information available. Accordingly, there can be no assurance that CNA’s ultimate cost for these catastrophes will not exceed this estimate. The catastrophe losses in 2004 related primarily to Hurricanes Charley, Frances, Ivan and Jeanne.

Commercial catastrophe losses, gross of reinsurance, were $797 million and $280 million for the three months ended September 30, 2005 and 2004 and $803 million and $293 million for the nine months ended September 30, 2005 and 2004. See Note I for further discussion of the Company’s catastrophe reinsurance program.

Claim and claim adjustment expense reserves are presented net of amounts due from insureds related to losses under high deductible policies. The Company has an allowance for uncollectible deductible amounts, which is presented as a component of the allowance for doubtful accounts for insurance receivables.

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

The following tables summarize the gross and net carried reserves as of September 30, 2005 and December 31, 2004.

September 30, 2005


Gross and Net Carried
Claim and Claim Adjustment Expense Reserves					Life and		Corporate
	Standard		Specialty		Group		and Other
(In millions)	Lines		Lines		Non-Core		Non-Core		Total

Gross Case Reserves	$	6,764	$	1,820	$	2,714	$	3,477	$	14,775
Gross IBNR Reserves		8,023		3,287		782		4,568		16,660


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	14,787	$	5,107	$	3,496	$	8,045	$	31,435


Net Case Reserves	$	4,289	$	1,214	$	1,442	$	1,483	$	8,428
Net IBNR Reserves		5,756		2,339		386		1,684		10,165


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	10,045	$	3,553	$	1,828	$	3,167	$	18,593

December 31, 2004


Gross and Net Carried
Claim and Claim Adjustment Expense Reserves					Life and		Corporate
	Standard		Specialty		Group		and Other
(In millions)	Lines		Lines		Non-Core		Non-Core		Total

Gross Case Reserves	$	6,904	$	1,659	$	2,800	$	3,806	$	15,169
Gross IBNR Reserves		7,398		3,201		880		4,875		16,354


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	14,302	$	4,860	$	3,680	$	8,681	$	31,523


Net Case Reserves	$	4,761	$	1,191	$	1,394	$	1,588	$	8,934
Net IBNR Reserves		4,547		2,042		430		1,691		8,710


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	9,308	$	3,233	$	1,824	$	3,279	$	17,644

APMT Reserves

CNA’s property and casualty insurance subsidiaries have actual and potential exposures related to APMT claims.

Establishing reserves for APMT claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment expense reserves for APMT, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial, and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimating techniques and methodologies, many of which involve significant judgments that are required of management. Accordingly, a high degree of uncertainty remains for the Company’s ultimate liability for APMT claim and claim adjustment expenses.

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

In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others: the number and outcome of direct actions against the Company; 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; increasingly aggressive tactics of plaintiffs’ lawyers; the risks and lack of predictability inherent in major litigation; increased filings of claims in certain states; enactment of national federal legislation to address asbestos claims; a further increase in asbestos and environmental pollution claims which cannot now be anticipated; increase in number of mass tort claims relating to silica and silica-containing products, and the outcome of ongoing disputes as to coverage in relation to these claims; a further increase of claims and claims payment that may exhaust underlying umbrella and excess coverage at accelerated rates; and future developments pertaining to the Company’s ability to recover reinsurance for asbestos, pollution and mass tort claims.

CNA has regularly performed ground up reviews of all open APMT claims to evaluate the adequacy of the Company’s APMT reserves. In performing its comprehensive ground up analysis, the Company considers input from its professionals with direct responsibility for the claims, inside and outside counsel with responsibility for representation of the Company, and its actuarial staff. These professionals review, 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; the policies issued by CNA, 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 existence of other insurance; and reinsurance arrangements.

With respect to other court cases and how they might affect the Company’s reserves and reasonably possible losses, the following should be noted: State and federal courts issue numerous decisions each year, which potentially impact losses and reserves in both a favorable and unfavorable manner. Examples of favorable developments include decisions to allocate defense and indemnity payments in a manner so as to limit carriers’ obligations to damages taking place during the effective dates of their policies; decisions holding that injuries occurring after asbestos operations are completed are subject to the completed operations aggregate limits of the policies; and decisions ruling that carriers’ loss control inspections of their insured’s premises do not give rise to a duty to warn third parties to the dangers of asbestos.

Examples of unfavorable developments include decisions limiting the application of the “absolute pollution” exclusion; and decisions holding carriers liable for defense and indemnity of asbestos, pollution and mass tort claims on a joint and several basis.

The Company’s ultimate liability for its environmental pollution and mass tort claims is impacted by several factors including ongoing disputes with policyholders over scope and meaning of coverage terms and, in the area of environmental pollution, court decisions that continue to restrict the scope and applicability of the absolute pollution exclusion contained in policies issued by the Company. Due to the inherent uncertainties described above, including the inconsistency of court decisions, the number of waste sites subject to cleanup, and in the area of environmental pollution, the standards for cleanup and liability, the ultimate liability of CNA for environmental pollution and mass tort claims may vary substantially from the amount currently recorded.

Due to the inherent uncertainties in estimating claim and claim adjustment expense reserves for APMT and due to the significant uncertainties previously described related to APMT claims, the 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 the Company’s business, results of operations, equity, insurer financial strength and debt ratings. Due to, among other things, the factors described above, it may be necessary for the Company to record material changes in its APMT claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge.

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

The following table provides data related to CNA’s APMT claim and claim adjustment expense reserves.

Asbestos and Environmental Pollution and Mass Tort Reserves


	September 30, 2005						December 31, 2004
				Environmental						Environmental
				Pollution and						Pollution and
(In millions)	Asbestos			Mass Tort			Asbestos			Mass Tort

Gross reserves	$	3,072		$	634		$	3,218		$	755
Ceded reserves		(1,493	)		(232	)		(1,532	)		(258	)


Net reserves	$	1,579		$	402		$	1,686		$	497

Asbestos

CNA’s property and casualty insurance subsidiaries have exposure to asbestos-related claims. Estimation of asbestos-related claim and claim adjustment expense reserves involves limitations such as inconsistency of court decisions, specific policy provisions, allocation of liability among insurers and insureds and additional factors such as missing policies and proof of coverage. Furthermore, estimation of asbestos-related claims is difficult due to, among other reasons, the proliferation of bankruptcy proceedings and attendant uncertainties, 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.

As of September 30, 2005 and December 31, 2004, CNA carried approximately $1,579 million and $1,686 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported asbestos-related claims. The Company recorded $8 million and $44 million of unfavorable asbestos-related net claim and claim adjustment expense reserve development for the nine months ended September 30, 2005 and 2004. The unfavorable net prior year development for the nine months ended September 30, 2004 was primarily related to a commutation. The Company paid asbestos-related claims, net of reinsurance recoveries, of $115 million and $104 million for the nine months ended September 30, 2005 and 2004.

Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. CNA has 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. The Company’s policies also contain other limits applicable to these claims, and the Company has additional coverage defenses to certain claims. The Company has attempted to manage its asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to CNA. Where CNA cannot settle a claim on acceptable terms, the Company aggressively litigates the claim. A recent court ruling by the United States Court of Appeals for the Fourth Circuit has supported certain of the Company’s positions with respect to coverage for “non-products” claims. However, adverse developments with respect to such matters could have a material adverse effect on CNA’s results of operations and/or equity.

Certain asbestos litigation in which CNA is currently engaged is described below:

The ultimate cost of reported claims, and in particular APMT claims, is subject to a great many uncertainties, including future developments of various kinds that CNA does not control and that are difficult or impossible to foresee accurately. With respect to the litigation identified below in particular, numerous factual and legal issues

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

remain unresolved. Rulings on those issues by the courts are critical to the evaluation of the ultimate cost to the Company. The outcome of the litigation cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

On February 13, 2003, CNA announced it had resolved asbestos related coverage litigation and claims involving A.P. Green Industries, A.P. Green Services and Bigelow – Liptak Corporation. Under the agreement, CNA is required to pay $74 million, net of reinsurance recoveries, over a ten year period commencing after the final approval of a bankruptcy plan of reorganization. The settlement resolves CNA’s liabilities for all pending and future asbestos claims involving A.P. Green Industries, Bigelow – Liptak Corporation and related subsidiaries, including alleged “non-products” exposures. The settlement received initial bankruptcy court approval on August 18, 2003 and CNA expects to procure confirmation of a bankruptcy plan containing an injunction to protect CNA from any future claims.

CNA is engaged in insurance coverage litigation in New York State Court, filed in 2003, with a defendant class of underlying plaintiffs who have asbestos bodily injury claims against the former Robert A. Keasbey Company (Keasbey) (Continental Casualty Co. v. Employers Ins. of Wausau et al., No. 601037/03 (N.Y. County)). Keasbey, a currently dissolved corporation, was a seller and installer of asbestos-containing insulation products in New York and New Jersey. Thousands of plaintiffs have filed bodily injury claims against Keasbey; however, Keasbey’s involvement at a number of work sites is a highly contested issue. Therefore, the defense disputes the percentage of valid claims against Keasbey. CNA issued Keasbey primary policies for 1970-1987 and excess policies for 1972-1978. CNA has paid an amount substantially equal to the policies’ aggregate limits for products and completed operations claims in the confirmed CNA policies. Claimants against Keasbey allege, among other things, that CNA owes coverage under sections of the policies not subject to the aggregate limits, an allegation CNA vigorously contests in the lawsuit. In the litigation, CNA and the claimants seek declaratory relief as to the interpretation of various policy provisions. The court dismissed a claim alleging bad faith and seeking unspecified damages on March 21, 2004; that ruling was affirmed on March 31, 2005 by Appellate Division, First Department. The trial in the Keasbey coverage action continues. It is unclear when the Company will have a decision from the trial court. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether the Company has any further responsibility to compensate claimants against Keasbey under its policies and, if so, under which policies; (b) whether the Company’s responsibilities extend to a particular claimant’s entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions in some of the policies apply to exclude certain claims; (e) the extent to which claimants can establish exposures to asbestos materials as to which Keasbey has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Keasbey and whether such theories can, in fact, be established; (g) the diseases and damages alleged by such claimants; and (h) the extent that such liability would be shared with other responsible parties. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

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

any further responsibility to compensate claimants against Burns & Roe under its policies and, if so, under which; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions, including professional liability exclusions, in some of the Company’s policies apply to exclude certain claims; (e) the extent to which claimants can establish exposures to asbestos materials as to which Burns & Roe has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Burns & Roe and whether such theories can, in fact, be established; (g) the diseases and damages alleged by such claimants; (h) the extent that any liability of Burns & Roe would be shared with other potentially responsible parties; and (i) the impact of bankruptcy proceedings on claims and coverage issue resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CIC issued certain primary and excess policies to Bendix Corporation (Bendix), now part of Honeywell International, Inc. (Honeywell). Honeywell faces approximately 77,708 pending asbestos bodily injury claims resulting from alleged exposure to Bendix friction products. CIC’s primary policies allegedly covered the period from at least 1939 (when Bendix began to use asbestos in its friction products) to 1983, although the parties disagree about whether CIC’s policies provided product liability coverage before 1940 and from 1945 to 1956. CIC asserts that it owes no further material obligations to Bendix under any primary policy. Honeywell alleges that two primary policies issued by CIC covering 1969-1975 contain occurrence limits but not product liability aggregate limits for asbestos bodily injury claims. CIC has asserted, among other things, even if Honeywell’s allegation is correct, which CNA denies, its liability is limited to a single occurrence limit per policy or per year, and in the alternative, a proper allocation of losses would substantially limit its exposure under the 1969-1975 policies to asbestos claims. These and other issues are being litigated in Continental Insurance Co., et al. v. Honeywell International Inc., No. MRS-L-1523-00 (Morris County, New Jersey) which was filed on May 15, 2000. In the litigation, the parties are seeking declaratory relief of the scope and extent of coverage, if any, afforded to Bendix under the policies issued by the Company. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether certain of the primary policies issued by the Company contain aggregate limits of liability; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether some of the claims against Bendix arise out of events which took place after expiration of the Company’s policies; (e) the extent to which claimants can establish exposures to asbestos materials as to which Bendix has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Bendix and whether such theories can, in fact, be established; (g) the diseases and damages claimed by such claimants; (h) the extent that any liability of Bendix would be shared with other responsible parties; and (i) whether Bendix is responsible for reimbursement of funds advanced by the Company for defense and indemnity in the past. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

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

fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date may be barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; and (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

Similar lawsuits were filed in Texas beginning in 2002, against two CNA companies and numerous other insurers and non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos (E.g. Boson v. Union Carbide Corp., (Nueces County, Texas)). During 2003, many of the Texas suits were dismissed as time-barred by the applicable Statute of Limitations. In other suits, the carriers argued that they did not owe any duty to the plaintiffs or the general public to advise the world generally or the plaintiffs particularly of the effects of asbestos and that Texas statutes precluded liability for such claims, and the Texas courts dismissed these suits. Certain of the Texas courts’ rulings were appealed, but plaintiffs later dismissed their appeals. Recently, a different Texas court denied similar motions seeking dismissal at the pleading stage, allowing limited discovery to proceed. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date are barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; and (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CCC was named in Adams v. Aetna, Inc., et al. (Circuit Court of Kanawha County, West Virginia, filed June 28, 2002), a purported class action against CCC and other insurers, alleging that the defendants violated West Virginia’s Unfair Trade Practices Act (“UTPA”) in handling and resolving asbestos claims against five specifically named asbestos defendants. The Adams litigation had been stayed pending a planned motion by plaintiffs to file an amended complaint that reflected two June 2004 decisions of the West Virginia Supreme Court of Appeals. In June 2005, the court presiding over Adams and three similar putative class actions against other insurers, on its own motion, directed plaintiffs to file any amended complaints by June 13, 2005 and directed the parties to agree upon a case management order that would result in trial being commenced by July 2006. Plaintiffs’ Amended Complaint greatly expands the scope of the action against the insurers, including CCC. Under the Amended Complaint, the defendant insurers, including CCC have now been sued for alleged violations of the UTPA in connection with handling and resolving asbestos personal injury and wrongful death claims in West Virginia courts against all their insureds if those claims were resolved before June 30, 2001. CCC, along with other insurer defendants removed the Adams case to Federal court, Adams v. Ins. Co. of North America (INA) et al. (S.D. W. Va. No. 2:05-CV-0527). A motion by plaintiffs to remand the case to state courts is pending. Numerous factual and legal issues remain to be resolved that are critical to the final result in Adams, the outcome of which cannot be predicted with any reliability. These issues include: (a) the legal sufficiency of the novel statutory claims pled by the claimants; (b) the applicability of claimants’ legal theories to insurers who issued excess policies and/or neither defended nor controlled the defense of certain policyholders; (c) the possibility that certain of the claims are barred by various Statutes of Limitation; (d) the fact that the imposition of duties would interfere with the attorney-client privilege and the contractual rights and responsibilities of the parties to the Company’s insurance policies; (e) whether plaintiffs’ claims are barred in whole or in part by injunctions that have been issued by bankruptcy courts that are overseeing, or that have overseen, the bankruptcies of various insureds; (f) whether some or all of the named plaintiffs or members of the plaintiff class have released CCC from the claims alleged in the Amended Complaint when they resolved their underlying asbestos claims; (g) the appropriateness of the case for class action treatment; and (h) the potential and relative magnitude of liabilities of co-defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

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

On March 22, 2002, a direct action was filed in Montana (Pennock, et al. v. Maryland Casualty, et al. First Judicial District Court of Lewis & Clark County, Montana) by eight individual plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses against CNA, Maryland Casualty and the State of Montana. This action alleges that the carriers failed to warn of or otherwise protect W.R. Grace employees from the dangers of asbestos at a W.R. Grace vermiculite mining facility in Libby, Montana. The Montana direct action is currently stayed because of W.R. Grace’s pending bankruptcy. With respect to such claims, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the unclear nature and scope of any alleged duties owed to people exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the potential application of Statutes of Limitation to many of the claims which may be made depending on the nature and scope of the alleged duties; (c) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; (d) the diseases and damages claimed by such claimants; (e) and the extent that such liability would be shared with other potentially responsible parties; and (f) the impact of bankruptcy proceedings on claims resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CNA is vigorously defending these and other cases and believes that it has meritorious defenses to the claims asserted. However, there are numerous factual and legal issues to be resolved in connection with these claims, and it is extremely difficult to predict the outcome or ultimate financial exposure represented by these matters. Adverse developments with respect to any of these matters could have a material adverse effect on CNA’s business, insurer financial strength and debt ratings, 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, CNA evaluates the exposure presented by each insured. As part of this evaluation, CNA considers the available insurance coverage; limits and deductibles; the potential role of other insurance, particularly underlying coverage below any CNA 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 the part of management 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.

The Company is also monitoring possible legislative reforms on the state and national level, including possible federal legislation to create a national privately financed trust financed by contributions from insurers such as CNA, industrial companies and others, which if established, could replace litigation of asbestos claims with payments to claimants from the trust. It is uncertain at the present time whether such legislation will be enacted or, if it is, its impact on the Company.

Environmental Pollution and Mass Tort

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

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 various CNA insurance subsidiaries 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 CNA’s adoption of the Simplified Commercial General Liability coverage form, which includes what is referred to in the industry as absolute pollution exclusion. CNA 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.

As of September 30, 2005 and December 31, 2004, CNA carried approximately $402 million and $497 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and mass tort claims. There was $3 million of unfavorable environmental pollution and mass tort net claim and claim adjustment expense reserve development recorded for the nine months ended September 30, 2005. No development was recorded for the nine months ended September 30, 2004. The Company recorded $15 million and $10 million of current accident year losses related to mass tort for the nine months ended September 30, 2005 and 2004. The Company paid environmental pollution-related claims and mass tort-related claims, net of reinsurance recoveries, of $113 million and $79 million for the nine months ended September 30, 2005 and 2004.

CNA has made resolution of large environmental pollution exposures a management priority. The Company has resolved a number of its large environmental accounts by negotiating settlement agreements. In its settlements, CNA 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 CNA settled with its policyholder. While the terms of each settlement agreement vary, CNA 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.

In 2003, CNA observed a marked increase in silica claims frequency in Mississippi, where plaintiff attorneys appear to have filed claims to avoid the effect of tort reform. In 2004, silica claims frequency in Mississippi has moderated notably due to implementation of tort reform measures and favorable court decisions. To date, the most significant silica exposures identified included a relatively small number of accounts with significant numbers of new claims reported in 2003 and that continued at a far lesser rate in 2004 and 2005. Establishing claim and claim adjustment expense reserves for silica claims is subject to uncertainties because of disputes concerning medical causation with respect to certain diseases, including lung cancer, geographical concentration of the lawsuits asserting the claims, and the large rise in the total number of claims without underlying epidemiological developments suggesting an increase in disease rates or plaintiffs. Moreover, judicial interpretations regarding application of various tort defenses, including application of various theories of joint and several liabilities, impede the Company’s ability to estimate its ultimate liability for such claims.

Net Prior Year Development

Unfavorable net prior year development of $216 million was recorded for the nine months ended September 30, 2005. This amount consisted of $344 million of unfavorable claim and allocated claim adjustment expense reserve development and $128 million of favorable premium development. Unfavorable net prior year development of $111 million was recorded for the nine months ended September 30, 2004. This amount consisted of $222 million of unfavorable claim and allocated claim adjustment expense reserve development and $111 million of favorable premium development.

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


Net Prior Year Development
							Corporate
For the nine months ended September 30, 2005	Standard			Specialty			and Other
(In millions)	Lines			Lines			Non-Core		Total

Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of the corporate aggregate reinsurance treaties:

Core (Non-APMT)	$	183		$	56		$	57	$	296
APMT		—			—			11		11


Total		183			56			68		307
Ceded losses related to corporate aggregate reinsurance treaties		19			(25	)		6		—


Pretax unfavorable net prior year development before impact of premium development		202			31			74		307


Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		(99	)		(9	)		11		(97	)
Ceded premiums related to corporate aggregate reinsurance treaties		(6	)		19			4		17


Total premium development		(105	)		10			15		(80	)


Total unfavorable net prior year development (pretax)	$	97		$	41		$	89	$	227


Net Prior Year Development
							Corporate
For the nine months ended September 30, 2004	Standard			Specialty			and Other
(In millions)	Lines			Lines			Non-Core			Total

Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of the corporate aggregate reinsurance treaties:

Core (Non-APMT)	$	107			74		$	9		$	190
APMT		—			—			44			44


Total		107			74			53			234
Ceded losses related to corporate aggregate reinsurance treaties		4			(9	)		5			—


Pretax unfavorable net prior year development before impact of premium development		111			65			58			234


Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		(97	)		(29	)		15			(111	)
Ceded premiums related to corporate aggregate reinsurance treaties		(1	)		3			(2	)		—


Total premium development		(98	)		(26	)		13			(111	)


Total unfavorable net prior year development (pretax)		13			39			71		$	123

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

Standard Lines

Unfavorable net prior year development of $97 million was recorded for the nine months ended September 30, 2005. This amount consisted of $202 million of unfavorable claim and allocated claim adjustment expense development and $105 million of favorable premium development. Unfavorable net prior year development of $13 million was recorded for the nine months ended September 30, 2004. This amount consisted of $111 million of unfavorable claim and allocated claim adjustment expense reserve development and $98 million of favorable premium development.

2005 Net Prior Year Development

Approximately $141 million of unfavorable net prior year claim and allocated claim adjustment expense development resulted from increased severity trends for workers compensation, primarily in accident years 2002 and prior.

Approximately $135 million of favorable net prior year claim and allocated claim adjustment expense development was recorded due to improvement in the severity and number of claims for property coverages and marine business, primarily in accident year 2004.

Approximately $90 million of unfavorable net prior year claim and allocated claim adjustment expense development and $83 million of favorable net prior year premium development resulted from an unfavorable arbitration ruling on two reinsurance treaties.

Approximately $76 million of unfavorable net prior year claim and allocated claim adjustment expense development was attributed to increased severity in liability coverages for large account policies.

Approximately $51 million of unfavorable net prior year claim and allocated claim adjustment expense development was related to reviews of liquor liability, trucking and habitational business that indicated that the number of large claims was higher than previously expected in recent accident years. The remainder of the favorable net prior year claim and allocated claim adjustment expense development was primarily a result of improved experience on several coverages on middle market business mainly in accident year 2004.

Favorable net prior year premium development was recorded primarily as a result of additional premium resulting from audits and endorsements on recent policies, primarily workers compensation.

Additionally, there was $19 million of unfavorable net prior year claim and allocated claim adjustment expense development and $6 million of favorable premium development related to the corporate aggregate reinsurance treaties.

2004 Net Prior Year Development

In addition approximately $75 million of unfavorable net prior year claim and allocated claim adjustment expense development recorded in the second quarter of 2004 resulted from increased severity trends for workers compensation on large account policies primarily in accident years 2002 and prior. Favorable premium development on retrospectively rated large account policies of $25 million was recorded in relation to this unfavorable net prior year claim and allocated claim adjustment expense development. Also, favorable net prior year premium development of approximately $60 million resulted primarily from higher audit and endorsement premiums on workers compensation and general liability policies. Approximately $30 million of the unfavorable

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

net prior year claim and allocated claim adjustment expense reserve development was recorded related to the higher audit and endorsement premium.

