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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005


o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File Number 1-5823

CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		36-6169860
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

CNA Center
Chicago, Illinois		60685
(Address of principal executive offices)		(Zip Code)

(312) 822-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:


		Name of each exchange on
Title of each class		which registered

Common Stock with a par value of $2.50 per share		New York Stock Exchange Chicago Stock Exchange Pacific Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Yes... Noü

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.

Yes... Noü

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ü No...

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act. (check one):

Large Accelerated Filer ... Accelerated Filer ü Non-Accelerated Filer ...

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes... Noü

As of February 28, 2006, 256,001,968 shares of common stock were outstanding. The aggregate market value of the common stock of CNA Financial Corporation held by non–affiliates of the registrant as of June 30, 2005 was approximately $635 million based on the closing price of $28.42 per share of the common stock on the New York Stock Exchange on June 30, 2005.

DOCUMENTS INCORPORATED
BY REFERENCE:

Portions of the CNA Financial Corporation Proxy Statement prepared for the 2006 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report.

PART I

ITEM 1. BUSINESS

CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. References to “CNA,” “the Company,” “we,” “our,” “us” or like terms refer to the business of CNA and its subsidiaries. Our property and casualty insurance operations are conducted by Continental Casualty Company (CCC), incorporated in 1897, and its affiliates, and The Continental Insurance Company (CIC), organized in 1853, and its affiliates. CIC became an affiliate of ours in 1995 as a result of the acquisition of The Continental Corporation (Continental). Life and group insurance operations were either sold or are primarily being managed as a run-off operation. These operations are primarily conducted within CCC and Continental Assurance Company (CAC). Loews Corporation (Loews) owned approximately 91% of our outstanding common stock and 100% of our Series H preferred stock as of December 31, 2005.

We serve a wide variety of customers, including small, medium and large businesses, associations, professionals, and groups and individuals with a broad range of insurance and risk management products and services.

Insurance products primarily include property and casualty coverages. Our services include risk management, information services, warranty and claims administration. Our products and services are marketed through independent agents, brokers, managing general agents and direct sales.

In 2005, we conducted our operations through four operating segments: Standard Lines, Specialty Lines, Life and Group Non-Core and Corporate and Other Non-Core. These segments are managed separately because of differences in their product lines and markets. Discussions of each segment including the products offered, the customers served, the distribution channels used and competition are set forth in the Management’s Discussion and Analysis (MD&A) included under Item 7 and in Note N of the Consolidated Financial Statements included under Item 8.

Competition

The property and casualty insurance industry is highly competitive both as to rate and service. Our consolidated property and casualty subsidiaries compete not only with other stock insurance companies, but also with mutual insurance companies, reinsurance companies and other entities for both producers and customers. We must continuously allocate resources to refine and improve our insurance products and services.

Rates among insurers vary according to the types of insurers and methods of operation. We compete for business not only on the basis of rate, but also on the basis of availability of coverage desired by customers, ratings and quality of service, including claim adjustment services.

There are approximately 2,400 individual companies that sell property and casualty insurance in the United States. Our consolidated property and casualty subsidiaries ranked as the fourteenth largest property and casualty insurance organization and we are the seventh largest commercial insurance writer in the United States based upon 2004 statutory net written premiums.

Regulation

The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Each state has established supervisory agencies with broad administrative powers relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, fixing minimum interest rates for accumulation of surrender values and maximum interest rates of policy loans, prescribing the form and content of statutory financial reports and regulating solvency and the type and amount of investments permitted. Such regulatory powers also extend to premium rate regulations, which require that rates not be excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries, intercompany transfers of assets may be subject to prior notice or approval by the state insurance regulators, depending on the size of such transfers and payments in relation to the financial position of the insurance affiliates making the transfer or payment.

Insurers are also required by the states to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each state.

Insurance companies are subject to state guaranty fund and other insurance-related assessments. Guaranty fund and other insurance-related assessments are levied by the state departments of insurance to cover claims of insolvent insurers.

Reform of the U.S. tort liability system is another issue facing the insurance industry. Over the last decade, many states have passed some type of reform. In recent years, for example, significant state general tort reforms have been enacted in Georgia, Ohio, Mississippi and South Carolina. Specific state legislation addressing state asbestos reform has been passed in Ohio, Georgia, Florida, and Texas. Several more states will be considering such legislation in the coming year. Although these states’ legislatures have begun to address their litigious environments, some reforms are being challenged in the courts and it will take some time before they are finalized. Even though there has been some tort reform success, new causes of action and theories of damages continue to be proposed in state court actions or by legislatures. Continued unpredictability in the law means that insurance underwriting and rating is expected to continue to be difficult in commercial lines, professional liability and some specialty coverages.

Although the Federal Government and its regulatory agencies do not directly regulate the business of insurance, federal legislative and regulatory initiatives can impact the insurance industry in a variety of ways. These initiatives and legislation include tort reform proposals; proposals to establish a privately financed trust to process asbestos bodily injury claims; proposals to overhaul the Superfund hazardous waste removal and liability statutes; proposals to address terrorism risk and various tax proposals affecting insurance companies. In 1999, Congress passed the Financial Services Modernization or “Gramm-Leach-Bliley” Act (GLB Act), which repealed portions of the Glass-Steagall Act and enabled closer relationships between banks and insurers. Although “functional regulation” was preserved by the GLB Act for state oversight of insurance, additional financial services modernization legislation could include provisions for an alternate federal system of regulation for insurance companies.

Our domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based capital is a method developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the risk-based capital requirements specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual capital is evaluated by a comparison to the risk-based capital requirements, as determined by the formula. Companies below minimum risk-based capital requirements are classified within certain levels, each of which determines a specified level of regulatory attention applicable to a company. As of December 31, 2005 and 2004, all of our domestic insurance subsidiaries exceeded the minimum risk-based capital requirements.

Subsidiaries with insurance operations outside the United States are also subject to regulation in the countries in which they operate. We have operations in the United Kingdom, Canada and other countries.

