6.	Claim and Claim Adjustment Expense Reserves

CNA’s property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including claims that are incurred but not reported (“IBNR”) as of the reporting date. CNA’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 including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.

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

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company’s results of operations and/or equity. CNA reported catastrophe losses, net of reinsurance, of $27 million and $123 million for the three and nine months ended September 30, 2012. Catastrophe losses in 2012 related primarily to U.S. storms and Hurricane Isaac. CNA reported catastrophe losses, net of reinsurance, of $50 million and $205 million for the three and nine months ended September 30, 2011.

Net Prior Year Development

The following tables and discussion include the net prior year development recorded for CNA Specialty, CNA Commercial and Other:


Three Months Ended September 30, 2012	CNA Specialty			CNA Commercial			Other			Total
(In millions)

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(39	)	$	2		$	(3	)	$	(40	)
Pretax (favorable) unfavorable premium development		(1	)		(5	)		(1	)		(7	)

Total pretax (favorable) unfavorable net prior year development	$	(40	)	$	(3	)	$	(4	)	$	(47	)


Three Months Ended September 30, 2011

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(5	)	$	(42	)	$	11		$	(36	)
Pretax (favorable) unfavorable premium development		(26	)		(11	)		1			(36	)

Total pretax (favorable) unfavorable net prior year development	$	(31	)	$	(53	)	$	12		$	(72	)


Nine Months Ended September 30, 2012

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(80	)	$	(25	)	$	(5	)	$	(110	)
Pretax (favorable) unfavorable premium development		(15	)		(41	)		1			(55	)

Total pretax (favorable) unfavorable net prior year development	$	(95	)	$	(66	)	$	(4	)	$	(165	)


Nine Months Ended September 30, 2011

Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(72	)	$	(99	)	$	5		$	(166	)
Pretax (favorable) unfavorable premium development		(34	)		21						(13	)

Total pretax (favorable) unfavorable net prior year development	$	(106	)	$	(78	)	$	5		$	(179	)

For the nine months ended September 30, 2012, favorable premium development was recorded for CNA Commercial primarily due to premium adjustments on auditable policies arising from increased exposures.

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

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

CNA Specialty

The following table and discussion provide further detail of the net prior year claim and allocated claim adjustment expense reserve development (“development”) recorded for the CNA Specialty segment:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
(In millions)

Medical professional liability	$	9		$	(18	)	$	(6	)	$	(52	)
Other professional liability		1			1			(1	)		(20	)
Surety		(60	)		1			(59	)		(2	)
Warranty								(1	)		(12	)
Other		11			11			(13	)		14

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	(39	)	$	(5	)	$	(80	)	$	(72	)

Three Month Comparison

2012

Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.

Other includes standard property and casualty coverages provided to CNA Specialty customers. Unfavorable development for other coverages was primarily due to an unfavorable outcome on an individual general liability claim in accident year 2009.

2011

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

Unfavorable development for other coverages was primarily due to increased frequency of large claims in auto and workers’ compensation coverages in accident years 2009 and 2010.

Nine Month Comparison

2012

Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.

Overall, favorable development for other coverages was primarily due to favorable loss emergence in property and workers’ compensation coverages in accident years 2005 and subsequent. Unfavorable development was recorded in accident year 2009 primarily due to an unfavorable outcome on an individual general liability claim.

2011

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

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

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

Unfavorable development for other coverages was primarily due to increased frequency of large claims in auto and workers’ compensation coverages in accident years 2009 and 2010.

CNA Commercial

The following table and discussion provide further detail of development recorded for the CNA Commercial segment:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
(In millions)

Commercial auto	$	9		$	(2	)	$	11		$	(36	)
General liability		(21	)		4			(26	)		26
Workers’ compensation		24			3			13			39
Property and other		(10	)		(47	)		(23	)		(128	)

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development	$	2		$	(42	)	$	(25	)	$	(99	)

Three Month Comparison

2012

Favorable development for general liability coverages was primarily due to favorable loss emergence in accident years 2003 and prior related to large account business.

Unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and 2011.

Favorable development for property and marine coverages was due to favorable loss emergence in non-catastrophe losses in accident years 2009 and subsequent.

2011

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

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

Nine Month Comparison

2012

Unfavorable development for commercial auto coverages was primarily due to higher than expected frequency in accident years 2009 and subsequent.

Favorable development for general liability coverages was primarily due to favorable loss emergence in accident years 2003 and prior related to large account business.

Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and 2011 and losses related to favorable premium development in accident year 2011. Favorable development was recorded in accident years 2001 and prior reflecting favorable experience.

Favorable development for property and marine coverages was due to a favorable outcome on an individual claim in accident year 2005 and favorable loss emergence in non-catastrophe losses in accident years 2009 through 2011.

2011

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

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

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

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