In the third quarter of 2004, approximately $15 million of unfavorable net prior claim and allocated claim adjustment expense development was recorded in relation to the Company’s share of the National Workers Compensation Reinsurance Pool (NWCRP). During the third quarter of 2004, the NWCRP reached an agreement with a former pool member to settle their pool liabilities at an amount less than their established share. The result of this settlement was a higher allocation to the remaining pool members, including the Company.

Specialty Lines

Unfavorable net prior year development of $41 million was recorded for the nine months ended September 30, 2005. This amount consisted of $31 million of unfavorable claim and allocated claim adjustment expense development and $10 million of unfavorable premium development. Unfavorable net prior year development of $39 million was recorded for the nine months ended September 30, 2004. This amount consisted of $65 million of unfavorable claim and allocated claim adjustment expense reserve development and $26 million of favorable premium development.

2005 Net Prior Year Development

Approximately $60 million of unfavorable claim and allocated claim adjustment expense development was recorded due to increased claim adjustment expenses and increased severities in the architects and engineers book of business, in accident years 2000 through 2003. Favorable net prior year premium development of approximately $10 million was recorded in relation to this unfavorable claim and allocated claim adjustment expense development.

Approximately $27 million of unfavorable net prior year claim and allocated claim adjustment expense development was related to large directors and officers (D&O) claims assumed from a London syndicate, primarily in accident years 2001 and prior. Approximately $40 million of unfavorable net prior year claim and allocated claim adjustment expense development was recorded due to large claims resulting from excess coverages provided to health care facilities.

Approximately $17 million of favorable net prior year claim and allocated claim adjustment expense development was recorded due to lower severity in the dental program.

Approximately $24 million of favorable net prior year claim and allocated claim adjustment expense development was recorded as a result of improvements in the claim severity and claim frequency, mainly in recent accident years, from nursing home businesses. The remainder of the favorable net prior year claim and allocated claim adjustment expense development was primarily attributed to favorable experience in the warranty line of business, partially offset by unfavorable net prior year claim and allocated claim adjustment expense development attributed to other large D&O claims.

Additionally, there was approximately $25 million of favorable net prior year claim and allocated claim adjustment expense development and $19 million of unfavorable premium development related to the corporate aggregate reinsurance treaties in the first nine months of 2005.

2004 Net Prior Year Development

The Company finalized commutation agreements with several members of the Trenwick Group in the second quarter of 2004. These commutations resulted in unfavorable claim and claim adjustment expense reserve development which was more than offset by a release of a previously established allowance for uncollectible reinsurance. Additionally, unfavorable net prior year claim and allocated claim adjustment expense reserve development resulted from the increased emergence of several large directors and officers (D&O) claims, primarily in recent accident years.

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

Corporate and Other Non-Core

Unfavorable net prior year development of $89 million was recorded for the nine months ended September 30, 2005. This amount consisted of $74 million of unfavorable claim and allocated claim adjustment expense development and $15 million of unfavorable premium development. Unfavorable net prior year development of $71 million was recorded for the nine months ended September 30, 2004. This amount consisted of $58 million of unfavorable claim and allocated claim adjustment expense reserve development and $13 million of unfavorable premium development.

2005 Net Prior Year Development

Approximately $56 million of unfavorable claim and allocated claim adjustment expense development was a result of a commutation recorded in the second quarter of 2005. Approximately $6 million of unfavorable claim and allocated claim adjustment expense development was related to the corporate aggregate reinsurance treaties. The unfavorable premium development was primarily driven by $10 million of additional ceded reinsurance premium on agreements where the ceded premium depends on the ceded loss and $4 million of additional premium ceded to the corporate aggregate reinsurance treaties.

2004 Net Prior Year Development

The net prior year development recorded for 2004 related to commutation agreements with several members of the Trenwick Group. These commutations resulted in unfavorable net prior year development partially offset by a release of a previously established allowance for uncollectible reinsurance.

Note I. Reinsurance

CNA assumes and cedes reinsurance with other insurers, reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk, minimize exposures on larger risks and to exit certain lines of business. The ceding of insurance does not discharge the primary liability of the Company. Therefore, 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.

Property and casualty reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA’s retained amount varies by type of coverage. Treaty reinsurance is purchased to protect specific lines of business such as property, workers compensation and professional liability. Corporate catastrophe reinsurance is also purchased for property and workers compensation exposure. Most treaty reinsurance is purchased on an excess of loss basis. CNA also utilizes facultative reinsurance in certain lines.

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

The effects of reinsurance on earned premiums are shown in the following table.

Components of Earned Premiums


Three months ended September 30	Direct		Assumed		Ceded		Net
(In millions)

2005
Property and casualty	$	2,548	$	13	$	856	$	1,705
Accident and health		245		18		96		167
Life		27		—		26		1


Total earned premiums	$	2,820	$	31	$	978	$	1,873


2004
Property and casualty	$	2,666	$	36	$	905	$	1,797
Accident and health		260		19		130		149
Life		46		—		45		1


Total earned premiums	$	2,972	$	55	$	1,080	$	1,947


Nine months ended September 30	Direct		Assumed		Ceded		Net
(In millions)

2005
Property and casualty	$	7,600	$	72	$	2,526	$	5,146
Accident and health		805		42		311		536
Life		109		—		107		2


Total earned premiums	$	8,514	$	114	$	2,944	$	5,684


2004
Property and casualty	$	8,059	$	163	$	2,663	$	5,559
Accident and health		919		45		421		543
Life		369		—		250		119


Total earned premiums	$	9,347	$	208	$	3,334	$	6,221

Life premiums are primarily from long duration contracts; property and casualty premiums and accident and health premiums are primarily from short duration contracts.

Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses, as compared to deposit accounting, which requires cash flows to be reflected as assets and liabilities. To qualify for reinsurance accounting, reinsurance agreements must include risk transfer. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. Reinsurance contracts that include both significant risk sharing provisions, such as adjustments to premiums or loss coverage based on loss experience, and relatively low policy limits as evidenced by a high proportion of maximum premium assessments to loss limits, may require considerable judgment to determine whether or not risk transfer requirements are met. For such contracts, often referred to as finite products, the Company assesses risk transfer for each contract generally by developing quantitative analyses at contract inception which measure the present value of reinsurer losses as compared to the present value of the related premium.

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

The following table summarizes the pretax impact of these contracts, including the corporate aggregate reinsurance treaties discussed in further detail below. In 2003, the Company discontinued purchases of such contracts.


Three months ended September 30	Aggregate Cover			CCC Cover			All Other			Total
(In millions)

2005
Ceded earned premium	$	1		$	—		$	(9	)	$	(8	)
Ceded claim and claim adjustment expense		—			—			15			15
Ceding commissions		—			—			3			3
Interest charges		(15	)		(17	)		(16	)		(48	)


Pretax expense	$	(14	)	$	(17	)	$	(7	)	$	(38	)


2004
Ceded earned premium	$	3		$	—		$	(21	)	$	(18	)
Ceded claim and claim adjustment expense		—			—			29			29
Ceding commissions		—			—			(2	)		(2	)
Interest charges		(19	)		(12	)		(22	)		(53	)


Pretax expense	$	(16	)	$	(12	)	$	(16	)	$	(44	)


Nine months ended September 30	Aggregate Cover			CCC Cover			All Other			Total
(In millions)

2005
Ceded earned premium	$	(17	)	$	—		$	56		$	39
Ceded claim and claim adjustment expense		—			—			(52	)		(52	)
Ceding commissions		—			—			(27	)		(27	)
Interest charges		(57	)		(49	)		(26	)		(132	)


Pretax expense	$	(74	)	$	(49	)	$	(49	)	$	(172	)


2004
Ceded earned premium	$	—		$	—		$	(13	)	$	(13	)
Ceded claim and claim adjustment expense		—			—			12			12
Ceding commissions		—			—			1			1
Interest charges		(61	)		(34	)		(55	)		(150	)


Pretax expense	$	(61	)	$	(34	)	$	(55	)	$	(150	)

Included in “All Other” above for the nine months ended September 30, 2005 is approximately $24 million of pretax expense related to Standard Lines which resulted from an unfavorable arbitration ruling on two reinsurance treaties impacting ceded earned premiums, ceded claim and claim adjustment expenses, ceding commissions and interest charges. This unfavorable outcome was partially offset by a release of previously established reinsurance bad debt reserves resulting in a net impact from the arbitration ruling of $10 million pretax expense for the nine months ended September 30, 2005.

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

The pretax impact by operating segment of the Company’s funds withheld reinsurance arrangements, including the corporate aggregate reinsurance treaties was as follows:


Period ended September 30	Three Months						Nine Months
(In millions)	2005			2004			2005			2004

Standard Lines	$	(24	)	$	(38	)	$	(120	)	$	(118	)
Specialty Lines		(3	)		4			(10	)		—
Corporate and Other		(11	)		(10	)		(42	)		(32	)


Pretax expense	$	(38	)	$	(44	)	$	(172	)	$	(150	)

Interest cost on reinsurance contracts accounted for on a funds withheld basis is incurred during all periods in which a funds withheld liability exists, and is included in net investment income. The amount subject to interest crediting rates on such contracts was $2,225 million and $2,564 million at September 30, 2005 and December 31, 2004. Certain funds withheld reinsurance contracts, including the corporate aggregate reinsurance treaties, require interest on additional premiums arising from ceded losses as if those premiums were payable at the inception of the contract.

The amount subject to interest crediting on these funds withheld contracts will vary over time based on a number of factors, including the timing of loss payments and ultimate gross losses incurred. The Company expects that it will continue to incur significant interest costs on these contracts for several years.

Corporate Aggregate Reinsurance Treaties

The Company has an aggregate reinsurance treaty related to the 1999 through 2001 accident years that covers substantially all of the Company’s property and casualty lines of business (the Aggregate Cover). The Aggregate Cover provides for two sections of coverage. These coverages attach at defined loss ratios for each accident year. Coverage under the first section of the Aggregate Cover, which is available for all accident years covered by the treaty, has a $500 million limit per accident year of ceded losses and an aggregate limit of $1 billion of ceded losses for the three accident years. The ceded premiums associated with the first section are a percentage of ceded losses and for each $500 million of limit the ceded premium is $230 million. The second section of the Aggregate Cover, which only relates to accident year 2001, provides additional coverage of up to $510 million of ceded losses for a maximum ceded premium of $310 million. Under the Aggregate Cover, interest charges on the funds withheld liability accrue at 8% per annum. The aggregate loss ratio for the three-year period has exceeded certain thresholds which required additional premiums to be paid and an increase in the rate at which interest charges are accrued. This rate will increase to 8.25% per annum commencing in 2006. Also, if an additional aggregate loss ratio threshold is exceeded, additional premiums of 10% of amounts in excess of the aggregate loss ratio threshold are to be paid retroactively with interest. The aggregate limits under both sections of the Aggregate Cover have been fully utilized.

In 2001, the Company entered into a one-year aggregate reinsurance treaty related to the 2001 accident year covering substantially all property and casualty lines of business in the Continental Casualty Company pool (the CCC Cover). The loss protection provided by the CCC Cover has an aggregate limit of approximately $761 million of ceded losses. The ceded premiums are a percentage of ceded losses. The ceded premium related to full utilization of the $761 million of limit is $456 million. The CCC Cover provides continuous coverage in excess of the second section of the Aggregate Cover discussed above. Under the CCC Cover, interest charges on the funds withheld are accrued at 8% per annum. The interest rate increases to 10% per annum if the aggregate loss ratio exceeds certain thresholds. The aggregate loss ratio exceeded that threshold in the fourth quarter of 2004 which required retroactive interest charges on funds withheld. The CCC Cover was fully utilized in 2003.

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

before such date. Upon mandatory commutation of the CCC Cover, the reinsurer is required to release to the Company the existing balance of the funds withheld account if the unpaid ultimate ceded losses at the time of commutation are less than or equal to the funds withheld account balance. If the unpaid ultimate ceded losses at the time of commutation are greater than the funds withheld account balance, the reinsurer will release the existing balance of the funds withheld account and pay CNA the present value of the projected amount the reinsurer would have had to pay from its own funds absent a commutation. The present value is calculated using 1-year LIBOR as of the date of the commutation.

On July 12, 2005, CNA received arbitration notices from several insurance affiliates of Hannover Reinsurance Group (Hannover) related to the Aggregate Cover and two additional finite reinsurance treaties written by Hannover. Among the contract interpretation issues in dispute are the allocation of losses to accident year under the first section of the Aggregate Cover, the timing of deductions from the funds withheld account for all of the treaties, the timing of deductions from a reserve account for one of the treaties, and coverage for certain self-insured obligations under one of the treaties. The Company intends to vigorously defend its interpretation of the contracts. If Hannover’s position on all issues were to be sustained, the Company estimates that it would incur additional ceded premium and interest charges of $50 million to $70 million after-tax.

Note J. Debt

Debt is composed of the following obligations.

Debt


	September 30,		December 31,
(In millions)	2005		2004

Variable rate debt:
Credit Facility — CNA Surety, due June 30, 2008	$	30	$	—
Debenture, CNA Surety, face amount of $31, due April 29, 2034		30		30
Credit Facility — CNA Surety due September, 30, 2005		—		25
Term Loan — CNA Surety, due September 30, 2005		—		10
Senior notes:
6.500%, face amount of $493, due April 15, 2005		—		493
6.750%, face amount of $250, due November 15, 2006		250		249
6.450%, face amount of $150, due January 15, 2008		149		149
6.600%, face amount of $200, due December 15, 2008		199		199
8.375%, face amount of $70, due August 15, 2012		69		69
5.850%, face amount of $549, due December 15, 2014		546		546
6.950%, face amount of $150, due January 15, 2018		149		149
Debenture, CNAF, 7.250%, face amount of $243, due November 15, 2023		241		241

Other debt, 1.000%-6.850%, due through 2019		38		47

Surplus Note:
Encompass Insurance Company of America (EICA) Surplus Note, face amount of $50, due March 31, 2006		50		50

Total debt	$	1,751	$	2,257


Short term debt	$	52	$	531
Long term debt		1,699		1,726


Total debt	$	1,751	$	2,257

In July of 2005, CNA Surety, a 63% owned and consolidated subsidiary of CNA, refinanced the $30 million of outstanding borrowings under its $50 million credit agreement with a new credit facility (the “2005 Credit Facility”). The 2005 Credit Facility provides a $50 million revolving credit facility that matures on June 30, 2008. The terms of the borrowings under the 2005 Credit Facility may be fixed, at CNA Surety’s option, for a period of one, two, three, or six months. The interest rate is based on, among other rates, LIBOR plus the applicable margin.

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

The margin, including a facility fee and utilization fee, can vary based on CNA Surety’s leverage ratio (debt to total capitalization) from 1.15% to 1.45%. The margin was 1.30% at September 30, 2005. As of September 30, 2005, the weighted average interest rate on the 2005 Credit Facility was 4.98% on the $30 million of outstanding borrowings.

The 2005 Credit Facility contains, among other conditions, limitations on CNA Surety with respect to the incurrence of additional indebtedness and maintenance of a rating of at least “A-” by A.M. Best Co. for each of CNA Surety’s insurance subsidiaries. The 2005 Credit Facility also requires the maintenance of certain financial ratios as follows: a) maximum funded debt to total capitalization ratio of 25%, b) minimum net worth of $375 million and c) minimum fixed charge coverage ratio of 2.5 times. CNA Surety is in compliance with all covenants as of September 30, 2005.

The Company retired its $493 million 6.5% senior notes on April 15, 2005.

In May of 2004, CNA Surety issued privately through a wholly-owned trust, $30 million of preferred securities through two pooled transactions. These securities bear interest at a rate of LIBOR plus 337.5 basis points with a thirty-year term and are redeemable after five years. The securities were issued by CNA Surety Capital Trust I (Issuer Trust). The sole asset of the Issuer Trust consists of a $31 million junior subordinated debenture issued by CNA Surety to the Issuer Trust. The subordinated debenture bears interest at a rate of LIBOR plus 337.5 basis points and matures in April of 2034. As of September 30, 2005, the interest rate on the junior subordinated debenture was 7.17%.

The combined aggregate maturities for debt at September 30, 2005 are presented in the following table.

Maturity of Debt


(In millions)

2005	$	1
2006		303
2007		11
2008		383
2009		3
Thereafter		1,059
Less original issue discount		(9	)


Total	$	1,751

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

Note K. Benefit Plans

Pension and Postretirement Healthcare and Life Insurance Benefit Plans

CNAF and certain subsidiaries sponsor noncontributory pension plans typically covering full-time employees age 21 or over who have completed at least one year of service. Effective January 1, 2000, the CNA Retirement Plan was closed to new participants; instead, retirement benefits are provided to these employees under the Company’s savings plans. While the terms of the pension plans vary, benefits are generally based on years of credited service and the employee’s highest 60 consecutive months of compensation. CNA uses December 31 as the measurement date for the majority of its plans.

CNA’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements. The assets of the plans are invested primarily in U.S. government and mortgage-backed securities with the balance in short-term investments, equity securities and limited partnerships.

CNA provides certain healthcare and life insurance benefits to eligible retired employees, their covered dependents and their beneficiaries. The funding for these plans is generally to pay covered expenses as they are incurred.

The components of net periodic benefit costs are presented in the following table.

Net Periodic Benefit Costs


Period ended September 30	Three Months						Nine Months
(In millions)	2005			2004			2005			2004

Pension Benefits
Service cost	$	6		$	8		$	20		$	32
Interest cost on projected benefit obligation		33			30			105			151
Expected return on plan assets		(37	)		(30	)		(114	)		(157	)
Prior service cost amortization		1			—			2			2
Actuarial loss		4			4			15			14


Net periodic pension cost	$	7		$	12		$	28		$	42


Postretirement benefits
Service cost	$	1		$	1		$	2		$	5
Interest cost on projected benefit obligation		3			3			8			22
Prior service cost amortization		(7	)		(4	)		(21	)		(21	)
Actuarial loss		1			1			3			4


Net periodic postretirement cost (benefit)	$	(2	)	$	1		$	(8	)	$	10

At December 31, 2004, CNA expected to contribute $7 million to its pension plans and $14 million to its postretirement healthcare and life insurance benefit plans in 2005. As of September 30, 2005, $56 million of contributions have been made to its pension plans and $10 million to its postretirement healthcare and life insurance benefit plans. CNA plans to contribute an additional $1 million to its pension plans and $4 million to its postretirement healthcare and life insurance benefit plans during the remainder of 2005.

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

Note L. Commitments, Contingencies and Guarantees

Commitments and Contingencies

In the normal course of business, CNA has obtained letters of credit in favor of various unaffiliated insurance companies, regulatory authorities and other entities. As of September 30, 2005 and December 31, 2004, there were approximately $22 million and $35 million of outstanding letters of credit.

The Company is obligated to make future payments totaling $255 million for non-cancelable operating leases expiring from 2005 through 2015 primarily for office space and data processing, office and transportation equipment. Estimated future minimum payments under these contracts are as follows: $17 million in 2005; $52 million in 2006; $44 million in 2007; $36 million in 2008; $29 million in 2009; and $77 million in 2010 and beyond. Additionally, the Company has entered into a limited number of guaranteed payment contracts, primarily relating to telecommunication and software services, amounting to approximately $30 million. Estimated future minimum payments under these contracts are as follows: $8 million in 2005; $15 million in 2006; and $7 million in 2007.

The Company currently has an agreement in place for services to be rendered in relation to employee benefits, administration and consulting. If the Company terminates this agreement without cause, or the agreement is terminated due to the Company’s default, prior to the end of any renewal term, the Company shall pay the greater of fifteen percent of the average monthly fees related to such services for the remainder of the term, or the specified minimum termination fee for the year. The minimum termination fee for the year ending December 31, 2005 is $8 million.

As of September 30, 2005 and December 31, 2004, the Company had committed approximately $213 million and $104 million for future capital calls from various third-party limited partnership investments in exchange for an additional ownership interest in the related partnership.

The Company invests in multiple bank loan participations as part of its overall investment strategy and has committed to additional future purchases and sales. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlement is made. As of September 30, 2005 and December 31, 2004, the Company had commitments to purchase $46 million and $41 million and sell $18 million and $2 million of various bank loan participations. When loan participations purchases are settled and recorded they may contain both funded and unfunded amounts. An unfunded loan represents an obligation by the Company to provide additional amounts under the terms of the loan participation. The funded portions are reflected on the Balance Sheet, while any unfunded amounts are not recorded until a draw is made under the loan facility. As of September 30, 2005 and December 31, 2004, the Company had obligations on unfunded bank loan participations in the amount of $14 million and $3 million.

In the normal course of investing activities, CCC had committed approximately $51 million as of September 30, 2005 and December 31, 2004 to future capital calls from certain of its unconsolidated affiliates in exchange for an additional ownership interest in such affiliates.

CNAF’s $750 million Series H Issue preferred stock accrues cumulative dividends at an initial rate of 8% per year, compounded annually. As of September 30, 2005, the Company had $179 million of undeclared but accumulated dividends. Loews owns 100% of the Series H Issue preferred stock.

Guarantees

CNAF has provided parent company guarantees, which expire in 2015, related to lease obligations of certain subsidiaries. Certain of those subsidiaries have been sold; however, the lease obligation guarantees remain in effect. CNAF would be required to remit prompt payment on leases in question if the primary obligor fails to observe and perform its covenants under the lease agreements. The maximum potential amount of future payments that the Company could be required to pay under these guarantees is approximately $7 million at September 30, 2005.

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

The Company holds an investment in a real estate joint venture. In the normal course of business, CNA, on a joint and several basis with other unrelated insurance company shareholders, has committed to continue funding the operating deficits of this joint venture. Additionally, CNA and the other unrelated shareholders, on a joint and several basis, have guaranteed an operating lease for an office building, which expires in 2016.

The guarantee of the operating lease is a parallel guarantee to the commitment to fund operating deficits; consequently, the separate guarantee to the lessor is not expected to be triggered as long as the joint venture continues to be funded by its shareholders and continues to make its annual lease payments.

In the event that the other parties to the joint venture are unable to meet their commitments in funding the operations of this joint venture, the Company would be required to assume the obligation for the entire office building operating lease. The maximum potential future lease payments at September 30, 2005 that the Company could be required to pay under this guarantee are approximately $253 million. If CNA were required to assume the entire lease obligation, the Company would have the right to pursue reimbursement from the other shareholders and would have the right to all sublease revenues.

CNA has provided guarantees of the indebtedness of certain of its independent insurance producers. These guarantees expire in 2008. The Company would be required to remit prompt and complete payment when due, should the primary obligor default. In the event of default on the part of the primary obligor, the Company has a right to any and all shares of common stock of the primary obligor. The maximum potential amount of future payments that CNA could be required to pay under these guarantees is approximately $6 million at September 30, 2005.

In the course of selling business entities and assets to third parties, the Company has 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 September 30, 2005, the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $940 million.

In addition, the Company has 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 September 30, 2005, the Company had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets for 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. The Company recorded approximately $21 million of other liabilities related to these indemnification agreements as of September 30, 2005 and December 31, 2004.