Employee Relations

As of December 31, 2005, we had approximately 10,100 employees and have experienced satisfactory labor relations. We have never had work stoppages due to labor disputes.

We have comprehensive benefit plans for substantially all of our employees, including retirement plans, savings plans, disability programs, group life programs and group healthcare programs. See Note J of the Consolidated Financial Statements included under Item 8 for further discussion of our benefit plans.

Supplementary Insurance Data

The following table sets forth supplementary insurance data:

Supplementary Insurance Data


Years ended December 31	2005			2004			2003
(In millions, except ratio information)
Trade Ratios – GAAP basis (a)
Loss and loss adjustment expense ratio		89.4	%		74.6	%		111.8	%
Expense ratio		31.2			31.5			37.3
Dividend ratio		0.3			0.2			1.4

Combined ratio		120.9	%		106.3	%		150.5	%

Trade Ratios – Statutory basis (a)
Loss and loss adjustment expense ratio		92.2	%		78.1	%		118.1	%
Expense ratio		31.0			27.2			34.6
Dividend ratio		0.5			0.6			1.2

Combined Ratio		123.7	%		105.9	%		153.9	%

Individual Life and Group Life Insurance Inforce (b)
Individual life	$	10,711		$	11,566		$	330,805
Group life		9,838			45,079			58,163

Total	$	20,549		$	56,645		$	388,968

Other Data – Statutory basis (c)
Property and casualty companies’ capital and surplus (d)	$	6,940		$	6,998		$	6,170
Life and group company(ies)’ capital and surplus		627			1,177			707
Property and casualty companies’ written premiums to surplus ratio		1.0			1.0			1.1
Life companies’ capital and surplus-percent to total liabilities		33.1	%		56.0	%		13.0	%
Participating policyholders-percent of gross life insurance inforce		3.5	%		1.4	%		0.5	%


(a)		Trade ratios reflect the results of our property and casualty insurance subsidiaries. Trade ratios are industry measures of property and casualty underwriting results. The loss and loss adjustment expense ratio is the percentage of net incurred claim and claim adjustment expenses and the expenses incurred related to uncollectible reinsurance receivables to net earned premiums. The primary difference in this ratio between accounting principles generally accepted in the United States of America (GAAP) and statutory accounting practices (SAP) is related to the treatment of active life reserves (ALR) related to long term care insurance products written in property and casualty insurance subsidiaries. For GAAP, ALR is classified as claim and claim adjustment expense reserves whereas for SAP, ALR is classified as unearned premium reserves. The expense ratio, using amounts determined in accordance with GAAP, is the percentage of underwriting and acquisition expenses (including the amortization of deferred acquisition expenses) to net earned premiums. The expense ratio, using amounts determined in accordance with SAP, is the percentage of acquisition and underwriting expenses (with no deferral of acquisition expenses) to net written premiums. The dividend ratio, using amounts determined in accordance with GAAP, is the ratio of dividends incurred to net earned premiums. The dividend ratio, using amounts determined in accordance with SAP, is the ratio of dividends paid to net earned premiums. The combined ratio is the sum of the loss and loss adjustment expense, expense and dividend ratios.

(b)		The decline in gross inforce is attributable to the sales of the group benefits and the individual life businesses. See Note H of the Consolidated Financial Statements included under Item 8 for additional inforce information.

(c)		Other data is determined in accordance with SAP. Life and group statutory capital and surplus as a percent of total liabilities is determined after excluding separate account liabilities and reclassifying the statutorily required Asset Valuation Reserve to surplus.

(d)		Surplus includes the property and casualty companies’ equity ownership of the life and group company(ies)’ capital and surplus.

The following table displays the distribution of gross written premiums for our operations by geographic concentration.

Gross Written Premiums


	Percent of Total
Years ended December 31	2005			2004			2003
California		9.0	%		9.3	%		8.5	%
New York		7.9			7.9			7.3
Florida		7.1			7.1			7.6
Texas		5.7			5.4			5.7
Illinois		4.2			5.1			9.3
Pennsylvania		4.2			4.7			4.2
New Jersey		3.8			5.3			4.5
Massachusetts		3.3			3.2			3.1
All other states, countries or political subdivisions (a)		54.8			52.0			49.8

Total		100.0	%		100.0	%		100.0	%


(a)		No other individual state, country or political subdivision accounts for more than 3.0% of gross written premiums.

Approximately 6.1%, 5.0% and 3.2% of our gross written premiums were derived from outside of the United States for the years ended December 31, 2005, 2004 and 2003. Gross written premiums from the United Kingdom were approximately 2.8%, 2.3%, and 1.8% of our premiums for the years ended December 31, 2005, 2004 and 2003. Premiums from any individual foreign country excluding the United Kingdom were not significant.

Property and Casualty Claim and Claim Adjustment Expenses

The following loss reserve development table illustrates the change over time of reserves established for property and casualty claim and claim adjustment expenses at the end of the preceding ten calendar years for our property and casualty insurance operations. The table excludes our life subsidiary(ies), and as such, the carried reserves will not agree to the Consolidated Financial Statements included under Item 8. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to the originally reported reserve liability. The third section, reading down, shows re-estimates of the originally recorded reserves as of the end of each successive year, which is the result of our property and casualty insurance subsidiaries’ expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest re-estimated reserves to the reserves originally established, and indicates whether the original reserves were adequate or inadequate to cover the estimated costs of unsettled claims.

The loss reserve development table for property and casualty companies is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. Additionally, the development amounts in the table below are the amounts prior to consideration of any related reinsurance bad debt allowance impacts.

Schedule of Loss Reserve Development


Calendar Year Ended	1995 (a)			1996			1997			1998			1999 (b)			2000			2001 (c)			2002 (d)			2003			2004			2005
(In millions)
Originally reported gross reserves for unpaid claim and claim adjustment expenses	$	31,296		$	29,559		$	28,731		$	28,506		$	26,850		$	26,510		$	29,649		$	25,719		$	31,284		$	31,204		$	30,694
Originally reported ceded recoverable		5,784			5,385			5,056			5,182			6,091			7,333			11,703			10,490			13,847			13,682			10,438

Originally reported net reserves for unpaid claim and claim adjustment expenses	$	25,512		$	24,174		$	23,675		$	23,324		$	20,759		$	19,177		$	17,946		$	15,229		$	17,437		$	17,522		$	20,256

Cumulative net paid as of:
One year later	$	6,594		$	5,851		$	5,954		$	7,321		$	6,547		$	7,686		$	5,981		$	5,373		$	4,382		$	2,651		$	–
Two years later		10,635			9,796			11,394			12,241			11,937			11,992			10,355			8,768			6,104			–			–
Three years later		13,516			13,602			14,423			16,020			15,256			15,291			12,954			9,747			–			–			–
Four years later		16,454			15,793			17,042			18,271			18,151			17,333			13,244			–			–			–			–
Five years later		18,179			17,736			18,568			20,779			19,686			17,775			–			–			–			–			–
Six years later		19,697			18,878			20,723			21,970			20,206			–			–			–			–			–			–
Seven years later		20,642			20,828			21,649			22,564			–			–			–			–			–			–			–
Eight years later		22,469			21,609			22,077			–			–			–			–			–			–			–			–
Nine years later		23,156			21,986			–			–			–			–			–			–			–			–			–
Ten years later		23,459			–			–			–			–			–			–			–			–			–			–

Net reserves re-estimated as of:
End of initial year	$	25,512		$	24,174		$	23,675		$	23,324		$	20,759		$	19,177		$	17,946		$	15,229		$	17,437		$	17,522		$	20,256
One year later		25,388			23,970			23,904			24,306			21,163			21,502			17,980			17,650			17,671			18,513			–
Two years later		24,859			23,610			24,106			24,134			23,217			21,555			20,533			18,248			19,120			–			–
Three years later		24,363			23,735			23,776			26,038			23,081			24,058			21,109			19,814			–			–			–
Four years later		24,597			23,417			25,067			25,711			25,590			24,587			22,547			–			–			–			–
Five years later		24,344			24,499			24,636			27,754			26,000			25,594			–			–			–			–			–
Six years later		25,345			24,120			26,338			28,078			26,625			–			–			–			–			–			–
Seven years later		25,086			25,629			26,537			28,437			–			–			–			–			–			–			–
Eight years later		26,475			25,813			26,770			–			–			–			–			–			–			–			–
Nine years later		26,618			26,072			–			–			–			–			–			–			–			–			–
Ten years later		26,848			–			–			–			–			–			–			–			–			–			–

Total net (deficiency) redundancy	$	(1,336	)	$	(1,898	)	$	(3,095	)	$	(5,113	)	$	(5,866	)	$	(6,417	)	$	(4,601	)	$	(4,585	)	$	(1,683	)	$	(991	)	$	–

Reconciliation to gross re-estimated reserves:
Net reserves re-estimated	$	26,848		$	26,072		$	26,770		$	28,437		$	26,625		$	25,594		$	22,547		$	19,814		$	19,120		$	18,513		$	–
Re-estimated ceded recoverable		8,459			7,626			6,967			7,440			9,671			10,447			16,043			15,451			13,908			12,840			–

Total gross re-estimated reserves	$	35,307		$	33,698		$	33,737		$	35,877		$	36,296		$	36,041		$	38,590		$	35,265		$	33,028		$	31,353		$	–

Net (deficiency) redundancy related to:
Asbestos claims	$	(2,361	)	$	(2,463	)	$	(2,362	)	$	(2,120	)	$	(1,543	)	$	(1,478	)	$	(706	)	$	(705	)	$	(64	)	$	(10	)	$	–
Environmental and mass tort claims		(802	)		(749	)		(776	)		(561	)		(663	)		(654	)		(193	)		(200	)		(52	)		(53	)		–

Total asbestos, environmental and mass tort		(3,163	)		(3,212	)		(3,138	)		(2,681	)		(2,206	)		(2,132	)		(899	)		(905	)		(116	)		(63	)		–
Other claims		1,827			1,314			43			(2,432	)		(3,660	)		(4,285	)		(3,702	)		(3,680	)		(1,567	)		(928	)		–

Total net (deficiency) redundancy	$	(1,336	)	$	(1,898	)	$	(3,095	)	$	(5,113	)	$	(5,866	)	$	(6,417	)	$	(4,601	)	$	(4,585	)	$	(1,683	)	$	(991	)	$	–


(a)		Includes gross reserves of $9,713 million and net reserves of $6,063 million for CIC and its insurance affiliates, which were acquired on May 10, 1995 (the Acquisition Date) and subsequent development thereon.

(b)		Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of $784 million as of December 31, 1999.

(c)		Effective January 1, 2001, we established a new life insurance company, CNA Group Life Assurance Company (CNAGLA). Further, on January 1, 2001 approximately $1,055 million of reserves were transferred from CCC to CNAGLA.

(d)		Effective October 31, 2002, we sold CNA Reinsurance Company Limited (CNA Re U.K.). As a result of the sale, net reserves were reduced by approximately $1,316 million.

The Company recorded loss reserve development of $991 million in 2005. Included in this amount is $433 million related to commutations of significant finite reinsurance treaties. Loss reserve development was also recorded related to the Company’s assumed reinsurance operations which are in run-off, workers compensation and excess workers compensation lines, primarily in accident years 2003 and prior, the architects and engineers book of business, pollution exposures and large directors and officers claims.

Additional information regarding our property and casualty claim and claim adjustment expense reserves and reserve development is set forth in the MD&A included under Item 7 and in Notes A and F of the Consolidated Financial Statements included under Item 8.

Investments

Information on our investments is set forth in the MD&A included under Item 7 and in Notes A, B, C and D of the Consolidated Financial Statements included under Item 8.