In connection with the issuance of preferred securities by CNA Surety Capital Trust I, CNA Surety issued a guarantee of $75 million to guarantee the payment by CNA Surety Capital Trust I of annual dividends of $1.5 million over 30 years and redemption of $30 million of preferred securities. See Note J for further description of debentures issued by CNA Surety, which are the sole assets of CNA Surety Capital Trust I.

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

Note N. Business Segments

CNA manages its property and casualty operations in two operating segments which represent CNA’s core operations: Standard Lines and Specialty Lines. The non-core operations are managed in Life and Group Non-Core and Corporate and Other Non-Core segments. These segments reflect the way CNA manages its operations and makes business decisions.

The Company manages most of its assets on a legal entity basis, while segment operations are conducted across legal entities. As such, only reinsurance and insurance receivables, insurance reserves and deferred acquisition costs are readily identifiable for each individual segment. Distinct investment portfolios are not maintained for each segment; accordingly, allocation of assets to each segment is not performed. Therefore, net investment income and realized investment gains or losses are allocated primarily based on each segment’s net carried insurance reserves, as adjusted.

Income taxes have been allocated on the basis of the taxable income of the segments.

In the following tables, certain financial measures are presented to provide information used by management to monitor the Company’s operating performance. Management utilizes these financial measures to monitor the Company’s insurance operations and investment portfolio. Net operating income, which is derived from certain income statement amounts, is used by management to monitor performance of the Company’s insurance operations. The Company’s investment portfolio is monitored through analysis of various quantitative and qualitative factors and certain decisions related to the sale or impairment of investments that produce realized gains and losses. Net realized investment gains and losses are comprised of after-tax realized investment gains and losses net of participating policyholders’ and minority interests.

Net operating income is calculated by excluding from net income the after-tax effects of 1) net realized investment gains or losses, 2) gains or losses from discontinued operations and 3) cumulative effects of changes in accounting principles. In the calculation of net operating income, management excludes after-tax net realized investment gains or losses because net realized investment gains or losses related to the Company’s investment portfolio are largely discretionary, except for losses related to other-than-temporary impairments, are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not an indication of trends in insurance operations.

The Company’s investment portfolio is monitored by management through analyses of various factors including unrealized gains and losses on securities, portfolio duration and exposure to interest rate, market and credit risk. Based on such analyses, the Company may impair an investment security in accordance with its policy, or sell a security. Such activities will produce realized gains and losses.

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


For the three months ended										Corporate
September 30, 2005	Standard			Specialty			Life and Group			and Other
(In millions)	Lines			Lines			Non-Core			Non-Core			Eliminations			Total

Net earned premiums	$	1,080		$	628		$	169		$	(1	)	$	(3	)	$	1,873
Net investment income		186			74			179			61			—			500
Other revenues		26			34			20			16			(16	)		80

Total operating revenues		1,292			736			368			76			(19	)		2,453

Claims, benefits and expenses:
Net incurred claims and benefits		1,148			366			342			12			—			1,868
Policyholders’ dividends		4			1			(1	)		(1	)		—			3
Amortization of deferred acquisition costs		281			128			5			2			—			416
Other insurance related expenses		76			45			69			(4	)		(3	)		183
Other operating expenses		23			28			13			39			(16	)		87

Total claims, benefits and expenses		1,532			568			428			48			(19	)		2,557

Operating income (loss) before income tax and minority interest		(240	)		168			(60	)		28			—			(104	)
Income tax (expense) benefit on operating income (loss)		100			(53	)		25			4			—			76
Minority interest		(4	)		(7	)		—			—			—			(11	)


Net operating income (loss)		(144	)		108			(35	)		32			—			(39	)

Realized investment gains (losses), net of participating policyholders’ and minority interests		51			16			(2	)		2			—			67

Income tax (expense) benefit on realized investment gains (losses)		(18	)		(5	)		1			(3	)		—			(25	)


Net income (loss)	$	(111	)	$	119		$	(36	)	$	31		$	—		$	3

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


For the nine months ended										Corporate
September 30, 2005	Standard			Specialty			Life and Group			and Other
(In millions)	Lines			Lines			Non-Core			Non-Core			Eliminations			Total

Net earned premiums	$	3,333		$	1,831		$	539		$	(10	)	$	(9	)	$	5,684
Net investment income		540			197			431			177			—			1,345
Other revenues		74			94			78			156			(51	)		351

Total operating revenues		3,947			2,122			1,048			323			(60	)		7,380

Claims, benefits, and expenses:
Net incurred claims and benefits		2,750			1,158			860			102			(2	)		4,868
Policyholders’ dividends		16			3			(1	)		—			—			18
Amortization of deferred acquisition costs		757			390			18			3			—			1,168
Other insurance related expenses		318			93			194			6			(7	)		604
Other operating expenses		82			81			43			103			(51	)		258

Total claims, benefits and expenses		3,923			1,725			1,114			214			(60	)		6,916

Operating income (loss) before income tax and minority interest		24			397			(66	)		109			—			464
Income tax (expense) benefit on operating income (loss)		41			(121	)		37			20			—			(23	)
Minority interest		(8	)		(8	)		—			—			—			(16	)


Net operating income (loss)		57			268			(29	)		129			—			425

Realized investment gains (losses), net of participating policyholders’ and minority interests		71			25			(8	)		(14	)		—			74
Income tax (expense) benefit on realized investment gains (losses)		(29	)		(6	)		3			2			—			(30	)


Net income (loss)	$	99		$	287		$	(34	)	$	117		$	—		$	469


As of September 30, 2005
(In millions)

Reinsurance receivables	$	4,854		$	1,618		$	2,967		$	5,211		$	—		$	14,650

Insurance receivables	$	1,781		$	406		$	115		$	47		$	—		$	2,349

Insurance reserves:
Claim and claim adjustment expense	$	14,787		$	5,107		$	3,496		$	8,045		$	—		$	31,435
Unearned premiums		2,003			1,616			169			558			(3	)		4,343
Future policy benefits		—			—			6,181			—			—			6,181
Policyholders’ funds		33			—			1,555			—			—			1,588

Deferred acquisition costs	$	434		$	281		$	518		$	1		$	—		$	1,234

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


For the nine months ended										Corporate
September 30, 2004	Standard			Specialty			Life and Group			and Other
(In millions)	Lines			Lines			Non-Core			Non-Core			Eliminations			Total

Net earned premiums	$	3,756		$	1,672		$	710		$	112		$	(29	)	$	6,221
Net investment income		382			182			457			195			—			1,216
Other revenues		102			93			72			25			(65	)		227

Total operating revenues		4,240			1,947			1,239			332			(94	)		7,664

Claims, benefits and expenses:
Net incurred claims and benefits		2,701			1,059			981			128			(21	)		4,848
Policyholders’ dividends		2			5			(1	)		—			—			6
Amortization of deferred acquisition costs		729			328			30			27			—			1,114
Other insurance related expenses		579			115			218			23			(8	)		927
Other operating expenses		84			84			58			106			(65	)		267

Total claims, benefits and expenses		4,095			1,591			1,286			284			(94	)		7,162

Operating income (loss) before income tax and minority interest		145			356			(47	)		48			—			502
Income tax (expense) benefit on operating income (loss)		(1	)		(107	)		27			(3	)		—			(84	)
Minority interest		(6	)		(13	)		—			—			—			(19	)


Net operating income (loss)		138			236			(20	)		45			—			399

Realized investment gains (losses), net of participating policyholders’ and minority interests		101			37			(616	)		63			—			(415	)
Income tax (expense) benefit on realized investment gains (losses)		(36	)		(14	)		231			(23	)		—			158


Net income (loss)	$	203		$	259		$	(405	)	$	85		$	—		$	142


As of December 31, 2004
(In millions)

Reinsurance receivables	$	5,129		$	1,682		$	3,284		$	5,793		$	—		$	15,888

Insurance receivables	$	2,013		$	340		$	153		$	61		$	—		$	2,567

Insurance reserves:
Claim and claim adjustment expense	$	14,302		$	4,860		$	3,680		$	8,681		$	—		$	31,523
Unearned premiums		1,978			1,546			164			834			—			4,522
Future policy benefits		—			—			5,883			—			—			5,883
Policyholders’ funds		43			—			1,682			—			—			1,725

Deferred acquisition costs	$	444		$	285		$	537		$	2		$	—		$	1,268

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

Note O. Significant Transactions

Managed Care Holdings Corporation

On March 31, 2005, the Company completed the sale of Managed Care Holdings Corporation, and its subsidiary, Caronia Corporation, to Octagon Risk Services, Incorporated, for approximately $16 million. As a result of the sale, CNA recorded a realized gain of approximately $1 million after-tax. For the three months ended September 30, 2004, the revenue of the business sold was $4 million. The revenues of the business sold were $4 million and $12 million for the nine months ended September 30, 2005 and 2004. For the three months ended September 30, 2004, net income was $1 million. Net income was $0.2 million and $3 million for the nine months ended September 30, 2005 and 2004. Additionally, the Company’s goodwill decreased $17 million as a result of the sale.

Specialty Medical Business

On January 6, 2005, the Company completed the sale of its specialty medical business to Aetna Inc. The revenues of the business sold were $3 million and $43 million for the three months ended September 30, 2005 and 2004 and $14 million and $120 million for the nine months ended September 30, 2005 and 2004. Net income related to this business was $2 million and $3 million for the three months ended September 30, 2005 and 2004 and $8 million and $11 million for the nine months ended September 30, 2005 and 2004.

Individual Life Sale

On April 30, 2004, the Company completed the sale of its individual life insurance business to Swiss Re. The business sold included term, universal and permanent life insurance policies and individual annuity products. CNA’s individual long term care and structured settlement businesses were excluded from the sale. Swiss Re acquired VFL, a wholly owned subsidiary of CAC, and CNA’s Nashville, Tennessee insurance servicing and administration building as part of the sale. In connection with the sale, CNA entered into a reinsurance agreement in which CAC ceded its individual life insurance business to Swiss Re on a 100% indemnity reinsurance basis. As a result of this reinsurance agreement, approximately $1 billion of future policy benefit reserves were ceded to Swiss Re. CNA received consideration of approximately $700 million and recorded a realized investment loss of $622 million pretax ($389 million after-tax) during the six months ended June 30, 2004.

Swiss Re assumed assets and liabilities of $6.6 billion and $5.2 billion at April 30, 2004. The revenues of the individual life business through the sale date were $151 million for the nine months ended September 30, 2004. The net results for this business through the sale date were a net loss of $6 million for the nine months ended September 30, 2004.

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

Note P. Related Party Transactions

CNA reimburses Loews, or pays directly, approximately $21 million annually for management fees, travel and related expenses and expenses of investment facilities and services provided to CNA.

The CNA Tax Group is included in the consolidated Federal income tax return of Loews and its eligible subsidiaries. For the nine months ended September 30, 2005 CNA paid Loews $272 million, compared to receiving $530 million from Loews for the nine months ended September 30, 2004, related to Federal income taxes.

CNA previously sponsored a stock ownership plan whereby the Company financed the purchase of Company common stock by certain officers, including executive officers. Interest charged on the principal amount of these outstanding stock purchase loans is generally equivalent to the long term applicable federal rate, compounded semi-annually, in effect on the disbursement date of the loan. Loans made pursuant to the plan are generally full recourse with a ten-year term maturing between October of 2008 and May of 2010; and are secured by the stock purchased. The carrying value of the loans as of September 30, 2005 exceeds the fair value of the related common stock collateral by $18 million.

Loans to National Contractor

CNA Surety has provided significant surety bond protection for a large national contractor that undertakes projects for the construction of government and private facilities, a substantial portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF provided loans to the contractor through a credit facility, up to an amended aggregate maximum of $126 million. The credit facility expires in March 2009 and the current interest rate is 5% per annum. As of September 30, 2005 and December 31, 2004, there was $126 million and $95 million of loans outstanding under the credit facility, and $6 million and $4 million of deferred or accrued and unpaid interest. Loews, through a participation agreement with CNAF, has funded and owns a participation of $40 million and $29 million of the outstanding advances as of September 30, 2005 and December 31, 2004.

Loans under the credit facility are secured by a pledge of substantially all of the assets of the contractor and certain of its affiliates. In connection with the credit facility, CNAF has also guaranteed or provided collateral for letters of credit which are charged against the maximum available line and, if drawn upon, would be treated as loans under the credit facility. As of September 30, 2005 and December 31, 2004, these guarantees and collateral obligations aggregated $13 million respectively.

The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, resulting in the contractor substantially reducing the scope of its original business and concentrating on those segments determined to be potentially profitable. As a consequence, operating cash flow, and in turn the capacity to service debt, have been reduced below previous levels. In light of these developments, CNA recorded a pretax impairment charge of $56 million in the fourth quarter of 2004, net of the participation by Loews, with respect to amounts loaned under the facility, and an additional pretax impairment charge of $13 million during the first quarter of 2005. Representatives from the Company and CNA Surety met with senior management of the national contractor in June 2005 to review their actual cash flow through that date, as well as discuss expected future cash flow. Pursuant to those discussions and ongoing monitoring of the status of the contractor’s restructuring plan, deterioration in operations and cash flow was observed. This deterioration was concentrated in an operating division of the contractor that had previously been placed into run off. As a result of these developments, the Company made a decision not to provide additional liquidity to the contractor. Accordingly, during the second quarter of 2005 the Company took a further pretax impairment charge of $21 million. Further, CNA Surety established $40 million of estimated initial surety loss reserves in the second quarter of 2005 in anticipation of future loss payments related to the national contractor. During the third quarter of 2005, CNA Surety paid $16 million in loss payments to the national contractor to settle outstanding bonded obligations. In the third quarter, CNA Surety began an evaluation of the contractor’s current restructuring efforts. Possible changes to the restructuring strategy could result in higher

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

loss estimates and trigger additional reserve actions. CNA Surety expects to complete this reevaluation in the fourth quarter.

If any such reserve additions were taken, CNA Surety would have exposure for the first $20 million and CCC would have all further surety bond exposure through the reinsurance arrangements discussed below. CNA Surety has advised that it intends to continue to provide surety bonds on behalf of the contractor while it reevaluates the contractor’s restructuring efforts, subject to the contractor’s initial and ongoing compliance with CNA Surety’s underwriting standards and ongoing management of CNA Surety’s exposure in relation to the contractor. All surety bonds written for the national contractor are issued by CCC and its affiliates, other than CNA Surety, and are subject to underlying reinsurance treaties pursuant to which all bonds written on behalf of CNA Surety are 100% reinsured to one of CNA Surety’s insurance subsidiaries.

During the second quarter of 2005, CCC and CNA Surety executed amendments to existing treaties that provide reinsurance protection to CNA Surety for losses associated with the contractor. Coverage for all such losses in excess of an aggregate $60 million is now provided under one treaty. This treaty provides coverage for the life of bonds either in force or written during the term of the treaty, which runs from January 1, 2005 to December 31, 2005.

CCC and CNA Surety continue to engage in periodic discussions with insurance regulatory authorities regarding the level of bonds provided for this principal and will continue to apprise those authorities of the status of their ongoing exposure to this account.

Indemnification and subrogation rights, including rights to contract proceeds on construction projects in the event of default, exist that reduce CNA Surety’s and ultimately the Company’s exposure to loss. While the Company believes that the contractor’s continuing restructuring efforts may be successful, the contractor’s failure to ultimately achieve its extended restructuring plan or perform its contractual obligations under the credit facility or under the Company’s surety bonds could have a material adverse effect on the Company’s results of operations and/ or equity. If such failures occur, the Company estimates the additional surety loss, net of indemnification and subrogation recoveries, but before the effects of minority interest, to be approximately $160 million pretax.

CNA Surety Corporation

CCC provided an excess of loss reinsurance contract to the insurance subsidiaries of CNA Surety over a period that expired on December 31, 2000 (the stop loss contract). The stop loss contract limits the net loss ratios for CNA Surety with respect to certain accounts and lines of insurance business. In the event that CNA Surety’s accident year net loss ratio exceeds 24% for 1997 through 2000 (the contractual loss ratio), the stop loss contract requires CCC to pay amounts equal to the amount, if any, by which CNA Surety’s actual accident year net loss ratio exceeds the contractual loss ratio multiplied by the applicable net earned premiums. The minority shareholders of CNA Surety do not share in any losses that apply to this contract. There were no reinsurance balances payable under this stop loss contract as of September 30, 2005.

Note Q. Statutory Accounting Practices

CNA’s domestic and foreign insurance subsidiaries maintain their accounts in conformity with accounting practices prescribed or permitted by insurance regulatory authorities, which vary in certain respects from GAAP. In converting from statutory to GAAP, typical adjustments include deferral of policy acquisition costs and the inclusion of net realized holding gains or losses in shareholders’ equity relating to fixed maturity securities. The National Association of Insurance Commissioners (NAIC) developed a codified version of statutory accounting principles, designed to foster more consistency among the states for accounting guidelines and reporting.

CNA’s insurance subsidiaries are domiciled in various jurisdictions. These subsidiaries prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the respective jurisdictions’ insurance

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

regulators. Prescribed statutory accounting practices are set forth in a variety of publications of the NAIC as well as state laws, regulations and general administrative rules.

CCC follows a permitted practice related to the statutory provision for reinsurance, or the uncollectible reinsurance reserve. This permitted practice allows CCC to record an additional uncollectible reinsurance reserve amount through a different financial statement line item than the prescribed statutory convention. This permitted practice was requested and has been granted for the reporting periods December 31, 2004 through September 30, 2005. This permitted practice had no effect on CCC’s statutory surplus as of September 30, 2005 or December 31, 2004.

During 2004 and through March 31, 2005, CIC followed a permitted practice related to its statutory accounting for reinsurance recoverables from voluntary pools. Under the prescribed statutory accounting practice, CIC would be required to record a reduction to its statutory surplus related to amounts due from reinsurers, including voluntary pools, that are not authorized in its state of domicile, South Carolina. The permitted practice allowed CIC to continue to report voluntary pools that were classified as authorized in CIC’s previous state of domicile, New Hampshire, as authorized in South Carolina. This permitted practice was intended to be transitional as a result of CIC’s redomestication from New Hampshire to South Carolina effective January 1, 2004. In the second quarter of 2005, it was determined by CIC’s domiciliary state insurance department that credit for reinsurance ceded to voluntary pools shall be allowed as an asset. Therefore, a permitted practice is no longer necessary.

CNAF’s ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from its subsidiaries. The payment of dividends to CNAF by its 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.

Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval of the Illinois Department of Financial and Professional Regulation — Division of Insurance (the Department), may be paid only from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of September 30, 2005, CCC is in a positive earned surplus position, thereby enabling CCC to pay approximately $330 million in dividends for the remainder of 2005 that would not be subject to the Department’s prior approval. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.

CCC’s earned surplus was negative at December 31, 2004. As a result, CCC obtained approval from the Department in December of 2004, for extraordinary dividends in the amount of approximately $125 million to be used to fund CNAF’s 2005 debt service requirements. CCC’s earned surplus was restored to a positive position, in part, as a result of a $500 million dividend received from its subsidiary, CAC, during the first quarter of 2005. By agreement with the New Hampshire Insurance Department, the CIC Group may not pay dividends to CCC until after January 1, 2006.

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

Note R. Restatement for Reinsurance and Equity Investee Accounting

In May of 2005, the Company filed an amendment to its 2004 Annual Report on Form 10-K to correct its accounting for several reinsurance contracts, primarily with a former affiliate, and its equity accounting for that affiliate. The Company restated its previously reported financial statements as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002 and all related disclosures, as well as its interim financial data for all interim periods of 2004 and 2003. This restatement was based upon reconsideration of the Company’s accounting for its former equity interest in Accord Re Ltd. (Accord) and for several reinsurance contracts with Accord, but also included two reinsurance agreements with unaffiliated parties that are immaterial in the aggregate. A subsidiary of The Continental Corporation (TCC) acquired a 49% ownership interest in Accord, a Bermuda company, in 1989 upon Accord’s formation. TCC also provided capital support to Accord through a guarantee from a TCC subsidiary. TCC was acquired by the Company in 1995.

Reinsurance relationships with Accord involved both property and casualty assumed reinsurance risks that were written by TCC subsidiaries and 100% ceded to Accord or reinsured from other cedents by Accord. Stop-loss protection in relation to those risks was obtained by Accord from a wholly-owned TCC subsidiary.

All of the Company’s reinsurance agreements with Accord relating to property risks were commuted as of year-end 2001, leaving six reinsurance agreements with Accord relating to casualty risks outstanding at that time. As of March 31, 2005 the Company provided no capital support to and had no ownership interest in Accord. During the period of the Company’s minority ownership, Accord also maintained reinsurance relationships with reinsurers unaffiliated with the Company.

The Company accounted for its reinsurance cessions to Accord and related retrocessions from Accord as reinsurance. The Company subsequently concluded that the reinsurance cession and retrocession should be viewed as a single transaction which does not transfer risk. The restatement corrections applied deposit accounting to the Company’s reinsurance cessions to Accord. The restatement corrections also include adjustments to the Company’s historical equity method accounting for its ownership and economic interest in Accord, including the effects of applying deposit accounting to certain of Accord’s reinsurance contracts with parties other than the Company. The remaining restatement corrections related to applying deposit accounting to two small reinsurance treaties unrelated to Accord that were previously accounted for using reinsurance accounting.

The effect of the restatement on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 is included in the table below.


	Three Months						Nine Months
Period ended September 30, 2004	As Previously			As			As Previously		As
(In millions, except per share data)	Reported			Restated			Reported		Restated

Consolidated statements of operations:
Net investment income	$	359		$	360		$	1,212	$	1,216
Insurance claims and policyholders’ benefits		1,596			1,596			4,859		4,854
Income tax benefit		52			52			77		74
Net income (loss)		(28	)		(27	)		136		142

Basic and diluted earnings (loss) per share available to common stockholders:	$	(0.17	)	$	(0.16	)	$	0.35	$	0.37

The restatement had no effect on cash flows from operating, investing or financing activities for the nine months ended September 30, 2004.

Separately, during the third quarter of 2005, the amount of interest paid included in the supplemental disclosure of cash flow information for the nine months ended September 30, 2004 was corrected from $162 million to $67 million.

CNA FINANCIAL CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

The following discussion highlights significant factors impacting the consolidated operations and financial condition of CNA Financial Corporation (CNAF) and its subsidiaries (collectively CNA or the Company). Based on 2004 statutory net written premiums, CNA is the seventh largest commercial insurance writer and the fourteenth largest property and casualty company in the United States of America.

Loews Corporation (Loews) owned approximately 91% of the outstanding common stock and 100% of the Series H preferred stock of CNAF as of September 30, 2005. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements in Item 1 of Part 1 of this Form 10-Q and the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in CNAF’s Form 10-K/A filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2004.

The Company restated its previously reported financial statements as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002 and all related disclosures, as well as its interim financial data for all interim periods of 2004 and 2003. This restatement was based upon reconsideration of the Company’s accounting for its former equity interest in Accord Re Ltd. (Accord) and for several reinsurance contracts with Accord, but also included two reinsurance agreements with unaffiliated parties that are immaterial in the aggregate. Further information on this restatement is provided in Note R of the Condensed Consolidated Financial Statements included under Item 1. For information regarding regulatory reviews of the Company’s use of non-traditional, or finite, insurance and the Company’s accounting for and transactions with Accord see the Liquidity and Capital Resources section of this MD&A under the Regulatory Matters caption.