Available Information

We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including CNA, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

We also make available free of charge on or through our internet website (http://www.cna.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Copies of these reports may also be obtained, free of charge, upon written request to: CNA Financial Corporation, CNA Center, 43 South, Chicago, IL 60685, Attn. Jonathan D. Kantor, Executive Vice President, General Counsel and Secretary.

ITEM 1A. RISK FACTORS

Our business faces many risks. We have described below some of the more significant risks which we face. There may be additional risks that we do not yet know of or that we do not currently perceive to be significant that may also impact our business. Each of the risks and uncertainties described below could lead to events or circumstances that have a material adverse effect on our business, results of operations, financial condition or equity. You should carefully consider and evaluate all of the information included in this Report and any subsequent reports we may file with the Securities and Exchange Commission or make available to the public before investing in any securities we issue.

If we determine that loss reserves are insufficient to cover our estimated ultimate unpaid liability for claims, we may need to increase our loss reserves.

We maintain loss reserves to cover our estimated ultimate unpaid liability for claims and claim adjustment expenses for reported and unreported claims and for future policy benefits. Reserves represent our best estimate at a given point in time. Insurance reserves are not an exact calculation of liability but instead are complex estimates derived by us, generally utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, mortality, morbidity, expected interest rates, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Many of these uncertainties are not precisely quantifiable and require significant judgment on our part. As trends in underlying claims develop, particularly in so-called “long tail” or long duration coverages, we are sometimes required to add to our reserves. This is called unfavorable development and results in a charge to our earnings in the amount of the added reserves, recorded in the period the change in estimate is made. These charges can be substantial and can have a material adverse effect on our results of operations and equity. Additional information on our reserves is included in Management’s Discussion and Analysis (MD&A) under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.

As industry practices and legal, judicial, social, and other environmental conditions change, unexpected issues related to claims and coverage may emerge. These issues have had and may continue to have a negative effect on our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims, resulting in further increases in our reserves which can have a material adverse effect on our results of operations and equity. The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. Recent examples of emerging claims and coverage issues include the following:

•		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;

•		increases in the volume of class action litigation challenging a range of industry practices including claims handling;

•		increases in the number of 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.

In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, we review and change our reserve estimates in a regular and ongoing process as experience develops and further claims are reported and settled. In addition, we periodically undergo state regulatory financial examinations, including review and analysis of our reserves. If estimated reserves are insufficient for any reason, the required increase in reserves would be recorded as a charge against our earnings for the period in which reserves are determined to be insufficient. These charges can be substantial and can materially adversely affect our results of operations and equity.

Loss reserves for asbestos, environmental pollution and mass torts are especially difficult to estimate and may result in more frequent and larger additions to these reserves.

Our experience has been that establishing reserves for casualty coverages relating to asbestos, environmental pollution and mass tort (which we refer to as APMT) claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported asbestos, environmental pollution and mass tort claims is subject to a higher degree of variability due to a number of additional factors including, among others, the following:

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

•		inconsistent court decisions and developing legal theories;

•		increasingly aggressive tactics of plaintiffs’ lawyers;

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

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

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

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

•		the number and outcome of direct actions against us;

•		our ability to recover reinsurance for these claims; and

•		changes in the legal and legislative environment in which we operate.

As a result of this higher degree of variability, we have necessarily supplemented traditional actuarial methods and techniques with additional estimating techniques and methodologies, many of which involve significant judgment on our part. Consequently, we may periodically need to record changes in our claim and claim adjustment expense reserves in the future in these areas in amounts that may be material. Additional information on APMT is included in MD&A under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.

Environmental pollution claims. The estimation of reserves for environmental pollution claims is complicated by the assertion by many policyholders of claims for defense costs and indemnification. We and others in the insurance industry are disputing coverage for many such claims. Key coverage issues in these claims include the following:

•		whether cleanup costs are considered damages under the policies (and accordingly whether we would be liable for these costs);

•		the trigger of coverage and the allocation of liability among triggered policies;

•		the applicability of pollution exclusions and owned property exclusions;

•		the potential for joint and several liability; and

•		the definition of an occurrence.

To date, courts have been inconsistent in their rulings on these issues, thus adding to the uncertainty of the outcome of many of these claims.

Further, the scope of federal and state statutes and regulations determining liability and insurance coverage for environmental pollution liabilities have been the subject of extensive litigation. In many cases, courts have expanded the scope of coverage and liability for cleanup costs beyond the original intent of our insurance policies. Additionally, the standards for cleanup in environmental pollution matters are unclear, the number of sites potentially subject to cleanup under applicable laws is unknown, and the impact of various proposals to reform existing statutes and regulations is difficult to predict.

Asbestos claims. The estimation of reserves for asbestos claims is particularly difficult for many of the same reasons discussed above for environmental pollution claims, as well as the following:

•		inconsistency of court decisions and jury attitudes, as well as future court decisions;

•		specific policy provisions;

•		allocation of liability among insurers and insureds;

•		missing policies and proof of coverage;

•		the proliferation of bankruptcy proceedings and attendant uncertainties;

•		novel theories asserted by policyholders and their legal counsel;

•		the targeting of a broader range of businesses and entities as defendants;

•		uncertainties in predicting the number of future claims and which other insureds may be targeted in the future;

•		volatility in claim numbers and settlement demands;

•		increases in the number of non-impaired claimants and the extent to which they can be precluded from making claims;

•		the efforts by insureds to obtain coverage that is not subject to aggregate limits;

•		the long latency period between asbestos exposure and disease manifestation, as well as the resulting potential for involvement of multiple policy periods for individual claims;

•		medical inflation trends;

•		the mix of asbestos-related diseases presented; and

•		the ability to recover reinsurance.

In addition, a number of our insureds have asserted that their claims for insurance are not subject to aggregate limits on coverage. If these insureds are successful in this regard, our potential liability for their claims would be unlimited. Some of these insureds contend that their asbestos claims fall within the so-called “non-products” liability coverage within their policies, rather than the products liability coverage, and that this “non-products” liability coverage is not subject to any aggregate limit. It is difficult to predict the extent to which these claims will succeed and, as a result, the ultimate size of these claims.

Catastrophe losses are unpredictable.

Catastrophe losses are an inevitable part of our business. Various events can cause catastrophe losses, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather and fires, and their frequency and severity are inherently unpredictable. For example, in 2005, we experienced substantial losses from Hurricanes Katrina, Rita and Wilma and in 2004, we experienced substantial losses from Hurricanes Charley, Frances, Ivan and Jeanne. These catastrophes are unprecedented in modern times. The extent of losses from catastrophes is a function of both the total amount of insured exposures in the affected areas and the severity of the events themselves. In addition, as in the case of catastrophe losses generally, it can take a long time for the ultimate cost to us to be finally determined. As our claim experience develops on a particular catastrophe, we may be required to adjust our reserves, or take additional unfavorable development, to reflect our revised estimates of the total cost of claims. We believe we could incur significant catastrophe losses in the future. Additional information on catastrophe losses is included in the MD&A under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.

Our key assumptions used to determine reserves and deferred acquisition costs for our long-term care product offerings could vary significantly.

Our reserves and deferred acquisition costs for our long-term care product offerings are based on certain key assumptions including morbidity, which is the frequency of illness, sickness and diseases contracted, policy persistency, which is the percentage of policies remaining in force, interest rates, future premium increases and future health care cost trends. If actual experience differs from these assumptions, the deferred acquisition costs may not be fully recovered and the reserves may not be adequate, requiring us to add to reserves, or take unfavorable development. Therefore, our financial results could be adversely impacted.

We continue to face exposure to losses arising from terrorist acts, despite the passage of the Terrorism Risk Insurance Extension Act of 2005.

We may bear substantial losses from future acts of terrorism. The Terrorism Risk Insurance Extension Act of 2005 (TRIEA) extended, until December 31, 2007, the program established by the Terrorism Risk Insurance Act of 2002. Under this program, insurers are required to offer terrorism insurance and the federal government will share the risk of loss by commercial property and casualty insurers arising from future terrorist attacks. TRIEA does not provide complete protection for future losses derived from acts of terrorism. Additional information on TRIEA is included in the MD&A under Item 7.

High levels of retained overhead expenses associated with business lines in run-off negatively impact our operating results.

During the past few years, we ceased offering certain insurance products relating principally to our life, group and reinsurance segments. Many of these business lines were sold, others have been placed in run-off and revenue will progressively decrease. Our results of operations have been materially, adversely affected by the high levels of retained overhead expenses associated with these run-off operations, and will continue to be so affected if we are not successful in eliminating or reducing these costs.

Our premium writings and profitability are affected by the availability and cost of reinsurance.

We purchase reinsurance to help manage our exposure to risk. Under our reinsurance arrangements, another insurer assumes a specified portion of our claim and claim adjustment expenses in exchange for a specified portion of policy premiums. Market conditions determine the availability and cost of the reinsurance protection we purchase, which affects the level of our business and profitability, as well as the level and types of risk we retain. If we are unable to obtain sufficient reinsurance at a cost we deem acceptable, we may be unwilling to bear the increased risk and would reduce the level of our underwriting commitments. Additional information on Reinsurance is included in the MD&A under Item 7 and Note H to the Consolidated Financial Statements included Item 8.

We may not be able to collect amounts owed to us by reinsurers.

We have significant amounts recoverable from reinsurers which are reported as receivables in our balance sheets and are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves. The ceding of insurance does not, however, discharge our primary liability for claims. As a result, we are subject to credit risk relating to our ability to recover amounts due from reinsurers. Certain of our reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies. In addition, reinsurers could dispute amounts which we believe are due to us. If we are not able to collect the amounts due to us from reinsurers, our claims expenses will be higher which could materially adversely affect our results of operations or equity. Additional information on Reinsurance is included in the MD&A under Item 7 and Note H to the Consolidated Financial Statements included under Item 8.

We incur significant interest expense related to funds withheld from reinsurance arrangements.

We have entered into several property and casualty reinsurance agreements where we retain the ceded premium as collateral to secure the reinsurers’ obligations to pay for ceded losses. We are required to credit interest on these “funds withheld” balances at specified rates for all periods in which the funds withheld liability exists. In addition, certain of these reinsurance contracts require us to pay interest on additional ceded premiums arising from ceded losses as if those premiums were payable at the inception of the underlying contract. The amount subject to interest crediting on these funds withheld contracts varies over time based on a number of factors including the timing of loss payments and the ultimate gross losses incurred. We expect to incur significant interest costs on these contracts for several years to come. In an effort to reduce future interest charges, resolve a dispute or unwind an arrangement with a reinsurer that is experiencing financial difficulties, from time to time, we commute or “buy out” reinsurance arrangements from certain reinsurance carriers. Commutations can result in our incurring a significant charge in our results of operations for the period in which the commutation takes place. Additional information on reinsurance is included in the MD&A under Item 7 and Note H to the Consolidate Financial Statements included under Item 8.

Rating agencies may downgrade their ratings of us and thereby adversely affect our ability to write insurance at competitive rates or at all.

Ratings are an increasingly important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries, as well as our public debt, are rated by four major rating agencies, namely, A.M.

Best Company, Inc., Standard & Poor’s Rating Services, Moody’s Investors Service, Inc. and Fitch, Inc. Ratings reflect the rating agency’s opinions of an insurance company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders and debtholders. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating.

In the past several years, the major rating agencies have lowered our financial strength and debt ratings and due to the intense competitive environment in which we operate, the uncertainty in determining reserves and the potential for us to take material unfavorable development in the future, and possible changes in the methodology or criteria applied by the rating agencies, the rating agencies may take action to lower our ratings in the future. If our property and casualty insurance financial strength ratings are downgraded below current levels, our business and results of operations could be materially adversely affected. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of our insurance products to certain markets, and the required collateralization of certain future payment obligations or reserves.