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

CONSOLIDATED OPERATIONS

Results of Operations

The following table includes the consolidated results of operations. For more detailed components of CNA’s business operations and the net operating income financial measure, see the segment discussions within this Management’s Discussion and Analysis (MD&A).


	Three months						Nine months
Period ended September 30	2005			2004			2005			2004
(In millions, except per share data)

Revenues
Net earned premiums	$	1,873		$	1,947		$	5,684		$	6,221
Net investment income		500			360			1,345			1,216
Other revenues		80			73			351			227


Total operating revenues		2,453			2,380			7,380			7,664


Claims, Benefits and Expenses
Net incurred claims and benefits		1,868			1,591			4,868			4,848
Policyholders’ dividends		3			5			18			6
Amortization of deferred acquisition costs		416			374			1,168			1,114
Other insurance related expenses		183			334			604			927
Other operating expenses		87			87			258			267


Total claims, benefits and expenses		2,557			2,391			6,916			7,162


Operating income (loss) before income tax and minority interest		(104	)		(11	)		464			502
Income tax (expense) benefit on operating income (loss)		76			32			(23	)		(84	)
Minority interest		(11	)		(6	)		(16	)		(19	)


Net operating income (loss)		(39	)		15			425			399

Realized investment gains (losses), net of participating policyholders’ and minority interests		67			(62	)		74			(415	)
Income tax (expense) benefit on realized investment gains (losses)		(25	)		20			(30	)		158


Net income (loss)	$	3		$	(27	)	$	469		$	142


Basic and Diluted Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share available to common stockholders	$	(0.06	)	$	(0.16	)	$	1.63		$	0.37


Weighted average outstanding common stock and common stock equivalents		256.0			256.0			256.0			256.0

Three Month Comparison

Net results from operations for the three months ended September 30, 2005 were adversely impacted by $294 million after-tax as a result of catastrophes, including Hurricanes Katrina, Rita, Dennis and Ophelia. This loss estimate was developed after consideration of reported claims, the insured values of properties in the affected areas, modeled losses, industry loss estimates and the Company’s reinsurance coverage. Because of the nature of the four hurricanes, the estimate involves significant judgment due in part to the limited ability to access portions of the affected area, legal and regulatory uncertainties, the complexity of factors contributing to the losses and the preliminary nature of the information available. Accordingly, there can be no assurance that CNA’s ultimate cost for these catastrophes will not exceed this estimate. Net results from operations for the three months ended September 30, 2004 were adversely impacted by Hurricanes Charley, Frances, Ivan and Jeanne. The four storms

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

negatively impacted third quarter 2004 results by $174 million after-tax. The 2005 and 2004 hurricane loss estimates are net of anticipated reinsurance recoveries, and include the impact of reinstatement premiums, insurance assessments and a bad debt provision for uncollectible insurance receivables.

Commercial catastrophe losses, gross of reinsurance, were $797 million and $280 million for the three months ended September 30, 2005 and 2004. See the Reinsurance section of this MD&A for further discussion of the Company’s catastrophe reinsurance program.

Net operating income for the three months ended September 30, 2005 decreased $54 million as compared with the same period in 2004. In addition to the catastrophes discussed above, these results were adversely impacted by increased unfavorable net prior year development and decreased premiums. Favorably impacting results were increased net investment income and a decrease in the provision for uncollectible insurance receivables. The Company recorded a bad debt provision related to Professional Employer Organization (PEO) accounts of $62 million after-tax in the third quarter of 2004. The Standard Lines and Specialty Lines segments produced a combined ratio of 119.9% for the three months ended September 30, 2005, which included a 26.4 point impact from catastrophes. The Standard Lines and Specialty Lines segments produced a combined ratio of 111.8% for the three months ended September 30, 2004, which included a 15.7 point impact from catastrophes.

Net income for the three months ended September 30, 2005 increased $30 million as compared with the same period in 2004, due primarily to increased net realized investment gains, partially offset by decreased operating income.

Pretax realized investment gains were $67 million for the three months ended September 30, 2005 as compared to realized investment losses of $62 million for the three months ended September 30, 2004. The increase in realized gains was primarily driven by favorable results in derivative securities and improved results in corporate and other taxable bonds, partially offset by less favorable results from tax-exempt bonds.

Net earned premiums decreased $74 million for the three months ended September 30, 2005 as compared with the same period in 2004. The decrease in net earned premiums was due primarily to lower premiums in the Standard Lines segment, partially offset by increased earned premiums in the Specialty Lines segment. See the segment discussion for further information.

Nine Month Comparison

Net operating income for the nine months ended September 30, 2005 increased $26 million as compared with the same period in 2004. Net operating income for the 2005 period was adversely impacted by increased catastrophe losses as discussed in the three month discussion, decreased premiums and $68 million after-tax of increased unfavorable net prior year development. Partially offsetting these adverse impacts was a $115 million after-tax benefit related to a Federal income tax settlement and a release of Federal income tax reserves which was recorded in the second quarter of 2005, increased net investment income, a decrease in the bad debt provision for insurance receivables as discussed above in the three month comparison and lower operating expenses. The Standard Lines and Specialty Lines segments produced a combined ratio of 106.2% for the nine months ended September 30, 2005, which included an 8.8 point impact from catastrophes. The Standard Lines and Specialty Lines segments produced a combined ratio of 101.7% for the nine months ended September 30, 2004, which included an 5.3 point impact from catastrophes.

Commercial catastrophe losses, gross of reinsurance, were $803 million and $293 million for the nine months ended September 30, 2005 and 2004. See the Reinsurance section of this MD&A for further discussion of the Company’s catastrophe reinsurance program.

Net income for the nine months ended September 30, 2005 increased $327 million as compared with the same period in 2004 due primarily to increased net realized investment gains and increased net operating income.

Pretax realized investment gains were $74 million for the nine months ended September 30, 2005 as compared to realized investment losses of $415 million for the nine months ended September 30, 2004. The increase in the net realized investment results was due primarily to a $622 million loss on the sale of the individual life insurance

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

Net Prior Year Development
For the three months ended September 30, 2005


							Corporate
	Standard			Specialty			and Other
(In millions)	Lines			Lines			Non-Core			Total

Pretax unfavorable (favorable) net prior year claim and allocated claim adjustment expense development excluding the impact of the corporate aggregate reinsurance treaties:

Core (Non-APMT)	$	18		$	(7	)	$	(1	)	$	10
APMT		—			—			1			1


Pretax unfavorable (favorable) net prior year development before impact of premium development		18			(7	)		—			11


Unfavorable premium development, excluding impact of corporate aggregate reinsurance treaties		8			6			1			15
Ceded premiums related to corporate aggregate reinsurance treaties		(1	)		—			—			(1	)


Total premium development		7			6			1			14


Total unfavorable (favorable) net prior year development (pretax)	$	25		$	(1	)	$	1		$	25


Total unfavorable (favorable) net prior year development (after-tax)	$	17		$	(1	)	$	1		$	17

Net Prior Year Development
For the three months ended September 30, 2004


							Corporate
	Standard			Specialty			and Other
(In millions)	Lines			Lines			Non-Core			Total

Pretax unfavorable (favorable) net prior year claim and allocated claim adjustment expense development excluding the impact of the corporate aggregate reinsurance treaties:

Core (Non-APMT)	$	(6	)	$	—		$	—		$	(6	)
APMT		—			—			4			4
Ceded losses related to corporate aggregate reinsurance treaties		4			(9	)		5			—


Pretax unfavorable (favorable) net prior year development before impact of premium development		(2	)		(9	)		9			(2	)


Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		11			(15	)		5			1
Ceded premiums related to corporate aggregate reinsurance treaties		(3	)		3			(3	)		(3	)


Total premium development		8			(12	)		2			(2	)


Total unfavorable (favorable) net prior year development (pretax)	$	6		$	(21	)	$	11		$	(4	)


Total unfavorable (favorable) net prior year development (after-tax)	$	5		$	(14	)	$	7		$	(2	)

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

Net Prior Year Development
For the nine months ended September 30, 2005


							Corporate
	Standard			Specialty			and Other
(In millions)	Lines			Lines			Non-Core		Total

Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of the corporate aggregate reinsurance treaties:

Core (Non-APMT)	$	183		$	56		$	57	$	296
APMT		—			—			11		11


Total		183			56			68		307
Ceded losses related to corporate aggregate reinsurance treaties		19			(25	)		6		—


Pretax unfavorable net prior year development before impact of premium development		202			31			74		307


Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		(99	)		(9	)		11		(97	)
Ceded premiums related to corporate aggregate reinsurance treaties		(6	)		19			4		17


Total premium development		(105	)		10			15		(80	)


Total unfavorable net prior year development (pretax)	$	97		$	41		$	89	$	227


Total unfavorable net prior year development (after-tax)	$	64		$	26		$	58	$	148

Net Prior Year Development
For the nine months ended September 30, 2004


							Corporate
	Standard			Specialty			and Other
(In millions)	Lines			Lines			Non-Core			Total

Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of the corporate aggregate reinsurance treaties:

Core (Non-APMT)	$	107		$	74		$	9		$	190
APMT		—			—			44			44


Total		107			74			53			234
Ceded losses related to corporate aggregate reinsurance treaties		4			(9	)		5			—


Pretax unfavorable net prior year development before impact of premium development		111			65			58			234


Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		(97	)		(29	)		15			(111	)
Ceded premiums related to corporate aggregate reinsurance treaties		(1	)		3			(2	)		—


Total premium development		(98	)		(26	)		13			(111	)


Total unfavorable net prior year development (pretax)	$	13		$	39		$	71		$	123


Total unfavorable net prior year development (after-tax)	$	9		$	25		$	46		$	80

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

Critical Accounting Estimates

The preparation of the Condensed Consolidated Financial Statements (Unaudited) in conformity with accounting principles generally accepted in the United States of America (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 amounts of revenues and expenses reported during the period. Actual results may differ from those estimates.

CNA’s Condensed Consolidated Financial Statements (Unaudited) and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. CNA continually evaluates the accounting policies and estimates used to prepare the Condensed Consolidated Financial Statements. In general, management’s 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 management to be critical to an understanding of CNA’s Condensed Consolidated Financial Statements as their application places the most significant demands on management’s judgment. Note A of the Consolidated Financial Statements included under Item 8 of the Company’s Form 10-K/A for the year ended December 31, 2004, 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 the Company’s results of operations or equity.

Insurance Reserves

Insurance reserves are established for both short and long-duration insurance contracts. Short-duration contracts are primarily related to property and casualty insurance policies where the reserving process is based on actuarial estimates of the amount of loss, including amounts for known and unknown claims. Long-duration contracts typically include traditional life insurance and long term care products and are estimated using actuarial estimates about mortality and morbidity, as well as assumptions about expected investment returns. Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals for prior accident years are defined as development within this MD&A. These changes can be favorable or unfavorable. The inherent risks associated with the reserving process are discussed in the Reserves – Estimates and Uncertainties section below.

Reinsurance

Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported as receivables in the Condensed Consolidated Balance Sheets. The ceding of insurance does not discharge the primary liability of the Company. 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. Therefore, 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.

Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses, as compared to deposit accounting, which requires cash flows to be reflected as assets and liabilities. To qualify for reinsurance accounting, reinsurance agreements must include risk transfer. Considerable judgment by management may be necessary to determine if risk transfer requirements are met. The Company believes it has appropriately applied reinsurance accounting principles in its evaluation of risk transfer. However, the Company’s evaluation of risk transfer and the resulting accounting could be challenged in connection with regulatory reviews or possible changes in accounting and/or financial reporting rules related to reinsurance, which could materially adversely affect the Company’s results of operations and/or equity. Further information on reinsurance is provided in the Reinsurance section below.

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

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 the Company’s results of operations or equity.

The Company’s investment portfolio is subject to market declines below book value that may be other-than-temporary. The Company has 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 impairment loss in the results of operations in the period in which the determination occurred. Further information on the Company’s process for evaluating impairments is included in the Investments section below.

Long Term Care Products

The Company’s reserves and deferred acquisition costs for its long term care products are based on certain assumptions including morbidity, policy persistency and interest rates. Actual experience may differ from these assumptions. 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 including potential future premium increases and future health care cost trends. The results of operations and/or equity may be materially, adversely affected if actual experience varies significantly from these assumptions.

Pension and Postretirement Benefit Obligations

The Company is required to make a significant number of assumptions in order to estimate the liabilities and costs related to its pension and postretirement benefit obligations to employees under its benefit plans. The assumptions that have the most impact on pension 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. Further information on the Company’s pension and postretirement benefit obligations is included in Note K of the Condensed Consolidated Financial Statements included under Item 1.

Legal Proceedings

The Company is involved in various legal proceedings that have arisen during the ordinary course of business. The Company evaluates the facts and circumstances of each situation, and when the Company determines it necessary, a liability is estimated and recorded. Further information on the Company’s legal proceedings and related contingent liabilities is provided in Notes G and H of the Condensed Consolidated Financial Statements included under Item 1.

Loans to National Contractor

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

credit which are charged against the maximum available line and, if drawn upon, would be treated as loans under the credit facility. As of September 30, 2005 and December 31, 2004, these guarantees and collateral obligations aggregated $13 million respectively.

Further information on the Company’s exposure to this national contractor and this credit agreement are provided in Note P of the Condensed Consolidated Financial Statements included under Item 1.

Reserves – Estimates and Uncertainties

The Company maintains reserves to cover its 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

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

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 H of the Condensed Consolidated Financial Statements included under Item 1.

The level of reserves maintained by the Company represents management’s best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on its assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that are derived by the Company, 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.

Among the many uncertain future events about which the Company makes assumptions and estimates, many of which have become increasingly unpredictable, are claims severity, frequency of claims, mortality, morbidity, expected interest rates, inflation, claims handling and 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 it is ultimately settled, referred to in the insurance industry as the “tail.” These factors must be individually considered in relation to the Company’s evaluation of each type of business. Many of these uncertainties are not precisely quantifiable, particularly on a prospective basis, and require significant management judgment.

Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, the Company regularly reviews the adequacy of its reserves and reassesses its reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods.

In addition, the Company is 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 the Company’s 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, and exposure to lead;

	•		the effects of accounting and financial reporting scandals and other major corporate governance failures, which have resulted in an increase in the number and size of claims, including director and officer and errors and omissions insurance claims;

	•		class action litigation relating to claims handling and other practices;

	•		construction defect claims, including claims for a broad range of additional insured endorsements on policies; and

	•		increases in the number of claims alleging abuse by members of the clergy, including passage of legislation to reopen or extend various statutes of limitations.

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 the Company’s claim and claim adjustment expense reserves and could lead to future reserve additions. See the Segment Results sections of this MD&A for a discussion of changes in reserve estimates and the impact on the Company’s results of operations.

The Company’s experience has been that establishing reserves for casualty coverages relating to asbestos, environmental pollution and mass tort (APMT) claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported

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

APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others:

	•		coverage issues, including whether certain costs are covered under the policies and whether policy limits apply;

	•		inconsistent court decisions and developing legal theories;

	•		increasingly aggressive tactics of plaintiffs’ lawyers;

	•		the risks and lack of predictability inherent in major litigation;

	•		changes in the volume of asbestos and environmental pollution and mass tort claims which cannot now be anticipated;

	•		continued increase in mass tort claims relating to silica and silica-containing products;

	•		the impact of the exhaustion of primary limits and the resulting increase in claims on any umbrella or excess policies the Company has issued;

	•		the number and outcome of direct actions against the Company; and

	•		the Company’s ability to recover reinsurance for asbestos and environmental pollution and mass tort claims.

It is also not possible to predict changes in the legal and legislative environment and the impact on the future development of APMT claims. This development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. It is difficult to predict the ultimate outcome of large coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. A further uncertainty exists as to whether a national privately financed trust to replace litigation of asbestos claims with payments to claimants from the trust will be established and approved through federal legislation, and, if established and approved, whether it will contain funding requirements in excess of the Company’s carried loss reserves.

Due to the factors described above, among others, establishing reserves for APMT claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment reserves for APMT, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimation techniques and methodologies, many of which involve significant judgments that are required of management. Due to the inherent uncertainties in estimating reserves for APMT claim and claim adjustment expenses and the degree of variability due to, among other things, the factors described above, the Company may be required to record material changes in its claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge. See the Asbestos and Environmental Pollution and Mass Tort Reserves section of this MD&A for additional information relating to APMT claims and reserves.

The Company’s recorded reserves, including APMT reserves, reflect management’s best estimate as of a particular point in time based upon known facts, current law and management’s judgment. The reserve analyses performed by the Company’s actuaries result in point estimates. Management uses these point estimates as the primary factor in determining the carried reserve. The carried reserve may differ from the actuarial point estimate as the result of management’s consideration of the factors noted above including, but not limited to, the potential volatility of the projections associated with the specific product being analyzed and the effects of changes in claims handling, underwriting and other factors impacting claims costs that may not be quantifiable through actuarial analysis. For

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

APMT reserves, the reserve analysis performed by the Company’s actuaries results in both a point estimate and a range. Management uses the point estimate as the primary factor in determining the carried reserve but also considers the range given the volatility of APMT exposures, as noted above.

For Standard Lines, the September 30, 2005 carried net claim and claim adjustment expense reserve is slightly higher than the actuarial point estimate. For Specialty Lines, the September 30, 2005 carried net claim and claim adjustment expense reserve is also slightly higher than the actuarial point estimate. For both Standard Lines and Specialty Lines, the difference is primarily due to the 2004 and 2005 accident years. The data from these recent accident years is very immature from a claim and claim adjustment expense point of view so it is prudent to wait until experience confirms that the loss ratios should be adjusted. For Corporate and Other Non-Core, the September 30, 2005 carried net claim and claim adjustment expense reserve is slightly higher than the actuarial point estimate. While the actuarial estimates for APMT exposures reflect current knowledge, management feels it is prudent, based on the history of developments in this area, to reflect some volatility in the carried reserve until the ultimate outcome of the issues associated with these exposures is clearer.

In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, the Company reviews its reserve estimates on a regular basis and makes adjustments in the period that the need for such adjustments is determined (see Net Prior Year Development above). These reviews have resulted in the Company identifying information and trends that have caused the Company to increase its 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 the Company’s results of operations, equity, business and insurer financial strength and debt ratings (see the Ratings section of this MD&A).

Reinsurance

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

The following table summarizes the amounts receivable from reinsurers at September 30, 2005 and December 31, 2004.


Components of reinsurance receivables	September 30, 2005			December 31, 2004
(In millions)

Reinsurance receivables related to insurance reserves:
Ceded claim and claim adjustment expense	$	12,842		$	13,879
Ceded future policy benefits		1,213			1,260
Ceded policyholders’ funds		59			65
Billed reinsurance receivables		536			684

Reinsurance receivables		14,650			15,888
Allowance for uncollectible reinsurance		(552	)		(546	)


Reinsurance receivables, net of allowance for uncollectible reinsurance	$	14,098		$	15,342

The Company has established an allowance for uncollectible reinsurance receivables. The allowance for uncollectible reinsurance receivables was $552 million and $546 million at September 30, 2005 and December 31, 2004. The expenses incurred related to uncollectible reinsurance receivables are presented as a component of “Insurance claims and policyholders’ benefits” on the Condensed Consolidated Statements of Operations.

The Company attempts to mitigate its credit risk related to reinsurance by entering into reinsurance arrangements only with reinsurers that have credit ratings above certain levels and by obtaining substantial amounts of collateral. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances.

In certain circumstances, including significant deterioration of a reinsurer’s financial strength ratings or resolution of disputes, the Company may engage in commutation discussions with individual reinsurers. The outcome of such discussions may result in a lump sum settlement that is less than the recorded receivable, net of any applicable allowance for doubtful accounts. Losses arising from commutations could have an adverse material impact on the Company’s results of operations.

Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses, as compared to deposit accounting, which requires cash flows to be reflected as assets and liabilities. To qualify for reinsurance accounting, reinsurance agreements must include risk transfer. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. Reinsurance contracts that include both significant risk sharing provisions, such as adjustments to premiums or loss coverage based on loss experience, and relatively low policy limits as evidenced by a high proportion of maximum premium assessments to loss limits, may require considerable judgment to determine whether or not risk transfer requirements are met. For such contracts, often referred to as finite products, the Company generally assesses risk transfer for each contract by developing quantitative analyses at contract inception which measure the present value of reinsurer losses as compared to the present value of the related premium.

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. The Company primarily records these deposits as either reinsurance receivables or other assets for ceded recoverables and reinsurance balances payable or other liabilities for assumed liabilities.

Catastrophe Reinsurance

The anticipated reinsurance recoveries related to Hurricane Katrina assume significant utilization of the Company’s Corporate Property Catastrophe, Corporate Property Per Risk and Marine reinsurance treaties. The Corporate Property Catastrophe treaty provides 90% coverage for the accumulation of losses between $200 million and $500

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

million arising out of a single catastrophe occurrence. Coverage under this treaty was fully utilized for Hurricane Katrina. After payment of a reinstatement premium, the Company has coverage for one additional occurrence in 2005 under this treaty. The Corporate Property Per Risk treaty limits the Company’s loss on an individual insured property to $10 million, subject to certain limitations and aggregate limits contained in the treaty. The Company’s Marine treaty provides $75 million of protection above a $10 million retention on the accumulation of losses arising out of a single catastrophe occurrence. After payment of reinstatement premiums, the Company has almost full ongoing coverage under these treaties.

In addition to these reinsurance treaties, the Company’s exposure to Hurricane Rita is further mitigated by an Aggregate Property Catastrophe treaty. This treaty provides reinsurance protection against the aggregation of losses from multiple catastrophic events. The Aggregate Property Catastrophe treaty covers 95% of $150 million of losses above a retention of $100 million from named earthquake or wind storm catastrophes which exceed $25 million in 2005. For any single event, the maximum that can be applied to the Company’s retention or recovered under the treaty is $80 million. The Company has approximately $45 million of available recoveries from this treaty in the event its estimate of gross losses from Hurricane Rita increases in the future. Hurricane Wilma made landfall on October 24, 2005. It is too early for the Company to estimate the impact of this hurricane. If the aggregate losses exceed $25 million, coverage under this treaty would apply.

Funds Withheld Reinsurance Arrangements

The Company’s overall ceded reinsurance program includes certain finite property and casualty contracts, such as the corporate aggregate reinsurance treaties discussed in more detail below, that are entered into and accounted for on a “funds withheld” basis. Under the funds withheld basis, the Company records the cash remitted to the reinsurer for the reinsurer’s margin, or cost of the reinsurance contract, as ceded premiums. The remainder of the premiums ceded under the reinsurance contract not remitted in cash is recorded as funds withheld liabilities. The Company is required to increase the funds withheld balance at stated interest crediting rates applied to the funds withheld balance or as otherwise specified under the terms of the contract. The funds withheld liability is reduced by any cumulative claim payments made by the Company in excess of the Company’s retention under the reinsurance contract. If the funds withheld liability is exhausted, interest crediting will cease and additional claim payments are recoverable from the reinsurer. The funds withheld liability is recorded in Reinsurance Balances Payable in the Condensed Consolidated Balance Sheets.