In addition, we believe that a lowering of the debt ratings of Loews Corporation by certain of the rating agencies could result in an adverse impact on our ratings, independent of any change in circumstances at CNA. Each of the major rating agencies that rates Loews currently maintains a negative outlook. Additional information on our ratings is included in the MD&A under Item 7.

We are subject to extensive federal, state and local governmental regulations that restrict our ability to do business and generate revenues.

The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Most insurance regulations are designed to protect the interests of our policyholders rather than our investors. Each state in which we do business has established supervisory agencies that regulate the manner in which we do business. Their regulations relate to, among other things, the following:

•		standards of solvency including risk-based capital measurements;

•		restrictions on the nature, quality and concentration of investments;

•		restrictions on our ability to withdraw from unprofitable lines of insurance;

•		the required use of certain methods of accounting and reporting;

•		the establishment of reserves for unearned premiums, losses and other purposes;

•		potential assessments for funds necessary to settle covered claims against impaired, insolvent or failed insurance companies;

•		licensing of insurers and agents;

•		approval of policy forms; and

•		limitations on the ability of our insurance subsidiaries to pay dividends to us.

Regulatory powers also extend to premium rate regulations which require that rates not be excessive, inadequate or unfairly discriminatory. The states in which we do business also require us to provide coverage to persons whom we would not otherwise consider eligible. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each state.

We are subject to capital adequacy requirements and, if we do not meet these requirements, regulatory agencies may restrict or prohibit us from operating our business.

Insurance companies such as us are subject to risk-based capital standards set by state regulators to help identify companies that merit further regulatory attention. These standards apply specified risk factors to various asset, premium and reserve components of our statutory capital and surplus reported in our statutory basis of accounting financial statements. Current rules require companies to maintain statutory capital and surplus at a specified minimum level determined using the risk-based capital formula. If we do not meet these minimum requirements, state regulators may restrict or prohibit us from operating our business. If we are required to record a charge against earnings in connection with a change in estimates or circumstances, such as increasing our reserves in the future as a

result of unexpectedly poor claims experience or recording realized losses due to impairment of our investments, we may violate these minimum capital adequacy requirements unless we are able to raise sufficient additional capital.

Our insurance subsidiaries, upon whom we depend for dividends and advances in order to fund our working capital needs, are limited by state regulators in their ability to pay dividends.

We are a holding company and are dependent upon dividends, advances, loans and other sources of cash from our subsidiaries in order to meet our obligations. Dividend payments, however, must be approved by the subsidiaries’ domiciliary state departments of insurance and are generally limited to amounts determined by formula which varies by state. The formula for the majority of the states is the greater of 10% of the prior year statutory surplus or the prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to the date of payment. Some states, however, have an additional stipulation that dividends cannot exceed the prior year’s earned surplus. If we are restricted, by regulatory rule or otherwise, from paying or receiving inter-company dividends, we may not be able to fund our working capital needs and debt service requirements from available cash. As a result, we would need to look to other sources of capital which may be more expensive or may not be available at all.

We are responding to subpoenas, interrogatories and inquiries relating to insurance brokers and agents, contingent commissions and bidding practices, and certain finite-risk insurance products.

Along with other companies in the industry, we have received subpoenas, interrogatories and inquiries from: (i) California, Connecticut, Delaware, Florida, Hawaii, Illinois, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, West Virginia and the Canadian Council of Insurance Regulators concerning investigations into practices including contingent compensation arrangements, fictitious quotes, and tying arrangements; (ii) the Securities and Exchange Commission (SEC), the New York State Attorney General, the United States Attorney for the Southern District of New York, the Connecticut Attorney General, the Connecticut Department of Insurance, the Delaware Department of Insurance, the Georgia Office of Insurance and Safety Fire Commissioner and the California Department of Insurance concerning reinsurance products and finite insurance products purchased and sold by us; (iii) the Massachusetts Attorney General and the Connecticut Attorney General concerning investigations into anti-competitive practices; and (iv) the New York State Attorney General concerning declinations of attorney malpractice insurance. We continue to respond to these subpoenas, interrogatories and inquiries.

Subsequent to receipt of the SEC subpoena, we have been producing documents and providing additional information at the SEC’s request. In addition, the SEC and representatives of the United States Attorney’s Office for the Southern District of New York have been conducting interviews with several of our current and former executives relating to the restatement of our financial results for 2004, including our relationship with and accounting for transactions with an affiliate that were the basis for the restatement. The SEC has also recently requested information relating to our current restatement. It is possible that our analyses of, or accounting treatment for, finite reinsurance contracts or discontinued operations could be questioned or disputed by regulatory authorities. As a result, further restatements of our financial results are possible.

We have restated our financial results for prior years and identified material weaknesses in our internal control over financial reporting.

In February of 2006 we determined that we would restate our annual financial statements for the years 2001 through 2004, as well as our interim financial statements through September 30, 2005, to correct the accounting for discontinued operations acquired in our merger with The Continental Corporation in 1995. Additionally, in March of 2006, we determined to restate our financial results for prior years to correct classification errors within our Consolidated Statements of Cash Flows. In May of 2005 we determined to restate our financial results for prior years to correct our accounting for several reinsurance contracts, primarily with a former affiliate, and to correct our equity accounting for that affiliate.

As a result of the foregoing restatements, we identified material weaknesses in our internal control over financial reporting as of December 31, 2005 and 2004, respectively, and determined that our prior year financial statements could not be relied upon. We also determined that our internal control over financial reporting as of such dates was not effective. Our system of internal control over financial reporting is a process designed to provide reasonable assurance to our management, Audit Committee and Board of Directors regarding the reliability of our financial reporting and the preparation and fair presentation of our published financial statements.