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


Three months ended September 30	Aggregate Cover			CCC Cover			All Other			Total
(In millions)

2005
Ceded earned premium	$	1		$	—		$	(9	)	$	(8	)
Ceded claim and claim adjustment expense		—			—			15			15
Ceding commissions		—			—			3			3
Interest charges		(15	)		(17	)		(16	)		(48	)


Pretax benefit (expense)	$	(14	)	$	(17	)	$	(7	)	$	(38	)


2004
Ceded earned premium	$	3		$	—		$	(21	)	$	(18	)
Ceded claim and claim adjustment expense		—			—			29			29
Ceding commissions		—			—			(2	)		(2	)
Interest charges		(19	)		(12	)		(22	)		(53	)


Pretax benefit (expense)	$	(16	)	$	(12	)	$	(16	)	$	(44	)


Nine months ended September 30	Aggregate Cover			CCC Cover			All Other			Total
(In millions)

2005
Ceded earned premium	$	(17	)	$	—		$	56		$	39
Ceded claim and claim adjustment expense		—			—			(52	)		(52	)
Ceding commissions		—			—			(27	)		(27	)
Interest charges		(57	)		(49	)		(26	)		(132	)


Pretax benefit (expense)	$	(74	)	$	(49	)	$	(49	)	$	(172	)


2004
Ceded earned premium	$	—		$	—		$	(13	)	$	(13	)
Ceded claim and claim adjustment expense		—			—			12			12
Ceding commissions		—			—			1			1
Interest charges		(61	)		(34	)		(55	)		(150	)


Pretax benefit (expense)	$	(61	)	$	(34	)	$	(55	)	$	(150	)

Included in “All Other” above for the nine months ended September 30, 2005 is approximately $24 million of pretax expense related to Standard Lines which resulted from an unfavorable arbitration ruling on two reinsurance treaties impacting ceded earned premiums, ceded claim and claim adjustment expenses, ceding commissions and interest charges. This unfavorable outcome was partially offset by a release of previously established reinsurance bad debt reserves resulting in a net impact of $10 million pretax expense for the nine months ended September 30, 2005.

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

The pretax impact by operating segment of the Company’s funds withheld reinsurance arrangements, including the corporate aggregate reinsurance treaties was as follows:


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Standard Lines	$	(24	)	$	(38	)	$	(120	)	$	(118	)
Specialty Lines		(3	)		4			(10	)		—
Corporate and Other		(11	)		(10	)		(42	)		(32	)


Pretax benefit (expense)	$	(38	)	$	(44	)	$	(172	)	$	(150	)

Corporate Aggregate Reinsurance Treaties

At the Company’s discretion, the contract can be commuted annually on the anniversary date of the contract. The CCC Cover requires mandatory commutation on December 31, 2010, if the agreement has not been commuted on or before such date. Upon mandatory commutation of the CCC Cover, the reinsurer is required to release to the Company the existing balance of the funds withheld account if the unpaid ultimate ceded losses at the time of

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

commutation are less than or equal to the funds withheld account balance. If the unpaid ultimate ceded losses at the time of commutation are greater than the funds withheld account balance, the reinsurer will release the existing balance of the funds withheld account and pay CNA the present value of the projected amount the reinsurer would have had to pay from its own funds absent a commutation. The present value is calculated using 1-year LIBOR as of the date of the commutation.

Terrorism Insurance

CNA and the insurance industry incurred substantial losses related to the 2001 World Trade Center event. For the most part, the industry was able to absorb the loss of capital from these losses, but the capacity to withstand the effect of any additional terrorism events was significantly diminished.

The Terrorism Risk Insurance Act of 2002 (the Act) established a program within the Department of the Treasury under which the federal government will share the risk of loss by commercial property and casualty insurers arising from future terrorist attacks. The Act expires on December 31, 2005. Each participating insurance company must pay a deductible, ranging from 7% of direct earned premiums from commercial insurance lines in 2003 to 15% in 2005, before federal government assistance becomes available. For losses in excess of a company’s deductible, the federal government will cover 90% of the excess losses, while companies retain the remaining 10%. Losses covered by the program will be capped annually at $100 billion; above this amount, insurers are not liable for covered losses and Congress is to determine the procedures for and the source of any payments. Amounts paid by the federal government under the program over certain phased limits are to be recouped by the Department of the Treasury through policy surcharges, which cannot exceed 3% of annual premium.

The Company is required to participate in the program, but it does not cover life or health insurance products. State law limitations applying to premiums and policies for terrorism coverage are not generally affected under the program. The Act required insurers to offer terrorism coverage through 2004. On June 18, 2004, the Department of the Treasury announced its decision to extend this offer requirement until December 31, 2005.

While the Act provides the property and casualty industry with an increased ability to withstand the effect of a terrorist event through 2005, given the unpredictability of the nature, targets, severity or frequency of potential terrorist events, the Company’s results of operations or equity could nevertheless be materially adversely impacted by them. The Company is attempting to mitigate this exposure through its underwriting practices, policy terms and conditions (where applicable). In addition, under state laws, the Company is generally prohibited from excluding terrorism exposure from its primary workers compensation. In those states that mandate property insurance coverage of damage from fire following a loss, the Company is also prohibited from excluding terrorism exposure under such coverage.

Terrorism-related reinsurance losses are not covered by the Act. The Company’s assumed reinsurance arrangements either exclude terrorism coverage or significantly limit the level of coverage.

There are currently two pending bills in Congress, H.R. 1153 and S. 467, to reauthorize the Act. These bills would extend the Act for two additional years and require that terrorism coverage be made available for all years. Deductibles under the bills would be held at 15% in 2006 and raised to 20% in 2007. The Department of the Treasury released a study on June 30, 2005 that does not support Congress’ reauthorization of the Act in its current form. The Company will continue to work with other insurers, policyholders and members of Congress to craft a workable solution to replace the Act.

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

Over the past several years, CNA has been underwriting its business to manage its terrorism exposure. If the Act is not reauthorized, CNA will utilize conditional terrorism exclusions for risks that present terrorism exposure, where permitted by law. Strict underwriting standards and risk avoidance measures will be taken where exclusions are not permitted. Annual policy renewals with effective dates of January 1, 2005 or later are being underwritten with the assumption that the Act will not be extended and that no Federal backstop for terrorism exposure will be available. In July 2004, the National Association of Insurance Commissioners adopted a Model Bulletin available for use in states that intend to approve terrorism coverage limitations in the event the Act is not reauthorized. To date, conditional terrorism exclusions have been approved in all states except New York, Florida and Georgia. Accordingly, if the Act is not extended, CNA will utilize these conditional terrorism exclusions in all states where so allowed. Notwithstanding CNA’s efforts, however, there is no assurance that CNA will be able to eliminate or limit terrorism exposure risks in coverages, or that all regulatory authorities will approve policy exclusions for terrorism. There is also substantial uncertainty as to CNA’s ability to effectively contain its terrorism exposure since, notwithstanding the underwriting measures described above, it continues to issue forms of coverage, in particular workers’ compensation, that are exposed to risk of loss from a terrorism event.

Restructuring

As discussed in the Company’s 2004 Form 10-K/A, the Company continues to manage the liabilities from a restructuring plan related to restructuring the property and casualty segments and the Life and Group Non-Core segment, discontinuation of the variable life and annuity business and consolidation of real estate locations (the 2001 Plan). No restructuring and other related charges related to the 2001 Plan were incurred for the three and nine months ended September 30, 2005 and 2004. During 2005, $1 million in payments for lease termination costs were charged against the liability and the remaining accrual of $1 million related to impaired asset charges was released. As of September 30, 2005, the accrued liability, relating to lease termination costs, was $13 million. Of the remaining accrual, approximately $2 million is expected to be paid in the fourth quarter of 2005.

SEGMENT RESULTS

The following discusses the results of operations for the Company’s operating segments. Management utilizes the net operating income financial measure to monitor the Company’s operations. Net operating income is calculated by excluding from net income the after-tax effects of 1) net realized investment gains or losses, 2) gains or losses from discontinued operations and 3) cumulative effects of changes in accounting principles. See further discussion regarding how the Company manages its business in Note N – Business Segments. In evaluating the results of the Standard Lines and Specialty Lines, management utilizes the combined ratio, the loss ratio, the expense ratio, and the dividend ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.

The Company records favorable or unfavorable premium and claim and claim adjustment expense reserve development related to the corporate aggregate reinsurance treaties as movements in the claim and allocated claim adjustment expense reserves for the accident years covered by the corporate aggregate reinsurance treaties indicate such development is required. While the available limit of these treaties has been fully utilized, the ceded premiums and losses for an individual segment may change because of the re-estimation of the subject losses. See the Reinsurance section of this MD&A for further discussion of the corporate aggregate reinsurance treaties. For the nine months ended September 30, 2005, the Company recorded unfavorable net prior year development of $17 million related to the corporate aggregate reinsurance treaties, consisting of $13 million of unfavorable development in Standard Lines, $6 million of favorable development in Specialty Lines and $10 million of unfavorable development in Corporate and Other Non-Core.

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

STANDARD LINES

The following table summarizes the results of operations for Standard Lines.

Results of Operations


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Net written premiums	$	1,047		$	1,046		$	3,352		$	3,520
Net earned premiums		1,080			1,183			3,333			3,756
Net investment income		186			125			540			382
Net operating income (loss)		(144	)		(74	)		57			138
Net realized investment gains (losses)		33			(23	)		42			65
Net income (loss)		(111	)		(97	)		99			203

Ratios
Loss and loss adjustment expense		106.3	%		80.4	%		82.5	%		71.9	%
Expense		33.0			41.1			32.2			34.8
Dividend		0.3			0.7			0.5			0.1


Combined		139.6	%		122.2	%		115.2	%		106.8	%

Three Month Comparison

Net written premiums for Standard Lines increased $1 million. The net written premium results are consistent with the Company’s strategy of portfolio optimization. The Company’s priority is a diversified portfolio in profitable classes of business. Net earned premiums decreased $103 million for the three months ended September 30, 2005 as compared with the same period in 2004. This decrease was primarily driven by decreased premiums written over the past quarters, as well as increased reinsurance reinstatement premiums in 2005 due to the hurricanes.

Standard Lines averaged rate decreases of 2% and rate increases of 3% for the three months ended September 30, 2005 and 2004 for the contracts that renewed during the period. Retention rates of 78% and 65% were achieved for those contracts that were up for renewal.

Net operating income decreased $70 million for the three months ended September 30, 2005 as compared with the same period in 2004. These results were adversely impacted by increased catastrophe impacts. Catastrophe impacts were $280 million after-tax and $172 million after-tax for the three months ended September 30, 2005 and 2004. The 2005 catastrophe impacts include estimated net losses related to Hurricanes Katrina, Rita, Dennis and Ophelia. Also adversely impacting the 2005 results was less favorable current accident year losses as discussed below and decreased premiums. Third quarter of 2005 results were favorably impacted by a decrease in the insurance receivable bad debt provision and increased net investment income.

Net loss increased $14 million for the three months ended September 30, 2005 as compared with the same period in 2004. This increase was primarily attributable to an increased net operating loss, partially offset by improved net realized investment results. See the Investments section of the MD&A for discussion on net investment income and net realized investment results.

The combined ratio increased 17.4 points for the three months ended September 30, 2005, as compared with the same period in 2004. The loss ratio increased 25.9 points due principally to increased catastrophe losses and a higher current accident year loss ratio compared with the same period in 2004. The 2005 catastrophes had an adverse impact of 40.0 points on the loss ratio for the three months ended September 30, 2005. The 2004 catastrophes had an adverse impact of 21.0 points on the loss ratio for the three months ended September 30, 2004.

The loss ratio for the third quarter of 2004 was favorably impacted by a $55 million reduction of 2004 accident year losses. Catastrophe losses, net of reinsurance, of $418 million pretax and $245 million pretax were recorded for the three months ended September 30, 2005 and 2004.

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

Unfavorable net prior year development of $25 million was recorded for the three months ended September 30, 2005, including $18 million of unfavorable claim and allocated claim adjustment expense reserve development and $7 million of unfavorable premium development. Unfavorable net prior year development of $6 million, including $2 million of favorable claim and allocated claim adjustment expense reserve development and $8 million of unfavorable premium development, was recorded for the three months ended September 30, 2004.

2005 Net Prior Year Development

Approximately $33 million of unfavorable net prior year claim and allocated claim adjustment expense development resulted from increased severity trends for workers compensation, primarily in accident year 2001 and prior. Approximately $23 million of favorable net prior year claim and allocated claim adjustment expense development was recorded due to continued improvement in the severity and number of claims for property coverages, primarily in accident year 2004.

Approximately $35 million of unfavorable net prior year claim and allocated claim adjustment expense development was attributed to increased severity in liability coverages for large account policies. The remainder of the favorable net prior year claim and allocated claim adjustment expense development was primarily a result of improved experience on several coverages on middle market business mainly in accident year 2004.

2004 Net Prior Year Development

In the third quarter of 2004, approximately $15 million of unfavorable net prior claim and allocated claim adjustment expense reserve development was recorded in relation to the Company’s share of the National Workers Compensation Reinsurance Pool (NWCRP). During the third quarter of 2004, the NWCRP reached an agreement with a former pool member to settle their pool liabilities at an amount less than their established share. The result of this settlement was a higher allocation to the remaining pool members, including the Company.

The expense ratio decreased 8.1 points for the three months ended September 30, 2005 as compared with the same period in 2004. This decrease in 2005 was primarily due to the decrease in the bad debt provision for insurance receivables, a change in estimate related to the 2004 hurricane assessments and lower guaranty fund assessments. The Company recorded an estimated bad debt provision of $95 million in the third quarter of 2004 related to PEO accounts. Partially offsetting these favorable impacts was the lower earned premium base.

The dividend ratio decreased 0.4 points for the three months ended September 30, 2005 as compared with the same period in 2004, driven primarily by lower current accident year dividends recorded in 2005.

Nine Month Comparison

Net written premiums for Standard Lines decreased $168 million and net earned premiums decreased $423 million for the nine months ended September 30, 2005 as compared with the same period in 2004. The net written premium results are consistent with the Company’s strategy of portfolio optimization. The Company’s priority is a diversified portfolio in profitable classes of business. The decrease in premiums earned was attributable to the decreased premium writing trend.

Standard Lines averaged rate decreases of 1% for the nine months ended September 30, 2005 and rate increases of 5% for the nine months ended September 30, 2004 for the contracts that renewed during the period. Retention rates of 75% and 69% were achieved for those contracts that were up for renewal.

Net operating income decreased $81 million for the nine months ended September 30, 2005 as compared with the same period in 2004. Net operating income was adversely impacted by increased catastrophe impacts, decreased premiums, increased unfavorable net prior year development and less favorable current accident year results. Partially offsetting these adverse impacts was increased net investment income, decreased bad debt provision for insurance receivables as discussed above in the three month comparison and favorable operating expenses.

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

Net income decreased $104 million for the nine months ended September 30, 2005 as compared with the same period in 2004. This decrease was attributable to decreased net operating income and decreased net realized investment results. See the Investments section of the MD&A for further discussion on net investment income and net realized investment results.

The combined ratio increased 8.4 points for the nine months ended September 30, 2005 as compared with the same period in 2004. The loss ratio increased 10.6 points due principally to increased catastrophe losses and increased unfavorable claim and allocated claim adjustment expense reserve development. The 2005 catastrophes had an adverse impact of 13.1 points on the loss ratio for the nine months ended September 30, 2005. The 2004 catastrophes had an adverse impact of 6.9 points on the loss ratio for the nine months ended September 30, 2004.

Unfavorable net prior year development of $97 million was recorded for the nine months ended September 30, 2005, including $202 million of unfavorable claim and allocated claim adjustment expense reserve development and $105 million of favorable premium development. Unfavorable net prior year development of $13 million, including $111 million of unfavorable claim and allocated claim adjustment expense reserve development and $98 million of favorable premium development, was recorded for the same period in 2004.

2005 Net Prior Year Development

Approximately $76 million of the unfavorable net prior year claim and allocated claim adjustment expense development was attributed to increased severity in liability coverages for large account policies.

Favorable net prior year premium development was recorded primarily as a result of additional premium resulting from audits and endorsements on recent policies, primarily workers compensation.

2004 Net Prior Year Development

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

In the third quarter of 2004, approximately $15 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was recorded in relation to the Company’s share of the NWCRP. During the third quarter of 2004, the NWCRP reached an agreement with a former pool member to settle their pool liabilities at an amount less than their established share. The result of this settlement was a higher allocation to the remaining pool members, including the Company.

The following table summarizes the gross and net carried reserves as of September 30, 2005 and December 31, 2004 for Standard Lines.

Gross and Net Carried Claim and Claim Adjustment Expense Reserves


	September 30, 2005		December 31, 2004
(In millions)

Gross Case Reserves	$	6,764	$	6,904
Gross IBNR Reserves		8,023		7,398


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	14,787	$	14,302


Net Case Reserves	$	4,289	$	4,761
Net IBNR Reserves		5,756		4,547


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	10,045	$	9,308

The expense ratio decreased 2.6 points for the nine months ended September 30, 2005 as compared with the same period in 2004. The 2005 expense ratio decreased as compared to 2004 due primarily to the reasons discussed in the three month comparison.

The dividend ratio increased 0.4 points for the nine months ended September 30, 2005 as compared with the same period in 2004 due to decreased favorable dividend development.

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

SPECIALTY LINES

The following table summarizes the results of operations for Specialty Lines.

Results of Operations


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Net written premiums	$	649		$	599		$	1,838		$	1,772
Net earned premiums		628			576			1,831			1,672
Net investment income		74			61			197			182
Net operating income		108			80			268			236
Net realized investment gains (losses)		11			(8	)		19			23
Net income		119			72			287			259

Ratios
Loss and loss adjustment expense		58.4	%		62.8	%		63.3	%		63.4	%
Expense		27.3			27.2			26.3			26.4
Dividend		0.2			0.4			0.2			0.3


Combined		85.9	%		90.4	%		89.8	%		90.1	%

Three Month Comparison

Net written premiums for Specialty Lines increased $50 million for the three months ended September 30, 2005 as compared to the same period in 2004. This increase was primarily due to increased premium writings across most professional liability insurance lines of business. These favorable impacts were partially offset by increased ceded premiums for certain professional liability lines of business and decreased premiums for the warranty business. Due to a change in the warranty product offering, fees related to the new warranty product are included within other revenues.

Net earned premiums increased $52 million for the three months ended September 30, 2005 as compared with the same period in 2004, which reflects the increased premium writings over the past several quarters in Specialty Lines.

Specialty Lines averaged rate increases of 2% and 6% for the three months ended September 30, 2005 and 2004 for the contracts that renewed during those periods. Retention rates of 83% and 81% were achieved for those contracts that were up for renewal. CNA expects rate achievement will continue to moderate as competition for premiums continues to accelerate in these lines of business.

Net operating income increased $28 million for the three months ended September 30, 2005 as compared with the same period in 2004. This increase was primarily driven by an increase in net investment income, improvements in current accident year results, a decrease in the bad debt provision for reinsurance receivables and increased earned premiums. These increases to operating income were partially offset by reduced favorable net prior year development and increased catastrophe impacts in 2005. Catastrophe impacts were $14 million after-tax and $7 million after-tax for the three months ended September 30, 2005 and 2004.

Net income increased $47 million for the three months ended September 30, 2005 as compared with the same period in 2004 due to increased net operating income and improved net realized investment results. See the Investments section of this MD&A for further discussion on net investment income and net realized investment results.

The combined ratio improved 4.5 points for the three months ended September 30, 2005 as compared with the same period in 2004. The loss ratio decreased 4.4 points due to a decrease in the bad debt provision for reinsurance receivables and improvements in the current accident year results, primarily in the warranty line of business. The improvement in the warranty current accident year results was offset by a corresponding increase in profit commissions as discussed in the expense ratio paragraph below. These favorable impacts to the loss ratio were partially offset by increased catastrophe losses. The 2005 catastrophes had an adverse impact of 3.1 points on the

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

loss ratio for the three months ended September 30, 2005. The 2004 catastrophes had an adverse impact of 1.7 points on the loss ratio for the three months ended September 30, 2004.

Favorable net prior year development of $1 million was recorded for the three months ended September 30, 2005, including $7 million of favorable claim and allocated claim adjustment expense reserve development and $6 million of unfavorable premium development. Favorable net prior year development of $21 million, including $9 million of favorable claim and allocated claim adjustment expense reserve development and $12 million of favorable premium development, was recorded for the three months ended September 30, 2004.

The expense ratio increased 0.1 points and was impacted by a change in estimate related to profit commissions in the warranty line of business. This was partially offset by decreased net commission rates in certain specialty lines and an increased earned premium base.

Nine Month Comparison

Net written premiums for Specialty Lines increased $66 million for the nine months ended September 30, 2005 as compared with the same period in 2004. Net earned premiums increased $159 million for the nine months ended September 30, 2005 as compared with the same period in 2004. These increases were primarily attributable to the increased premium writing trend discussed above. Additionally, net earned premiums were adversely impacted by the premium development discussed below.

Specialty Lines averaged rate increases of 2% and 10% for the nine months ended September 30, 2005 and 2004 for the contracts that renewed during the period. Retention rates of 86% and 82% were achieved for those contracts that were up for renewal.

Net operating income increased $32 million compared to the prior year period. These results were favorably impacted by increased earned premium, improved current accident year results and an increase in net investment income. These results were unfavorably impacted by the absence of a net reduction of the allowance for uncollectible reinsurance receivables recorded in 2004 and increased catastrophe impacts. Catastrophe impacts were $14 million after-tax and $9 million after-tax for the nine months ended September 30, 2005 and 2004.

Net income increased $28 million for the nine months ended September 30, 2005 as compared with the same period in 2004 due primarily to increased net operating income. See the Investments section of this MD&A for discussion on net investment income and net realized investment results.

The combined ratio improved 0.3 points for the nine months ended September 30, 2005 as compared with the same period in 2004. The loss ratio decreased 0.1 points and was impacted by an improvement in the current accident year results, primarily due to the warranty line of business as discussed above and decreased unfavorable net prior year claim and claim adjustment expense reserve development. These improvements were partially offset by an increase in the bad debt provision recorded for reinsurance receivables as compared to the prior year period and increased catastrophe losses. The 2005 catastrophes had an adverse impact of 1.1 points on the loss ratio for the nine months ended September 30, 2005. The 2004 catastrophes had an adverse impact of 0.8 points on the loss ratio for the nine months ended September 30, 2004.

Unfavorable net prior year development was $41 million, including $31 million of unfavorable claim and allocated claim adjustment expense and $10 million of unfavorable premium development for the nine months ended September 30, 2005. Unfavorable net prior year development of $39 million, including $65 million of unfavorable claim and allocated claim adjustment expense development and $26 million of favorable premium development, was recorded for the same period in 2004.

2005 Net Prior Year Development

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

in accident years 2000 through 2003. Favorable net prior year premium development of approximately $10 million was recorded in relation to this unfavorable claim and allocated claim adjustment expense development.

Approximately $17 million of favorable net prior year claim and allocated claim adjustment expense development was recorded due to lower severity in the dental program.

2004 Net Prior Year Development

In the second quarter of 2004, the Company finalized commutation agreements with several members of the Trenwick Group. These commutations resulted in unfavorable claim and claim adjustment expense reserve development which was more than offset by a release of a previously established allowance for uncollectible reinsurance. Additionally, unfavorable net prior year claim and allocated claim adjustment expense reserve development resulted from the increased emergence of several large D&O claims primarily in recent accident years.

The following table summarizes the gross and net carried reserves as of September 30, 2005 and December 31, 2004 for Specialty Lines.

Gross and Net Carried Claim and Claim Adjustment Expense Reserves


	September 30, 2005		December 31, 2004
(In millions)

Gross Case Reserves	$	1,820	$	1,659
Gross IBNR Reserves		3,287		3,201


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	5,107	$	4,860


Net Case Reserves	$	1,214	$	1,191
Net IBNR Reserves		2,339		2,042


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	3,553	$	3,233

The expense ratio decreased 0.1 points primarily due to the reasons discussed in the three month comparison and lower state premium taxes and guaranty fund assessments in 2005 as compared to 2004 due to a change in estimate which reduced prior accruals.

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

LIFE AND GROUP NON-CORE

The following table summarizes the results of operations for Life and Group Non-Core.

Results of Operations


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Net earned premiums	$	169		$	182		$	539		$	710
Net investment income		179			109			431			457
Net operating loss		(35	)		(13	)		(29	)		(20	)
Net realized investment gains (losses)		(1	)		2			(5	)		(385	)
Net loss		(36	)		(11	)		(34	)		(405	)

Three Month Comparison

The earned premiums for the Life and Group Non-Core segment consist primarily of premiums from the group and individual long term care businesses. Net earned premiums of $161 million in the third quarter of 2005 and $165 million in the third quarter of 2004 relate to these businesses. The specialty medical business was sold on January 6, 2005. There was $42 million of net earned premiums from the sold specialty medical business in the three months ended September 30, 2004.

Net results declined $25 million in the third quarter of 2005 as compared with the same period in 2004. The decline in net results was due primarily to a $17 million after-tax provision for estimated indemnification liabilities related to the sold individual life business and unfavorable reserve development of $14 million after-tax related to an accident and health reinsurance program. Partially offsetting these unfavorable impacts was increased net investment income, which included approximately $61 million from the trading portfolio which was largely offset by a corresponding increase in the policyholders’ funds reserves supported by the trading portfolio. See the Investments section of this MD&A for additional information on net investment income and net realized investment results.

Nine Month Comparison

Net earned premiums for Life and Group Non-Core decreased $171 million for the nine months ended September 30, 2005 as compared with the same period in 2004. The decrease in net earned premiums was due primarily to decreased premiums from the sold individual life and specialty medical businesses.

Net results improved $371 million for the nine months ended September 30, 2005 as compared with the same period in 2004. The improvement in net results related primarily to a $389 million after-tax realized loss from the sale of the individual life business in 2004. Additionally contributing to the improvement in net results are the absence of a $22 million after-tax increase in insurance reserves and allowance for uncollectible reinsurance recorded in 2004 related to assumed business underwritten through a managing general agent, IOA Global, which consists primarily of certain accident and health exposures (IGI Program) and the absence of a charge recorded in 2004 related to individual long term care reserve strengthening. Also impacting the 2005 results are the unfavorable impacts discussed in the three month comparison and the absence of favorable results from the individual life and specialty medical businesses.

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

CORPORATE AND OTHER NON-CORE

The following table summarizes the results of operations for the Corporate and Other Non-Core segment, including APMT and intrasegment eliminations.

Results of Operations


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Net investment income	$	61		$	65		$	177		$	195
Revenues		59			46			249			301
Net operating income		32			22			129			45
Net realized investment gains (losses)		(1	)		(13	)		(12	)		40
Net income		31			9			117			85

Three Month Comparison

Revenues increased $13 million for the three months ended September 30, 2005 as compared with the same period in 2004. The increase in revenues was due primarily to reduced net realized investment losses. Partially offsetting this increase was decreased net investment income due to the segment’s declining reserve base. See the Investments section of this MD&A for additional information on net realized investment results.

Net income increased $22 million for the three months ended September 30, 2005 as compared with the same period in 2004. The increase in net income was due primarily to the increased revenues as discussed above and decreased unfavorable net prior year development.

Unfavorable net prior year development of $1 million was recorded for the three months ended September 30, 2005. There was no net prior year claim and allocated claim adjustment expense reserve development and $1 million of unfavorable premium development. Unfavorable net prior year development of $11 million was recorded for the three months ended September 30, 2004, including $9 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $2 million of unfavorable premium development.

Nine Month Comparison

Revenues decreased $52 million for the nine months ended September 30, 2005 as compared with the same period in 2004. The decrease in revenues was due primarily to reduced net earned premiums in CNA Re of $124 million due to the exit from the assumed reinsurance business in 2003, decreased net realized investment results and decreased net investment income as discussed above. Partially offsetting these decreases was $121 million ($79 million after-tax) of interest related to a Federal income tax settlement. See Note F of the Notes to the Condensed Consolidated Financial Statements for further discussion. See the Investments section of this MD&A for additional information on net realized investment results.

As previously disclosed, CNA sold its personal insurance business to Allstate Corporation (Allstate) in 1999. Under the revised terms of this transaction, Allstate purchased an option exercisable during 2005 to purchase 100% of the common stock of five CNA subsidiaries at the fair market value as of the exercise date. Royalty fees earned for the nine months ended September 30, 2005 and 2004 for personal insurance policies 100% reinsured with Allstate were approximately $24 million and $20 million. The royalty fee arrangement terminated on September 30, 2005.

Net income increased $32 million for the nine months ended September 30, 2005 as compared with the same period in 2004. The second quarter of 2005 Federal income tax settlement and a release of Federal income tax reserves increased net income by $115 million. This increase was partially offset by decreased net realized investment results, decreased operating results from CNA Re, decreased net investment income and increased unfavorable net prior year development. Net realized investment results for the nine months ended September 30, 2005 include a

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

$22 million after-tax impairment related to a national contractor. See the Critical Accounting Estimates section of this MD&A for additional information regarding the national contractor.

Unfavorable net prior year development was $89 million, including $74 million of unfavorable net prior year claim and allocated claim adjustment expense and $15 million of unfavorable premium development, for the nine months ended September 30, 2005. Unfavorable net prior year development of $71 million, including $58 million of unfavorable claim and allocated claim adjustment expense development and $13 million of unfavorable premium development, was recorded in the same period in 2004.

2005 Net Prior Year Development

Approximately $56 million of unfavorable claim and allocated claim adjustment expense development recorded in 2005 was a result of a second quarter commutation of a finite reinsurance contract put in place in 1992. CNA recaptured $400 million of losses and received $344 million of cash. The commutation was economically attractive because of the reinsurance agreement’s contractual interest rate and maintenance charges. Approximately $6 million of unfavorable claim and allocated claim adjustment expense development was related to the corporate aggregate reinsurance treaties. The unfavorable premium development was driven by $10 million of additional ceded reinsurance premium on agreements where the ceded premium depends on the ceded loss and $4 million of additional premium ceded to the corporate aggregate reinsurance treaties.

2004 Net Prior Year Development

The net prior year development recorded for the nine months ended September 30, 2004 relates to commutation agreements with several members of the Trenwick Group which resulted in unfavorable net prior year development which was partially offset by a release of a previously established allowance for uncollectible reinsurance.

The following table summarizes the gross and net carried reserves as of September 30, 2005 and December 31, 2004 for Corporate and Other Non-Core.

Gross and Net Carried
Claim and Claim Adjustment Expense Reserves


	September 30, 2005		December 31, 2004
(In millions)

Gross Case Reserves	$	3,477	$	3,806
Gross IBNR Reserves		4,568		4,875


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	8,045	$	8,681


Net Case Reserves	$	1,483	$	1,588
Net IBNR Reserves		1,684		1,691


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	3,167	$	3,279

APMT Reserves

CNA’s property and casualty insurance subsidiaries have actual and potential exposures related to APMT claims.

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

traditional actuarial methods and techniques are necessarily supplemented with additional estimating techniques and methodologies, many of which involve significant judgments that are required of management. Accordingly, a high degree of uncertainty remains for the Company’s ultimate liability for APMT claim and claim adjustment expenses.

In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others: the number and outcome of direct actions against the Company; 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; increasingly aggressive tactics of plaintiffs’ lawyers; the risks and lack of predictability inherent in major litigation; increased filings of claims in certain states; enactment of national federal legislation to address asbestos claims; a future increase in asbestos and environmental pollution claims which cannot now be anticipated; a future increase in number of mass tort claims relating to silica and silica-containing products, and the outcome of ongoing disputes as to coverage in relation to these claims; a further increase of claims and claims payments that may exhaust underlying umbrella and excess coverages at accelerated rates; and future developments pertaining to the Company’s ability to recover reinsurance for asbestos, pollution and mass tort claims.

CNA regularly performs ground up reviews of all open APMT accounts to evaluate the adequacy of the Company’s APMT reserves. In performing its comprehensive ground up analysis, the Company considers input from its professionals with direct responsibility for the claims, inside and outside counsel with responsibility for representation of the Company, and its actuarial staff. These professionals review, 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; the policies issued by CNA, 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 existence of other insurance; and reinsurance arrangements.

With respect to other court cases and how they might affect the Company’s reserves and reasonable possible losses, the following should be noted. State and federal courts issue numerous decisions each year, which potentially impact losses and reserves in both a favorable and unfavorable manner. Examples of favorable developments include decisions to allocate defense and indemnity payments in a manner so as to limit carriers’ obligations to damages taking place during the effective dates of their policies; decisions holding that injuries occurring after asbestos operations are completed are subject to the completed operations aggregate limits of the policies; and decisions ruling that carriers’ loss control inspections of their insured’s premises do not give rise to a duty to warn third parties to the dangers of asbestos.

Examples of unfavorable developments include decisions limiting the application of the absolute pollution exclusion and decisions holding carriers liable for defense and indemnity of asbestos, pollution and mass tort claims on a joint and several basis.

The Company’s ultimate liability for its environmental pollution and mass tort claims is impacted by several factors including ongoing disputes with policyholders over scope and meaning of coverage terms and, in the area of environmental pollution, court decisions that continue to restrict the scope and applicability of the absolute pollution exclusion contained in policies issued by the Company. Due to the inherent uncertainties described above, including the inconsistency of court decisions, the number of waste sites subject to cleanup and in the area of environmental pollution, the standards for cleanup and liability, the ultimate liability of CNA for environmental pollution and mass tort claims may vary substantially from the amount currently recorded.

Due to the inherent uncertainties in estimating reserves for APMT claim and claim adjustment expenses and due to the significant uncertainties previously described related to APMT claims, the 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 the Company’s 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 the Company to record material changes in its

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

The following table provides data related to CNA’s APMT claim and claim adjustment expense reserves.

Asbestos and Environmental Pollution and Mass Tort Reserves


	September 30, 2005						December 31, 2004
				Environmental						Environmental
				Pollution and						Pollution and
(In millions)	Asbestos			Mass Tort			Asbestos			Mass Tort

Gross reserves	$	3,072		$	634		$	3,218		$	755
Ceded reserves		(1,493	)		(232	)		(1,532	)		(258	)


Net reserves	$	1,579		$	402		$	1,686		$	497

Asbestos

In the past several years, CNA has 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. During 2004 and continuing in 2005, the rate of new filings appears to have decreased from the filing rates seen in the past several years. Various challenges to mass screening claimants have been mounted. Nevertheless, the Company continues to experience an overall increase in total asbestos claim counts. The majority of asbestos bodily injury claims are filed by persons exhibiting few, if any, disease symptoms. Recent studies have concluded that the percentage of unimpaired claimants to total claimants ranges between 66% and up to 90%. Some courts, including the federal district court responsible for pre-trial proceedings in all federal asbestos bodily injury actions, have ordered 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” have challenged those orders. Therefore, the ultimate impact of the orders on future asbestos claims remains uncertain.

Several factors are, in management’s view, negatively impacting asbestos claim trends. Plaintiff attorneys who previously sued entities who are now bankrupt are seeking other viable targets. As a result, companies with few or no previous asbestos claims are becoming targets in asbestos litigation and, although they may have little or no liability, nevertheless must be defended. Additionally, plaintiff attorneys and trustees for future claimants are demanding that policy limits be paid lump-sum into the bankruptcy asbestos trusts prior to presentation of valid claims and medical proof of these claims. Various challenges to these practices are currently in litigation and the ultimate impact or success of these tactics remains uncertain. 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.

As a result of bankruptcies and insolvencies, management has observed an increase in the total number of policyholders with current asbestos claims as additional defendants are added to existing lawsuits and are named in new asbestos bodily injury lawsuits. New asbestos bodily injury claims have also increased substantially in 2003, but the rate of increase has moderated in 2004 and continues to moderate in 2005.

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

The Company has resolved a number of its large asbestos accounts by negotiating settlement agreements. Structured settlement agreements provide for payments over multiple years as set forth in each individual agreement. At September 30, 2005, CNA had 13 structured settlement agreements with a reserve, net of reinsurance, of $158 million. At December 31, 2004, CNA had 11 structured settlement agreements with a reserve, net of reinsurance, of $175 million. As to the 13 structured settlement agreements existing at September 30, 2005, payment obligations under those settlement agreements are projected to terminate by 2016.

In 1985, 47 asbestos producers and their insurers, including CIC, executed the Wellington Agreement. The agreement 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. At September 30, 2005, CNA had obligations for four accounts. With respect to these four remaining unpaid Wellington obligations, CNA has evaluated its exposure and the expected reinsurance recoveries under these agreements and has a recorded reserve of $16 million, net of reinsurance. At December 31, 2004, CNA had fulfilled its Wellington Agreement obligations as to all but four accounts and had a recorded reserve of $17 million, net of reinsurance.

CNA has also used coverage in place agreements to resolve large asbestos exposures. Coverage in place agreements are typically agreements between CNA and its policyholders identifying the policies and the terms for payment of asbestos related liabilities. Claims payments are contingent on presentation of adequate documentation showing exposure during the policy periods and other documentation supporting the demand for claims payment. Coverage in place agreements may have annual payment caps. Coverage in place agreements are evaluated based on claims filings trends and severities. As of September 30, 2005, CNA had negotiated 34 coverage in place agreements. The Company has evaluated these commitments and the expected reinsurance recoveries under these agreements and has recorded a reserve of $70 million, net of reinsurance as of September 30, 2005. As of December 31, 2004, CNA had negotiated 33 coverage in place agreements. The Company had evaluated these commitments and the expected reinsurance recoveries under these agreements and had recorded a reserve of $76 million, net of reinsurance, as of December 31, 2004.

The Company categorizes active asbestos accounts as large or small accounts. CNA defines a large account as an active account with more than $100,000 of cumulative paid losses. The Company has made closing large accounts a significant management priority. At September 30, 2005, CNA had 201 large accounts with reserves of $339 million, net of reinsurance. At December 31, 2004, the Company had 180 large accounts and had established reserves of $368 million, net of reinsurance. Small accounts are defined as active accounts with $100,000 or less cumulative paid losses. At September 30, 2005, CNA had 1,082 small accounts, approximately 81% of its total active asbestos accounts, with reserves of $113 million, net of reinsurance. At December 31, 2004, the Company had 1,109 small accounts, approximately 83% of its total active asbestos accounts, with reserves of $141 million, net of reinsurance. Small accounts are typically representative of policyholders with limited connection to asbestos. As entities which were historic targets in asbestos litigation continue to file for bankruptcy protection, plaintiffs’ attorneys are seeking other viable targets. As a result, companies with few or no previous asbestos claims are becoming targets in asbestos litigation and nevertheless must be defended by CNA under its policies. Bankruptcy filings and increased claims filings in the last few years could potentially increase costs incurred in defending small accounts.

The Company also evaluates its asbestos liabilities arising from its assumed reinsurance business and its participation in various pools. At September 30, 2005 and December 31, 2004, CNA had $145 million and $148 million of reserves, net of reinsurance, related to these asbestos liabilities arising from the Company’s assumed

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

reinsurance obligations and CNA’s participation in pools, including Excess & Casualty Reinsurance Association (ECRA).

At September 30, 2005 and December 31, 2004, the unassigned IBNR reserve was $684 million and $707 million, net of reinsurance. This IBNR reserve relates to potential development on accounts that have not settled and potential future claims from unidentified policyholders.

The tables below depict CNA’s overall pending asbestos accounts and associated reserves at September 30, 2005 and December 31, 2004.

Pending Asbestos Accounts and Associated Reserves

September 30, 2005


			Net Paid Losses		Net Asbestos		Percent of
	Number of		in 2005		Reserves		Asbestos
	Policyholders		(In millions)		(In millions)		Net Reserves

Policyholders with settlement agreements
Structured Settlements		13	$	29	$	158		10	%
Wellington		4		2		16		1
Coverage in place		34		7		70		5
Fibreboard		1		—		54		3


Total with settlement agreements		52		38		298		19


Other policyholders with active accounts
Large asbestos accounts		201		52		339		22
Small asbestos accounts		1,082		21		113		7


Total other policyholders		1,283		73		452		29


Assumed reinsurance and pools		—		4		145		9
Unassigned IBNR		—		—		684		43


Total		1,335	$	115	$	1,579		100	%

December 31, 2004


			Net Paid Losses		Net Asbestos		Percent of
	Number of		in 2004		Reserves		Asbestos
	Policyholders		(In millions)		(In millions)		Net Reserves

Policyholders with settlement agreements
Structured Settlements		11	$	39	$	175		10	%
Wellington		4		4		17		1
Coverage in place		33		14		76		5
Fibreboard		1		—		54		3


Total with settlement agreements		49		57		322		19


Other policyholders with active accounts
Large asbestos accounts		180		47		368		22
Small asbestos accounts		1,109		23		141		8


Total other policyholders		1,289		70		509		30


Assumed reinsurance and pools		—		8		148		9
Unassigned IBNR		—		—		707		42


Total		1,338	$	135	$	1,686		100	%

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

Certain asbestos litigation in which CNA is currently engaged is described below:

The ultimate cost of reported claims, and in particular APMT claims, is subject to a number of uncertainties, including future developments of various kinds that CNA does not control and that are difficult or impossible to foresee accurately. With respect to the litigation identified below in particular, numerous factual and legal issues remain unresolved. Rulings on those issues by the courts are critical to the evaluation of the ultimate cost to the Company. The outcome of the litigation cannot be predicted with any reliability. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

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

pursued by such claimants to establish the liability of Keasbey and whether such theories can, in fact, be established; (g) the diseases and damages alleged by such claimants; and (h) the extent that such liability would be shared with other responsible parties. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CNA has insurance coverage disputes related to asbestos bodily injury claims against Burns & Roe Enterprises, Inc. (Burns & Roe). Originally raised in litigation, now stayed, these disputes are currently part of In re: Burns & Roe Enterprises, Inc., pending in the U.S. Bankruptcy Court for the District of New Jersey, No. 00-41610. Burns & Roe provided engineering and related services in connection with construction projects. At the time of its bankruptcy filing, on December 4, 2000, Burns & Roe faced approximately 11,000 claims alleging bodily injury resulting from exposure to asbestos as a result of construction projects in which Burns & Roe was involved. CNA allegedly provided primary liability coverage to Burns & Roe from 1956-1969 and 1971-1974, along with certain project-specific policies from 1964-1970. The parties in the litigation are seeking a declaration of the scope and extent of coverage, if any, afforded to Burns & Roe for its asbestos liabilities. The litigation has been stayed since May 14, 2003 pending resolution of the bankruptcy proceedings. A confirmation hearing in the bankruptcy proceeding has been scheduled for April, 2006. With respect to the Burns & Roe litigation and the pending bankruptcy proceeding, numerous unresolved factual and legal issues will impact the ultimate exposure to the Company. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether the Company has any further responsibility to compensate claimants against Burns & Roe under its policies and, if so, under which; (b) whether the Company’s responsibilities under its policies extend to a particular claimants’ entire claim or only to a limited percentage of the claim; (c) whether the Company’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions, including professional liability exclusions, in some of the Company’s policies apply to exclude certain claims; (e) the extent to which claimants can establish exposures to asbestos materials as to which Burns & Roe has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Burns & Roe and whether such theories can, in fact, be established; (g) the diseases and damages claimed by such claimants; (h) the extent that any liability of Burns & Roe would be shared with other potentially responsible parties; and (i) the impact of bankruptcy proceedings on claims and coverage issue resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

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

Company for defense and indemnity in the past. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

Suits have also been initiated directly against two CNA companies and other insurers in four jurisdictions: Ohio, Texas, West Virginia and Montana. In the approximately 75 Ohio actions, plaintiffs allege that the defendants negligently performed duties undertaken to protect workers and the public from the effects of asbestos, spoliated evidence and conspired and acted in concert to harm the plaintiffs. (E.g., Varner v. Ford Motor Co., (Ohio Ct. Common Pl., filed June 12, 2003); Peplowski v. ACE American Ins. Co. (N.D. Ohio, filed April 1, 2004), and Cross v. Garlock, Inc., (Ohio Ct. Common Pl., filed September 1, 2004)). The Cuyahoga County court granted insurers, including CNA, dismissals against an initial group of plaintiffs, ruling that insurers had no duty to warn plaintiffs about the dangers of asbestos and that there was no basis for spoliation, conspiracy and concert of action claims. That ruling was recently affirmed on appeal. Budd v. Am. Std., Inc., No. 84829 (Ohio Ct. App. May 26, 2005). The Cuyahoga County court has continued to dismiss substantially similar types of complaints and plaintiffs have either failed to appeal the dismissals or have voluntarily dismissed their appeals. Nonetheless, plaintiffs continue to file additional similar suits. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date may be barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; and (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

Similar lawsuits were filed in Texas beginning in 2002 against two CNA companies and numerous other insurers and non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos (E.g. Boson v. Union Carbide Corp., (Nueces County, Texas)). During 2003, many of the Texas suits were dismissed as time-barred by the applicable Statute of Limitations. In other suits, the carriers argued that they did not owe any duty to the plaintiffs or the general public to advise the world generally or the plaintiffs particularly of the effects of asbestos and that Texas statutes precluded liability for such claims, and the Texas courts dismissed these suits. Certain of the Texas courts’ rulings were appealed, but plaintiffs later dismissed their appeals. Recently, a different Texas court denied similar motions seeking dismissal at the pleading stage, allowing limited discovery to proceed. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to date are barred by various Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and the right of any particular claimant to recovery; and (e) the existence of hundreds of co-defendants in some of the suits and the applicability of the legal theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

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

handling and resolving asbestos personal injury or wrongful death claims in the West Virginia courts against all their insureds if those claims were resolved before June 30, 2001. CCC, along with other insurer defendants, removed the Adams case to Federal court, Adams v. Ins. Co. of North America (INA), et al. (S.D. W. Va. No. 2:05-CV-0527). A motion by plaintiffs to remand the case to state court is pending. Numerous factual and legal issues remain to be resolved that are critical to the final result in Adams, the outcome of which cannot be predicted with any reliability. These issues include: (a) the legal sufficiency of the novel statutory claims pled by the claimants; (b) the applicability of claimants’ legal theories to insurers who issued excess policies and/ or neither defended nor controlled the defense of certain policyholders; (c) the possibility that certain of the claims are barred by various statutes of limitation; (d) the fact that the imposition of duties would interfere with the attorney-client privilege and the contractual rights and responsibilities of the parties to the Company’s insurance policies; (e) whether plaintiffs’ claims are barred in whole or in part by injunctions that have been issued by bankruptcy courts that are overseeing, or that have overseen, the bankruptcies of various insureds; (f) whether some or all of the named plaintiffs or members of the plaintiff class have released CCC from the claims alleged in the Amended Complaint when they resolved their underlying asbestos claims; (g) the appropriateness of the case for class action treatment; and (h) the potential and relative magnitude of liabilities of co-defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

	•		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

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

	•		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.