If we fail to maintain effective internal control over financial reporting, we could be scrutinized by regulators in a manner that extends beyond the SEC’s requests for information relating to the restatements (as further described in the prior risk factor). We could also be scrutinized by securities analysts and investors. As a result of this scrutiny, we could suffer a loss of public confidence in our financial reporting capabilities and thereby face adverse effects on our business and the market price of our securities.

Our investment portfolio, which is a key component of our overall profitability, may suffer reduced returns or losses, especially with respect to our equity investments in limited partnerships which are often subject to greater leverage and volatility.

Investment returns are an important part of our overall profitability. General economic conditions, stock market conditions, fluctuations in interest rates, and many other factors beyond our control can adversely affect the returns and the overall value of our equity investments and our ability to control the timing of the realization of investment income. In addition, any defaults in the payments due to us for our investments, especially with respect to liquid corporate and municipal bonds, could reduce our investment income and realized investment gains or could cause us to incur investment losses. Further, we invest a portion of our assets in equity investments, primarily through limited partnerships, which are subject to greater volatility than our fixed income investments. In some cases, these limited partnerships use leverage and are thereby subject to even greater volatility. Although limited partnership investments generally provide higher expected return, they present greater risk and are more illiquid than our fixed income investments. As a result of these factors, we may not realize an adequate return on our investments, may incur losses on sales of our investments and may be required to write down the value of our investments.

We may be adversely affected by the cyclical nature of the property and casualty business.

The property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates.

We face intense competition in our industry.

All aspects of the insurance industry are highly competitive and we must continuously allocate resources to refine and improve our insurance products and services. Insurers compete on the basis of factors including products, price, services, ratings and financial strength. We may lose business to competitors offering competitive insurance products at lower prices. We compete with a large number of stock and mutual insurance companies and other entities for both distributors and customers. In addition, the Graham-Leach-Bliley Act of 1999 has encouraged growth in the number, size and financial strength of our potential competitors by removing barriers that previously prohibited holding companies from simultaneously owning commercial banks, insurers and securities firms.

We may suffer losses from non-routine litigation and arbitration matters which may exceed the reserves we have established.

We face substantial risks of litigation and arbitration beyond ordinary course claims and APMT matters, which may contain assertions in excess of amounts covered by reserves that we have established. These matters may be difficult to assess or quantify and may seek recovery of very large or indeterminate amounts that include punitive or treble damages. Accordingly, unfavorable results in these proceedings could have a material adverse impact on our results of operations.

Additional information on litigation is included in the MD&A under Item 7 and Note G to the Consolidated Financial Statements included under Item 8.

We are dependent on a small number of key executives and other key personnel to operate our business successfully.

Our success substantially depends upon our ability to attract and retain high quality key executives and other employees. We believe there are only a limited number of available qualified executives in the business lines in which we compete. We rely substantially upon the services of our executive officers to implement our business strategy. The loss of the services of any members of our management team or the inability to attract and retain other talented personnel could impede the implementation of our business strategies. We do not maintain key man life insurance policies with respect to any of our employees.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

CNA Center, owned by CAC, a wholly owned subsidiary of CCC, serves as our home office. Our subsidiaries own or lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to our principal office locations:


	Amount (Square Feet) of Building
	Owned and Occupied or Leased
Location	and Occupied by CNA		Principal Usage
CNA Center, 333 S. Wabash, Chicago, Illinois		904,990	Principal executive offices of CNAF
401 Penn Street, Reading, Pennsylvania		171,406	Property and casualty insurance offices
2405 Lucien Way, Maitland, Florida		150,825	Property and casualty insurance offices
40 Wall Street, New York, New York		124,482	Property and casualty insurance offices
1111 E. Broad Street, Columbus, Ohio		97,276	Property and casualty insurance offices
675 Placentia Avenue, Brea, California		78,655	Property and casualty insurance offices
600 N. Pearl Street, Dallas, Texas		76,666	Property and casualty insurance offices
405 Howard Street, San Francisco, California		47,667	Property and casualty insurance offices
1100 Cornwall Road, Monmouth Junction, New Jersey		41,767	Property and casualty insurance offices
100 CNA Drive, Nashville, Tennessee		35,653	Property and casualty insurance offices

We lease our office space described above except for the CNA Center, the Reading, Pennsylvania building and the Columbus, Ohio building, which are owned. We consider that our properties are generally in good condition, are well maintained and are suitable and adequate to carry on our business.

ITEM 3. LEGAL PROCEEDINGS

Information on our legal proceedings is set forth in Notes F and G of the Consolidated Financial Statements included under Item 8.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange, and is traded on the Philadelphia Stock Exchange, under the symbol CNA.

As of February 28, 2006, we had 256,001,968 shares of common stock outstanding. Approximately 91% of our outstanding common stock is owned by Loews. We had 2,183 stockholders of record as of February 28, 2006 according to the records maintained by our transfer agent.

The table below shows the high and low closing sales prices for our common stock based on the New York Stock Exchange Composite Transactions.

Common Stock Information


	2005				2004
	High		Low		High		Low
Quarter:
Fourth	$	34.91	$	28.52	$	27.06	$	22.17
Third		30.46		28.40		29.54		23.98
Second		28.90		26.21		30.49		26.32
First		29.79		25.84		28.65		24.52

No dividends have been paid on our common stock in 2005 or 2004. Our ability to pay dividends is limited by regulatory dividend restrictions on our principal operating insurance subsidiaries. In addition, the provisions of our Series H Cumulative Preferred Issue (Series H Issue) prohibit the payment of dividends on our common stock while accrued and unpaid dividends remain outstanding on the Series H Issue. See the Liquidity and Capital Resources section under Item 7 of this MD&A and Note L to the Consolidated Financial Statements included under Item 8 for additional information.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data.