Environmental Pollution and Mass Tort

Environmental pollution cleanup is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and restoration by “Potentially Responsible Parties” (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs fail to do so and assign liability to PRPs. The extent of liability to be allocated to a PRP is dependent upon a variety of factors. Further, the number of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been identified by the Environmental Protection Agency (EPA) and included on its National Priorities List (NPL). State authorities have designated many cleanup sites as well.

Many policyholders have made claims against various CNA insurance subsidiaries 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 CNA’s adoption of the Simplified Commercial General Liability coverage form, which includes what is referred to in the industry as an absolute pollution exclusion. CNA 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.

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

claim and claim adjustment expense reserve development recorded for the nine months ended September 30, 2005. No development was recorded for the nine months ended September 30, 2004. The Company recorded $15 million and $10 million of current accident year losses related to mass tort for the nine months ended September 30, 2005 and 2004. The Company paid environmental pollution-related claims and mass tort-related claims, net of reinsurance recoveries, of $113 million and $79 million for the nine months ended September 30, 2005 and 2004.

The Company classifies its 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. At September 30, 2005, CNA had five structured settlement agreements with its policyholders for which it had future payment obligations with a recorded reserve of $7 million, net of reinsurance. At December 31, 2004, CNA had two structured settlement agreements and has established reserves of $5 million, net of reinsurance, to fund future payment obligations under the agreements.

CNA has also used coverage in place agreements to resolve pollution exposures. Coverage in place agreements are typically agreements between CNA and its policyholders identifying the policies and the terms for payment of pollution related liabilities. Claims payments are contingent on presentation of adequate documentation of damages during the policy periods and other documentation supporting the demand for claims payment. Coverage in place agreements may have annual payment caps. At September 30, 2005, CNA had 18 such agreements with a recorded reserve of $17 million, net of reinsurance. At December 31, 2004, CNA had negotiated 15 coverage in place agreements and had established a reserve of $16 million, net of reinsurance.

The Company categorizes active accounts as large or small accounts in the pollution area. CNA defines a large account as an active account with more than $100,000 cumulative paid losses. At September 30, 2005, CNA had 124 large accounts with a collective reserve of $66 million, net of reinsurance. At December 31, 2004, the Company had 134 large accounts with a collective reserve of $75 million, net of reinsurance. The Company has made closing large accounts a significant management priority. Small accounts are defined as active accounts with $100,000 or less cumulative paid losses. At September 30, 2005, CNA had 372 small accounts with a collective reserve of $43 million, net of reinsurance. At December 31, 2004, CNA had 405 small accounts with a collective reserve of $47 million, net of reinsurance.

The Company also evaluates its environmental pollution exposures arising from its assumed reinsurance and its participation in various pools, including ECRA. CNA had reserves of $34 million and $36 million related to these liabilities as of September 30, 2005 and December 31, 2004.

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

INVESTMENTS

Net Investment Income

The significant components of net investment income are presented in the following table.

Net Investment Income


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Fixed maturity securities	$	393		$	396		$	1,167		$	1,189
Short term investments		42			14			103			39
Limited partnerships		72			26			189			131
Equity securities		6			3			18			11
Income (loss) from trading portfolio (a)		41			(21	)		25			13
Interest on funds withheld and other deposits		(50	)		(54	)		(139	)		(157	)
Other		5			4			16			15


Gross investment income		509			368			1,379			1,241
Investment expense		(9	)		(8	)		(34	)		(25	)


Net investment income	$	500		$	360		$	1,345		$	1,216

Net investment income increased by $140 million for the three months ended September 30, 2005 compared with the same period of 2004. This increase was due primarily to improved investment income from the trading portfolio, limited partnerships and short term investments which reflects the improved period over period returns within the sector. The improved income from the trading portfolio was largely offset by a corresponding increase in the policyholders’ funds reserves supported by the trading portfolio.

The Company earned higher net investment income for the nine months ended September 30, 2005 compared with the same period of 2004. This increase was due primarily to improved short term and limited partnership results in addition to reduced interest expense on funds withheld and other deposits. See the Reinsurance section of the MD&A regarding additional information about interest costs on funds withheld and other deposits.

The bond segment of the investment portfolio yielded 4.8% and 4.7% for the nine months ended September 30, 2005 and 2004.

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

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)


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds	$	2		$	4		$	(10	)	$	13
Corporate and other taxable bonds		9			(35	)		(36	)		(2	)
Tax-exempt bonds		4			42			38			23
Asset-backed bonds		7			9			18			44
Redeemable preferred stock		—			6			10			11


Total fixed maturity securities		22			26			20			89
Equity securities		6			10			45			187
Derivative securities		53			(105	)		34			(88	)
Short term investments		1			—			1			—
Other, including disposition of businesses net of participating policyholders’ interest		(15	)		10			(28	)		(594	)


Realized investment gains (losses) before allocation to participating policyholders’ and minority interests		67			(59	)		72			(406	)
Allocated to participating policyholders’ and minority interest		—			(3	)		2			(9	)

Income tax (expense) benefit		(25	)		20			(30	)		158


Net realized investment gains (losses), net of participating policyholders’ and minority interests	$	42		$	(42	)	$	44		$	(257	)

Net realized investment gains were $42 million for the three months ended September 30, 2005 as compared to net realized investment losses of $42 million for the three months ended September 30, 2004. The increase in net realized gains was primarily driven by favorable results in derivative securities and improved results in corporate and other taxable bonds, partially offset by less favorable results from tax-exempt bonds. Impairment losses of $11 million after-tax and $12 million after-tax were recorded for the three months ended September 30, 2005 and September 30, 2004.

Net realized investment gains were $44 million for the nine months ended September 30, 2005 as compared to net realized investment losses of $257 million for the nine months ended September 30, 2004. The improvement in the net realized investment results was due primarily to a $389 million after-tax loss on the sale of the individual life insurance business in 2004. This improvement was partially offset by reduced gains for equities securities, which was largely attributable to the 2004 gain of $105 million after-tax on the disposition of Canary Wharf. Impairment losses of $46 million after-tax were recorded for the nine months ended September 30, 2005 across various sectors, including an impairment loss of $22 million after-tax related to loans made under a credit facility to a national contractor. See Note P for further details. Impairment losses were $13 million after-tax for other-than-temporary declines in fair value for fixed maturity and equity securities for the nine months ended September 30, 2004.

A primary objective in the management of the fixed maturity and equity portfolios is to maximize total return relative to underlying liabilities and respective liquidity needs. The Company’s 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 may enter into a decision to move between asset classes. Based on the Company’s consideration of these factors, in the course of normal investment activity the Company may, in pursuit of the total return objective, be willing to sell securities that, in its analysis, are overvalued on a risk adjusted basis relative to other opportunities that are available at the time in the market; in turn the Company may purchase other securities that, according to its analysis, are undervalued in relation to other

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

securities in the market. In making these value decisions, securities may be bought and sold that shift the investment portfolio between asset classes. The Company also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time reduce such exposures based on its views of a specific issuer or industry sector. These activities will produce realized gains or losses.

The investment portfolio is periodically analyzed for changes in duration and related price change risk. Additionally, the Company periodically reviews 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 3 – Quantitative and Qualitative Disclosures about Market Risks included herein. Under certain economic conditions, including but not limited to a changing interest rate environment, the Company may hedge the value of the investment portfolio by utilizing derivative strategies.

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, the Company segregates assets for asset liability management purposes.

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. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in net investment income. Changes in fair value related to available-for-sale securities are reported as a component of other comprehensive income. Changes in fair value of trading securities are reported within net investment income.

The following table provides further detail of gross realized gains and gross realized losses on available-for-sale fixed maturity securities and equity securities.

Realized Gains and Losses


	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Net realized gains (losses) on fixed maturity securities and equity securities:
Fixed maturity securities:
Gross realized gains	$	65		$	130		$	330		$	443
Gross realized losses		(43	)		(104	)		(310	)		(354	)


Net realized gains on fixed maturity securities		22			26			20			89


Equity securities:
Gross realized gains		16			16			70			198
Gross realized losses		(10	)		(6	)		(25	)		(11	)


Net realized gains on equity securities		6			10			45			187


Net realized gains on fixed maturity and equity securities	$	28		$	36		$	65		$	276

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

The following table provides details of the largest realized losses from sales of securities aggregated by issuer, including: the fair value of the securities at date of sale, the amount of the loss recorded and the period of time that the security had been in an unrealized loss position prior to sale. The period of time that the security had been in an unrealized loss position prior to sale can vary due to the timing of individual security purchases. Also included is a narrative providing the industry sector along with the facts and circumstances giving rise to the loss.

Largest Realized Losses from Securities Sold at a Loss


	Nine Months Ended September 30, 2005
	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. Volatility of interest rates prompted movement to other asset classes.	$	12,661	$	59		0-12+

Manufactures and sells vehicles worldwide under various brand names. The company also has financing and insurance operations. The company is experiencing inventory capacity issues. Losses relate to trades that took place to reduce issuer exposure.		357		45		0-12+

Large media company that was downgraded to below investment grade. Losses relate to trades that took place to reduce issuer exposure.		76		5		0-12+

Large domestic passenger and freight airline that filed for bankruptcy during third quarter 2005. Losses relate to trades that took place to reduce issuer exposure.		12		5		0-6

Issuer of high grade state general obligation bonds. Loss was incurred as a result of unfavorable interest rate change.		227		5		0-12

Total	$	13,333	$	119

(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.

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

Valuation and Impairment of Investments

The following table details the carrying value of CNA’s general account investment portfolios.

Carrying Value of Investments


	September 30,					December 31,
	2005		%			2004		%
(In millions)

General account investments:
Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies	$	3,287		8	%	$	4,346		11	%
Asset-backed securities		10,542		25			7,788		20
States, municipalities and political subdivisions — tax-exempt		9,075		22			8,857		22
Corporate securities		5,964		14			6,513		17
Other debt securities		2,936		7			3,053		8
Redeemable preferred stock		214		1			146		—
Options embedded in convertible debt securities		1		—			234		1


Total fixed maturity securities available-for-sale		32,019		77			30,937		79


Fixed maturity securities trading:
U.S. Treasury securities and obligations of government agencies		67		—			27		—
Asset-backed securities		109		—			125		—
Corporate securities		196		1			199		1
Other debt securities		33		—			35		—
Redeemable preferred stock		5		—			4		—


Total fixed maturity securities trading		410		1			390		1


Equity securities available-for-sale:
Common stock		281		1			260		1
Non-redeemable preferred stock		226		—			150		—


Total equity securities available-for-sale		507		1			410		1


Total equity securities trading		42		—			46		—


Short term investments available-for-sale		6,772		16			5,404		14
Short term investments trading		381		1			459		1
Limited partnerships		1,618		4			1,549		4
Other investments		34		—			36		—


Total general account investments	$	41,783		100	%	$	39,231		100	%

The Company’s general account investment portfolio consists primarily of publicly traded government bonds, asset-backed securities, short-term investments, municipal bonds and corporate bonds.

Investments in the general account had a total net unrealized gain of $769 million at September 30, 2005 compared with $1,197 million at December 31, 2004. The unrealized position at September 30, 2005 was comprised of a net unrealized gain of $644 million for fixed maturities, a net unrealized gain of $126 million for equity securities and a $1 million unrealized loss for short-term securities. The unrealized position at December 31, 2004 was comprised of a net unrealized gain of $1,061 million for fixed maturities and a net unrealized gain of $136 million for equity securities.

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

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities


	Cost or		Gross		Gross Unrealized Losses				Net
	Amortized		Unrealized		Less than		Greater than		Unrealized
September 30, 2005	Cost		Gains		12 Months		12 Months		Gain/(Loss)
(In millions)

Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies	$	3,182	$	124	$	18	$	1	$	105
Asset-backed securities		10,616		42		102		14		(74	)
States, municipalities and political subdivisions — tax-exempt		8,945		181		44		7		130
Corporate securities		5,722		326		70		14		242
Other debt securities		2,697		255		14		2		239
Redeemable preferred stock		212		4		2		—		2
Options embedded in convertible debt securities		1		—		—		—		—


Total fixed maturity securities available-for-sale		31,375		932		250		38		644


Total fixed maturity securities trading		410		—		—		—		—


Equity securities available-for-sale:
Common stock		171		112		2		—		110
Non-redeemable preferred stock		210		16		—		—		16


Total equity securities available-for-sale		381		128		2		—		126


Total equity securities trading		42		—		—		—		—


Total fixed maturity and equity securities	$	32,208	$	1,060	$	252	$	38	$	770


	Cost or		Gross		Gross Unrealized Losses				Net
	Amortized		Unrealized		Less than		Greater than		Unrealized
December 31, 2004	Cost		Gains		12 Months		12 Months		Gain
(In millions)

Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of government agencies	$	4,233	$	126	$	13	$	—	$	113
Asset-backed securities		7,706		105		19		4		82
States, municipalities and political subdivisions — tax-exempt		8,699		189		28		3		158
Corporate securities		6,093		477		52		5		420
Other debt securities		2,769		295		11		—		284
Redeemable preferred stock		142		6		—		2		4
Options embedded in convertible debt securities		234		—		—		—		—


Total fixed maturity securities available-for-sale		29,876		1,198		123		14		1,061


Total fixed maturity securities trading		390		—		—		—		—


Equity securities available-for-sale:
Common stock		148		112		—		—		112
Non-redeemable preferred stock		126		24		—		—		24


Total equity securities available-for-sale		274		136		—		—		136


Total equity securities trading		46		—		—		—		—


Total fixed maturity and equity securities	$	30,586	$	1,334	$	123	$	14	$	1,197

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

The following table summarizes, for fixed maturity and equity securities in an unrealized loss position at September 30, 2005 and December 31, 2004, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.

Unrealized Loss Aging


	September 30, 2005				December 31, 2004
			Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Loss		Fair Value		Loss
(In millions)

Fixed maturity securities:
Investment grade:
0-6 months	$	13,637	$	160	$	7,742	$	53
7-12 months		2,160		45		2,448		59
13-24 months		965		25		368		12
Greater than 24 months		136		5		2		—


Total investment grade		16,898		235		10,560		124


Non-investment grade:
0-6 months		656		25		188		7
7-12 months		157		20		69		4
13-24 months		106		8		20		2
Greater than 24 months		2		—		—		—


Total non-investment grade		921		53		277		13


Total fixed maturity securities		17,819		288		10,837		137


Equity securities:
0-6 months		90		2		4		—
7-12 months		3		—		1		—
13-24 months		—		—		1		—
Greater than 24 months		4		—		3		—


Total equity securities		97		2		9		—


Total fixed maturity and equity securities	$	17,916	$	290	$	10,846	$	137

A significant judgment in the valuation of investments is the determination of when an other-than-temporary decline in value has occurred. The Company follows a consistent and systematic process for impairing securities that sustain other-than-temporary declines in value. The Company has established a committee responsible for the impairment process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by the Company’s Chief Financial Officer. The Impairment Committee is responsible for analyzing watch list securities on at least a quarterly basis. The watch list includes individual securities that fall below certain thresholds or that exhibit evidence of impairment indicators including, but not limited to, a significant adverse change in the financial condition and near term prospects of the investment or a significant adverse change in legal factors, the business climate or credit ratings.

When a security is placed on the watch list, it is monitored for further fair value changes and additional news related to the issuer’s financial condition. The focus is on objective evidence that may influence the evaluation of impairment factors.

The decision to impair a security incorporates both quantitative criteria and qualitative information. The Impairment Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than book value, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in value, (d) whether the debtor is current on interest and principal payments and (e) general market conditions and industry or sector specific factors.

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

The Impairment Committee’s decision to impair a security is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all of the factors considered. For securities that are impaired, the security is written down to fair value and the resulting losses are recognized in realized gains/losses in the Consolidated Statements of Operations.

The Company’s non-investment grade fixed maturity securities available-for-sale as of September 30, 2005 that were in a gross unrealized loss position had a fair value of $921 million. As discussed previously, a significant judgment in the valuation of investments is the determination of when an other-than-temporary impairment has occurred. The Company’s Impairment Committee analyzes securities placed on the watch list on at least a quarterly basis. Part of this analysis is to monitor the length of time and severity of the decline below book value of the watch list securities. 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 September 30, 2005 and December 31, 2004.

Unrealized Loss Aging for Non-investment Grade Securities


			Fair Value as a Percentage of Book Value								Gross
	Estimated										Unrealized
September 30, 2005	Fair Value		90-99%		80-89%		70-79%		<70%		Loss
(In millions)

Fixed maturity securities:
Non-investment grade:
0-6 months	$	656	$	19	$	4	$	2	$	—	$	25
7-12 months		157		5		11		4		—		20
13-24 months		106		4		4		—		—		8
Greater than 24 months		2		—		—		—		—		—


Total non-investment grade	$	921	$	28	$	19	$	6	$	—	$	53


			Fair Value as a Percentage of Book Value								Gross
	Estimated										Unrealized
December 31, 2004	Fair Value		90-99%		80-89%		70-79%		<70%		Loss
(In millions)

Fixed maturity securities:
Non-investment grade:
0-6 months	$	188	$	6	$	1	$	—	$	—	$	7
7-12 months		69		3		1		—		—		4
13-24 months		20		1		1		—		—		2


Total non-investment grade	$	277	$	10	$	3	$	—	$	—	$	13

As part of the ongoing impairment monitoring process, the Impairment Committee has evaluated the facts and circumstances based on available information for each of the non-investment grade securities and determined that no further impairments were appropriate at September 30, 2005. This determination was based on a number of factors that the Impairment Committee regularly considers 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, the Company’s 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, the Company has the intent and ability to hold these securities for a period of time sufficient to recover the book value of its investment through a 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, the Impairment Committee continually assesses its ability to hold securities for a time sufficient to recover any temporary loss in value or until maturity. The Company maintains sufficient levels of liquidity so as to not impact the asset/liability management process.

The Company’s equity securities available for sale as of September 30, 2005 that were in an unrealized loss position had a fair value of $97 million. The Company’s Impairment Committee, under the same process as followed for

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

fixed maturity securities, monitors the equity securities for other-than-temporary declines in value. In all cases where a decline in value is judged to be temporary, the Company expects to recover the book value of its investment through a recovery in the fair value of the security.

Invested assets are exposed to various risks, such as interest rate, market and credit risk. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term, including increases in interest rates, could have an adverse material impact on the Company’s results of operations or equity.

The general account portfolio consists primarily of high quality bonds, 91% and 93% of which were rated as investment grade (rated BBB or higher) at September 30, 2005 and December 31, 2004. The following table summarizes the ratings of CNA’s general account bond portfolio at carrying value.

General Account Bond Ratings


	September 30,					December 31,
	2005		%			2004		%
(In millions)

U.S. Government and affiliated agency securities	$	3,550		11	%	$	4,640		15	%
Other AAA rated		16,439		51			14,628		47
AA and A rated		5,371		17			5,597		18
BBB rated		4,023		12			4,072		13
Below investment-grade		2,826		9			2,240		7


Total	$	32,209		100	%	$	31,177		100	%

At September 30, 2005 and at December 31, 2004, approximately 96% and 99% of the general account portfolio was U.S. Government and affiliated agency securities 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 Company management.

Non-investment grade bonds, as presented in the table above, are high-yield securities rated below BBB by bond rating agencies, as well as other unrated securities that, in the opinion of management, are below investment-grade. High-yield securities generally involve a greater degree of risk than investment-grade securities. However, expected returns should compensate for the added risk. This risk is also considered in the interest rate assumptions for the underlying insurance products.

The carrying value of non-traded securities at September 30, 2005 was $109 million which represents 0.3% of the Company’s total investment portfolio. These securities were in a net unrealized gain position of $72 million at September 30, 2005. Of the non-traded securities, 53% are priced by unrelated third party sources.

Included in CNA’s general account fixed maturity securities at September 30, 2005 were $10,651 million of asset-backed securities, at fair value, consisting of approximately 59% in collateralized mortgage obligations (CMOs), 20% in corporate asset-backed obligations, 18% in corporate mortgage-backed pass-through certificates, and 3% in U.S. Government agency issued pass-through certificates. The CMOs held are actively traded in liquid markets and are priced by broker-dealers.

102

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

The carrying value of the components of the general account short-term investment portfolio is presented in the following table.

Short-term Investments


	September 30,		December 31,
	2005		2004
(In millions)

Short-term investments available-for-sale:
Commercial paper	$	1,778	$	1,655
U.S. Treasury securities		1,851		2,382
Money market funds		453		174
Other		2,690		1,193


Total short-term investments available-for-sale		6,772		5,404


Short-term investments trading:
Commercial paper		91		46
U.S. Treasury securities		62		300
Money market funds		228		99
Other		—		14


Total short-term investments trading		381		459


Total short-term investments	$	7,153	$	5,863

The fair value of collateral held related to securities lending, included in other short-term investments, was $2,006 million and $918 million at September 31, 2005 and December 31, 2004.

CNA invests in certain derivative financial instruments primarily to reduce its exposure to market risk (principally interest rate, equity price and foreign currency risk) and credit risk (risk of non-performance of underlying obligor). Derivative securities are recorded at fair value at the reporting date. The Company also uses derivatives to mitigate market risk by purchasing S&P 500^â index futures in a notional amount equal to the contract liability relating to Life and Group Non-Core indexed group annuity contracts.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

The principal operating cash flow sources of CNA’s insurance subsidiaries are premiums and investment income. The primary operating cash flow uses are payments for claims, policy benefits and operating expenses.

For the nine months ended September 30, 2005, net cash provided by operating activities was $1,034 million as compared with $1,259 million provided for the same period in 2004. The decrease in cash provided by operating activities related primarily to decreased net premium collections, partially offset by a reduction in claims and expense payments in 2005 as compared with 2004. The decrease in net premium collections is primarily due to the sale of the individual life business. Also impacting operating cash flows were net tax payments of $289 million in 2005 as compared with net tax refunds of $534 million in 2004. In addition, the Company received cash of $344 million in 2005 related to a commutation and received cash of $121 million related to net refund interest as discussed further in Note F of the Notes to the Condensed Consolidated Financial Statements.

Cash flows from investing activities include the purchase and sale of financial instruments, as well as the purchase and sale of land, buildings, equipment and other assets not generally held for resale.

For the nine months ended September 30, 2005, net cash used by investing activities was $540 million as compared with $1,149 million used for the same period in 2004. Cash flows used for investing activities related principally to purchases of fixed maturity securities.

103

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

Cash flows from financing activities include proceeds from the issuance of debt or equity securities, outflows for dividends or repayment of debt and outlays to reacquire equity instruments.

For the nine months ended September 30, 2005, net cash used by financing activities was $503 million as compared with $178 million used for the same period in 2004. Cash flows used for financing activities were related principally to the repayment of debt.

The Company believes it has adequate liquidity to meet its catastrophe loss obligations.

The company has a shelf registration statement under which it may issue an aggregate of $1,500 million of debt or equity securities. This registration statement was declared effective by the Securities and Exchange Commission (SEC) on September 14, 2005.

Debt and Other Commitments

See Note J of the Notes to the Condensed Consolidated Financial Statements for a detailed discussion of the Company’s debt.

See Note P of the Notes to the Condensed Consolidated Financial Statements for information related to CNA Surety’s and a large national contractor’s related party transactions with CNAF. The impact of these transactions should be considered when evaluating the Company’s liquidity and capital resources.

See Note L of the Notes to the Condensed Consolidated Financial Statements for information related to the Company’s commitments and contingencies. The impact of these commitments and contingencies should be considered when evaluating the Company’s liquidity and capital resources.

A summary of the Company’s commitments as of September 30, 2005 is presented in the following table.

Commitments


											2010 and
September 30, 2005	2005		2006		2007		2008		2009		Beyond		Total
(In millions)

Debt (a)	$	43	$	409	$	106	$	472	$	73	$	1,629		2,732
Lease obligations		17		52		44		36		29		77		255
Claim and claim expense reserves (b)		2,441		7,173		5,111		3,658		2,612		12,349		33,344
Future policy benefits reserves (c)		68		178		173		174		170		8,866		9,629
Policyholder funds reserves (c)		258		952		155		35		9		156		1,565
Guaranteed payment contracts (d)		8		15		7		—		—		—		30


Total	$	2,835	$	8,779	$	5,596	$	4,375	$	2,893	$	23,077	$	47,555

	(a)		Includes estimated future interest payments, but does not include original issue discount.

	(b)		Claim and claim adjustment expense reserves are not discounted and represent the Company’s estimate of the amount and timing of the ultimate settlement and administration of claims based on its assessment of facts and circumstances known as of September 30, 2005. See the Reserves – Estimates and Uncertainties section of this MD&A for further information. Claim and claim adjustment expense reserves of $12 million related to business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included.

	(c)		Future policy benefits and policyholder funds reserves are not discounted and represent the Company’s estimate of the ultimate amount and timing of the settlement of benefits based on its assessment of facts and circumstances known as of September 30, 2005. Future policy benefit reserves of $979 million and policyholder fund reserves of $54 million related to business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included.

	(d)		Primarily relating to telecommunications and software services.

104

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

Regulatory Matters

The Company has established a plan to reorganize and streamline its U.S. property and casualty insurance legal entity structure. One phase of this multi-year plan has been completed. This phase served to consolidate the Company’s U.S. property and casualty insurance risks into CCC, as well as realign the capital supporting these risks. As part of this phase, the Company implemented a 100% quota share reinsurance agreement, effective January 1, 2003, ceding all of the net insurance risks of CIC and its 14 affiliated insurance companies (CIC Group) to CCC. Additionally, the ownership of the CIC Group was transferred to CCC in order to align the insurance risks with the supporting capital. In subsequent phases of this plan, the Company will continue its efforts to reduce both the number of U.S. property and casualty insurance entities it maintains and the number of states in which such entities are domiciled. In order to facilitate the execution of this plan, the Company, CCC and CIC have agreed to participate in a working group consisting of several states of the National Association of Insurance Commissioners.

In connection with the approval process for aspects of the reorganization and legal entity streamlining plan, the Company agreed to undergo a state regulatory financial examination of CCC and CIC as of December 31, 2003, including a review of insurance reserves by an independent actuarial firm. Such review also includes examination of certain of the finite reinsurance contracts entered into by the Company and whether such contracts possess sufficient risk transfer characteristics necessary to qualify for accounting treatment as reinsurance. Several examination reports were issued by state regulatory authorities in the second and third quarters of 2005, and two examination reports are outstanding.

Pursuant to its participation in the working group referenced above, the Company has agreed to certain time frames and informational provisions in relation to the reorganization plan. The Company has also agreed that any proceeds from the sale of any member of the CIC pool, net of transaction expenses, will be retained in CIC or one of its subsidiaries until the dividend stipulation discussed below expires.

Along with other companies in the industry, the Company has received subpoenas, interrogatories and inquiries from: (i) California, Connecticut, Delaware, Florida, Hawaii, Illinois, Minnesota, New Jersey, New York, North Carolina, 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 finite insurance products purchased and sold by the Company; (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. Subsequent to issuance of its subpoena as indicated above, the SEC requested that Company produce documents and provide additional information relating to its previously referenced restatement, including its relationship with and accounting for Accord Re. The Company continues to respond to these subpoenas, interrogatories and inquiries.

In the course of complying with the above matters, during the first quarter of 2005 the Company conducted a comprehensive review of its finite reinsurance relationships, including the contracts with Accord and other reinsurers that were the subject of the previously referenced restatement. It is possible that the Company’s analyses of, or accounting treatment for, other finite reinsurance contracts could be questioned or disputed in state regulatory examinations or in connection with the subpoenas, interrogatories and inquiries recited above in relation to finite insurance products purchased and sold by the Company and the referenced restatement, and further restatements of the Company’s financial results are possible as a consequence, which could have a material adverse impact on the Company’s financial condition. See the Critical Accounting Estimates section of this MD&A for further information.

105

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

Dividends from Subsidiaries

CCC’s earned surplus was negative at December 31, 2004. As a result, CCC obtained approval from the Department in December of 2004 for extraordinary dividends in the amount of approximately $125 million to be used to fund the CNAF’s 2005 debt service requirements. CCC’s earned surplus was restored to a positive position, in part, as a result of a $500 million dividend received from its subsidiary, CAC, during the first quarter of 2005.

By agreement with the New Hampshire Insurance Department, the CIC Group may not pay dividends to CCC until after January 1, 2006.

Loews

The Series H Cumulative Preferred Issue (Series H Issue) is held by Loews and accrues cumulative dividends at an initial rate of 8% per year, compounded annually. As of September 30, 2005, the Company has $179 million of undeclared but accumulated dividends. The Series H Issue dividend amounts for the three and nine months ended September 30, 2005 and 2004 have been subtracted from Net Income (Loss) to determine income (loss) available to common stockholders.

Series H Issue is senior to CNAF’s common stock as to the payment of dividends and amounts payable upon any liquidation, dissolution or winding up. No dividends may be declared on CNAF’s common stock until all cumulative dividends on the Series H Issue have been paid. CNAF may not issue any equity securities ranking senior to or on par with the Series H Issue without the consent of a majority of its stockholders. The Series H Issue is non-voting and is not convertible into any other securities of CNAF. It may be redeemed only upon the mutual agreement of CNAF and a majority of the stockholders of the preferred stock.

Ratings

Ratings are an important factor in establishing the competitive position of insurance companies. CNA’s 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 its 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 CNA’s insurance subsidiaries.

The actions that can be taken by rating agencies are changes in ratings or modifiers. “On Review,” “Credit Watch” and “Rating Watch” are modifiers used by the ratings agencies to alert those parties relying on the Company’s ratings of the possibility of a rating change in the near term. Modifiers are utilized when the agencies are uncertain as to the impact of a Company action or initiative, which could prove to be material to the current rating level.

106

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

Modifiers are generally used to indicate a possible change in rating within 90 days. “Outlooks” accompanied with ratings are additional modifiers used by the rating agencies to alert those parties relying on the Company’s ratings of the possibility of a rating change in the longer term. The time frame referenced in an outlook is not necessarily limited to ninety days as defined in the Credit-Watch category.

The table below reflects the various group ratings issued by A.M. Best, Fitch, Moody’s and S&P as of -October 11, 2005 for the Property and Casualty and Life companies. The table also includes the ratings for CNAF’s senior debt and Continental senior debt.

Insurance Financial Strength Ratings

Debt Ratings

Property & Casualty (a)

Life (b)

CNAF

Continental

CCC

CIC

Senior

Group

CAC

Debt

A.M. Best

A–

bbb

Not rated

Fitch

A–

BBB–

Moody’s

Baa1

Baa3

S&P

A–

BBB+

BBB–

(a) Fitch’s outlook for the Property & Casualty companies’ financial strength and holding company debt ratings is stable. All others are negative.

(b) A.M. Best, Fitch and Moody’s have a stable outlook while S&P has a negative outlook on the CAC rating.

On August 16 and 25, 2005, Standard & Poor’s and A.M Best Company assigned the current debt ratings (bbb and BBB-, respectively) to CNA’s $1.5 billion shelf offering.

If CNA’s property and casualty insurance financial strength ratings were downgraded below current levels, CNA’s business and results of operations could be materially adversely affected. The severity of the impact on CNA’s 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 the Company’s insurance products to certain markets, and the required collateralization of certain future payment obligations or reserves.

In addition, the Company believes that a lowering of the debt ratings of Loews by certain of these agencies could result in an adverse impact on CNA’s ratings, independent of any change in circumstances at CNA. Each of the major rating agencies which rates Loews currently maintains a negative outlook, but none currently has Loews on negative Credit Watch.

The Company has entered into several settlement agreements and assumed reinsurance contracts that require collateralization of future payment obligations and assumed reserves if the Company’s ratings or other specific criteria fall below certain thresholds. The ratings triggers are generally more than one level below the Company’s current ratings.

107

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

Accounting Pronouncements

In December of 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R), that amends Statement of Financial Accounting Standard No. 123 (SFAS 123), as originally issued in May of 1995. SFAS 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). After the effective date of this standard, entities will not be permitted to use the intrinsic value method specified in APB 25 to measure compensation expense and generally would be required to measure compensation expense using a fair-value based method. Public companies are to apply this standard using either the modified prospective method or the modified retrospective method. The modified prospective method requires a company to (a) record compensation expense for all awards it grants, modifies, repurchases or cancels after the date it adopts the standard and (b) record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption. The modified retrospective method requires companies to record compensation expense to either (a) all prior years for which SFAS 123 was effective (i.e. for all fiscal years beginning after December 15, 1994) or (b) only to prior interim periods in the year of initial adoption if the effective date of SFAS 123R does not coincide with the beginning of the fiscal year. On March 29, 2005, the SEC staff issued Staff Accounting Bulletin 107 (SAB 107) providing additional guidance on implementing SFAS 123R. Further, SAB 107 recommends additional discussion in the MD&A on items that could affect comparability of financial statements from period to period. The Company plans to provide additional details in the MD&A on Form 10-K for 2005. SFAS 123R is effective for the Company beginning after January 1, 2006. Adoption of this standard is not expected to have a material impact on the Company’s results of operations and/or equity.

In May of 2005, the FASB issued Statement of Financial Accounting Standard No. 154, Accounting Changes and Error Correction. This standard is a replacement of Accounting Policy Board Opinion No. 20 and FASB Standard No. 3. Under the new standard, any voluntary changes in accounting principles should be adopted via a retrospective application of the accounting principle in the financial statements presented in addition to obtaining an opinion from the auditors that the new principle is preferred. In addition, adoption of a change in accounting principle required by the issuance of a new accounting standard would also require retroactive restatement, unless the new standard includes explicit transition guidelines. This new standard is effective for fiscal years beginning after December 14, 2005.

FORWARD-LOOKING STATEMENTS

This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. You can identify forward-looking statements because generally they include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates,” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in the Company’s insurance business, including losses and loss reserves for asbestos, environmental pollution and mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews the Company is conducting; the ongoing state regulatory examinations of the Company’s primary insurance company subsidiaries, and the Company’s responses to the results of those reviews and examinations; the Company’s expectations concerning its revenues, earnings, expenses and investment activities; expected cost savings and other results from the Company’s expense reduction and restructuring activities; and the Company’s proposed actions in response to trends in its 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. Many of these risks and uncertainties cannot be controlled by the Company. Some examples of these risks and uncertainties are:

108

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

•

general economic and business conditions, including inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;

•

changes in financial markets such as fluctuations in interest rates, long-term periods of low interest rates, credit conditions and currency, commodity and stock prices;

•		the effects of corporate bankruptcies, such as Enron and WorldCom, on capital markets, and on the markets for directors and officers and errors and omissions coverages;

•		changes in foreign or domestic political, social and economic conditions;

•

regulatory initiatives and compliance with governmental regulations, judicial decisions, including interpretation of policy provisions, decisions regarding coverage and theories of liability, trends in litigation and the outcome of any litigation involving the Company, and rulings and changes in tax laws and regulations;

•

effects upon insurance markets and upon industry business practices and relationships of current litigation, investigations and regulatory activity by the New York State Attorney General’s office and other authorities concerning contingent commission arrangements with brokers and bid solicitation activities;

•

legal and regulatory activities with respect to certain non-traditional and finite-risk insurance products, and possible resulting changes in accounting and financial reporting in relation to such products, including the Company’s restatement of financial results in May of 2005 and its relationship with Accord Re Ltd. as disclosed in connection with that restatement;

•

regulatory limitations, impositions and restrictions upon the Company, including the effects of assessments and other surcharges for guaranty funds and second-injury funds and other mandatory pooling arrangements;

•

the impact of competitive products, policies and pricing and the competitive environment in which the Company operates, including changes in the Company’s book of business;

•

product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew of under priced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;

•

development of claims and the impact on loss reserves, including changes in claim settlement policies;

•

the effectiveness of current initiatives by claims management to reduce loss and expense ratio through more efficacious claims handling techniques;

•		the performance of reinsurance companies under reinsurance contracts with the Company;

•		results of financing efforts, including the availability of bank credit facilities;

•		changes in the Company’s composition of operating segments;

•

weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, as well as of natural disasters such as hurricanes and earthquakes;

•

man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;

•		the possibility that the Terrorism Risk Insurance Act of 2002 will not be extended beyond the end of 2005, as a result of which the Company could incur substantial additional exposure to losses resulting from terrorist attacks, which could be increased by current state regulatory restrictions on terrorism policy exclusions and by regulatory unwillingness to approve such exclusions prospectively;

•		the occurrence of epidemics;

•

exposure to liabilities due to claims made by insureds and others relating to asbestos remediation and health-based asbestos impairments, as well as exposure to liabilities for environmental pollution, mass tort, and construction defect claims;

109

CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 – 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. The Company’s primary market risk exposures are due to changes in interest rates, although the Company has 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 the Company’s operations. The Company may use the following tools to manage its 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 its existing asset and liability portfolios.

Sensitivity Analysis

CNA monitors its 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 the Company’s fair value at risk and the resulting effect on stockholders’ equity. The analysis presents the sensitivity of the fair value of the Company’s financial instruments to selected changes in market rates and prices. The range of change chosen reflects the Company’s 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 the Company’s 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 the Company’s interest sensitive assets and liabilities that were held on September 30, 2005 and December 31, 2004 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 September 30, 2005 and December 31, 2004, with all other variables held constant.

Equity price risk was measured assuming an instantaneous 10% and 25% decline in the S&P 500 Index (Index) from its level at September 30, 2005 and December 31, 2004, with all other variables held constant. The Company’s equity holdings were assumed to be highly and positively correlated with the Index. At September 30, 2005, a 10% and 25% decrease in the Index would result in a $212 million and $531 million decrease compared to a $214 million and $534 million decrease at December 31, 2004, in the market value of the Company’s equity investments.

Of these amounts, under the 10% and 25% scenarios, $4 million and $11 million at September 30, 2005 and $5 million and $14 million at December 31, 2004 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.

The following tables present the estimated effects on the fair value of the Company’s financial instruments at September 30, 2005 and December 31, 2004, due to an increase in interest rates of 100 basis points, a 10% decline in foreign currency exchange rates and a 10% decline in the Index.

111

CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued

Market Risk Scenario 1


			Increase (Decrease)
	Market		Interest			Currency			Equity
September 30, 2005	Value		Rate Risk			Risk			Risk
(In millions)

General account:
Fixed maturity securities available-for-sale	$	32,019	$	(1,884	)	$	(81	)	$	(21	)
Fixed maturity securities trading		410		(4	)		—			(2	)
Equity securities available-for-sale		507		—			(6	)		(51	)
Equity securities trading		42		—			—			(4	)
Short term investments available-for-sale		6,772		(11	)		(40	)		—
Short term investments trading		381		—			—			—
Limited partnerships		1,618		7			—			(20	)
Other invested assets		31		—			—			—
Interest rate swaps		—		104			—			—
Equity indexed futures for trading securities		—		2			—			(110	)
Other derivative securities		3		6			—			—


Total general account		41,783		(1,780	)		(127	)		(208	)


Separate accounts:
Fixed maturity securities		476		(22	)		—			—
Equity securities		45		—			—			(4	)
Short term investments		26		—			—			—


Total separate accounts		547		(22	)		—			(4	)


Total securities	$	42,330	$	(1,802	)	$	(127	)	$	(212	)


Debt (carrying value)	$	1,751	$	(94	)	$	—		$	—

Market Risk Scenario 1


				Increase (Decrease)
	Fair			Interest			Currency			Equity
December 31, 2004	Value			Rate Risk			Risk			Risk
(In millions)

General account:
Fixed maturity securities available-for-sale	$	30,937		$	(1,824	)	$	(88	)	$	(26	)
Fixed maturity securities trading		390			(4	)		(1	)		(3	)
Equity securities available-for-sale		410			—			(9	)		(41	)
Equity securities trading		46			—			—			(5	)
Short term investments available-for-sale		5,404			(7	)		(10	)		—
Short term investments trading		459			—			—			—
Limited partnerships		1,549			6			—			(18	)
Other invested assets		42			—			—			—
Interest rate swaps		(8	)		8			—			—
Equity index futures for trading		—			2			—			(116	)
Other derivative securities		2			7			(21	)		—


Total general account		39,231			(1,812	)		(129	)		(209	)


Separate accounts:
Fixed maturity securities		486			(24	)		—			—
Equity securities		55			—			—			(5	)
Short term investments		20			—			—			—


Total separate accounts		561			(24	)		—			(5	)


Total securities	$	39,792		$	(1,836	)	$	(129	)	$	(214	)


Debt (carrying value)	$	2,257		$	(97	)	$	—		$	—

112

CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information on CNA’s legal proceedings is set forth in Notes G and H of the Condensed Consolidated Financial Statements included under Part I, Item 1.

Item 5. Other Information

	(a)		CCC and James R. Lewis entered into an Employment Agreement as of October 26, 2005 pursuant to which Mr. Lewis will continue to serve as Executive Vice President and Chief Executive Officer of the Company’s Property and Casualty Operations from January 1, 2006 to December 31, 2008. A copy of said Employment Agreement is filed with this Report as Exhibit 10.21.

	(b)		CNAF and Stephen W. Lilienthal entered into an Employment Agreement as of October 26, 2005 pursuant to which Mr. Lilienthal will continue to serve as Chief Executive Officer of CNAF and as Chairman and Chief Executive Officer of CNAF’s wholly-owned insurance subsidiaries from January 1, 2006 to December 31, 2008. A copy of said Employment Agreement is filed with this Report as Exhibit 10.22.

Item 6. Exhibits

(a) Exhibits


Description of Exhibit	Exhibit Number

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		31.1

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		31.2

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		32.1*

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		32.2*

Exhibits 32.1 and 32.2 are being furnished and shall not be deemed “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. These Exhibits shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.

116


Class		Outstanding at October 24, 2005

Common Stock, Par value $2.50		255,963,918


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware (State or other jurisdiction of incorporation or organization)		36-6169860 (I.R.S. Employer Identification No.)


CNA Center Chicago, Illinois (Address of principal executive offices)		60685 (Zip Code)


Item		Page
Number		Number
	PART I. Financial Information

1.	Condensed Consolidated Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets at September 30, 2005 and at December 31, 2004		3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
	September 30, 2005 and 2004 (as restated)		4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
	September 30, 2005 and 2004 (as restated)		5

	Notes to Condensed Consolidated Financial Statements		6

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		53

3.	Quantitative and Qualitative Disclosures about Market Risk		111

4.	Controls and Procedures		115

	PART II. Other Information

1.	Legal Proceedings		116

5.	Other Information		116

6.	Exhibits		116

	Signatures		117
Employment Agreement with James R. Lewis
Employment Agreement with Stephen W. Lilienthal
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer


	Contractual/		Estimated		Estimated
September 30, 2005	Notional		Fair Value		Fair Value
(In millions)	Amount		Asset		(Liability)

General account
Swaps	$	1,581	$	—	$	(2	)
Futures purchased		1,179		2		—
Futures sold, not yet purchased		127		—		—
Forwards purchased		42		—		—
Forwards sold, not yet purchased		41		—		—
Commitments to purchase government and municipal securities		22		—		—
Commitments to sell government and municipal securities		35		—		—
Equity warrants		6		2		—
Options purchased		87		—		—
Options written		88		—		—
Options embedded in convertible debt securities		12		1		—


Total	$	3,220	$	5	$	(2	)


Separate accounts
Options written	$	4	$	—	$	—


Total	$	4	$	—	$	—


Revenue by Line of Business
	Three Months						Nine Months
Period ended September 30	2005			2004			2005			2004
(In millions)

Standard Lines
Property	$	149		$	159		$	458		$	492
Casualty		963			939			2,891			3,174
CNA Global		231			209			669			675


Standard Lines revenue		1,343			1,307			4,018			4,341


Specialty Lines
Professional Liability Insurance (CNA Pro)		576			487			1,635			1,484
Surety		101			92			290			267
Warranty		75			81			222			233


Specialty Lines revenue		752			660			2,147			1,984


Life and Group Non-Core
Life & Annuity		111			41			247			(217	)
Health		230			265			679			786
Other		25			(1	)		114			54


Life and Group Non-Core revenue		366			305			1,040			623


Corporate and Other Non-Core
CNA Re		23			28			49			191
Other		55			38			260			204


Corporate and Other Non-Core revenue		78			66			309			395


Eliminations		(19	)		(20	)		(60	)		(94	)


Total revenue	$	2,520		$	2,318		$	7,454		$	7,249


	Statutory Capital and Surplus				Statutory Net Income (Loss)						Statutory Net Income (Loss)
					Three months ended September 30						Nine months ended September 30
(In millions)	September 30, 2005		December 31, 2004		2005			2004			2005		2004
Property and casualty companies	$	7,332	$	6,998	$	(19	)	$	(123	)	$	849	$	280
Life and group insurance companies (a)		722		1,177		(4	)		20			49		414

•		the possibility of further changes in the Company’s ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices; and

•		the actual closing of contemplated transactions and agreements.


	CNA Financial Corporation
Dated: October 28, 2005	By	/s/ D. Craig Mense
		D. Craig Mense
		Chief Financial Officer