Selected Financial Data



As of and for the Years Ended December 31	2005		2004			2003			2002			2001
(In millions, except per share data and ratios)			Restated (a)			Restated (a)			Restated (a)			Restated (a)
Results of Operations:
Revenues	$	9,862	$	9,924		$	11,715		$	12,293		$	13,097

Income (loss) from continuing operations	$	243	$	446		$	(1,419	)	$	263		$	(1,550	)
Income (loss) from discontinued operations, net of tax		21		(21	)		2			(43	)		6
Cumulative effects of changes in accounting principles, net of tax		—		—			—			(57	)		(61	)

Net income (loss)	$	264	$	425		$	(1,417	)	$	163		$	(1,605	)

Earnings (loss) per Share:
Income (loss) from continuing operations	$	0.68	$	1.49		$	(6.52	)	$	1.18		$	(7.99	)
Income (loss) from discontinued operations, net of tax		0.08		(0.09	)		0.01			(0.20	)		0.04
Cumulative effects of changes in accounting principles, net of tax		—		—			—			(0.26	)		(0.32	)

Earnings (loss) per share available to common stockholders	$	0.76	$	1.40		$	(6.51	)	$	0.72		$	(8.27	)

Financial Condition:
Total investments	$	39,695	$	39,231		$	38,100		$	35,293		$	35,826
Total assets		58,786		62,496			68,296			61,426			65,425
Insurance reserves		42,436		43,653			45,494			40,250			43,721
Long and short term debt		1,690		2,257			1,904			2,292			2,567
Stockholders’ equity		8,950		8,974			8,735			9,139			7,839
Book value per share	$	31.26	$	31.63		$	30.95		$	37.51		$	35.06
Statutory Surplus:
Property and casualty companies (b)	$	6,940	$	6,998		$	6,170		$	6,836		$	6,241
Life and group insurance company(ies)		627		1,177			707			1,645			1,752


(a)		See Note T of the Consolidated Financial Statements included under Item 8 for further discussion.

(b)		Surplus includes the property and casualty companies’ equity ownership of the life and group company(ies)’ capital and surplus.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion should be read in conjunction with Item 1A. Risk Factors, Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data of this Form 10-K.

We have restated our previously reported financial statements as of December 31, 2004 and for the years ended December 31, 2004 and 2003 and all related disclosures, as well as our financial data for the first three interim periods of 2005 and all interim periods of 2004. The restatement is to correct the accounting for discontinued operations acquired in our merger with The Continental Corporation in 1995 and to correct classification errors within our Consolidated Statements of Cash Flows. A current review of discontinued operations identified an overstatement of the net assets of these discontinued operations and errors in accounting for the periodic results of these operations. This MD&A gives effect to the restatement of the Consolidated Financial Statements. See Note T of the Consolidated Financial Statements included under Item 8 for further discussion.

CONSOLIDATED OPERATIONS

Results of Operations

The following table includes the consolidated results of our operations. For more detailed components of our business operations and the net operating income financial measure, see the segment discussions within this MD&A.

Consolidated Operations


Years ended December 31 (In millions, except per share data)	2005			2004			2003
Revenues:
Net earned premiums	$	7,569		$	8,209		$	9,216
Net investment income		1,892			1,680			1,656
Other revenues		411			283			383

Total operating revenues		9,872			10,172			11,255

Claims, Benefits and Expenses:
Net incurred claims and benefits		6,975			6,434			10,163
Policyholders’ dividends		24			11			114
Amortization of deferred acquisition costs		1,543			1,680			1,965
Other insurance related expenses		829			969			1,411
Other expenses		329			326			393

Total claims, benefits and expenses		9,700			9,420			14,046

Operating income (loss) before income tax and minority interest		172			752			(2,791	)
Income tax (expense) benefit on operating income (loss)		105			(126	)		1,081
Minority interest		(24	)		(27	)		6

Net operating income (loss)		253			599			(1,704	)

Realized investment gains (losses), net of participating policyholders’ and minority interests		(10	)		(248	)		460
Income tax (expense) benefit on realized investment gains (losses)		–			95			(175	)

Income (loss) from continuing operations		243			446			(1,419	)

Income (loss) from discontinued operations, net of tax of $(2), $(1) and $(11)		21			(21	)		2

Net income (loss)	$	264		$	425		$	(1,417	)

Basic and Diluted Earnings (Loss) per Share:
Income (loss) from continuing operations	$	0.68		$	1.49		$	(6.52	)
Income (loss) from discontinued operations, net of tax		0.08			(0.09	)		0.01

Basic and diluted earnings (loss) per share available to common stockholders	$	0.76		$	1.40		$	(6.51	)

Weighted Average Outstanding Common Stock and Common Stock Equivalents		256.0			256.0			227.0

2005 Compared with 2004

Net income decreased $161 million in 2005 as compared with 2004, due to decreased net operating income partially offset by improved net investment results.

Net operating income decreased $346 million in 2005 as compared with 2004. This decrease in net operating income was primarily driven by increased unfavorable net prior year development of $437 million after-tax which includes the impact of significant commutations in 2005 and 2004, decreased earned premiums, and increased catastrophe impacts in 2005. Partially offsetting these impacts were increased net investment income, a $115 million after-tax benefit related to a federal income tax settlement and release of federal income tax reserves, and lower insurance acquisition and operating expenses. The Standard Lines and Specialty Lines segments

produced a combined ratio of 110.0% and 100.5% for the years ended December 31, 2005 and 2004, which included an 11.6% and 3.6% impact from significant commutations and catastrophes.

Unfavorable net prior year development of $807 million, including $945 million of unfavorable claim and allocated claim adjustment expense reserve development and $138 million of favorable premium development, was recorded in 2005. Unfavorable net prior year development of $134 million, including $250 million of unfavorable claim and allocated claim adjustment expense reserve development and $116 million of favorable premium development, was recorded in 2004.

During 2005 and 2004, we commuted several significant reinsurance contracts that resulted in unfavorable development of $433 million and $76 million, which is included in the development above, and which were partially offset by the release of previously established allowance for uncollectible reinsurance. These commutations resulted in an unfavorable impact of $259 million after-tax and favorable impact of $18 million after-tax in 2005 and 2004. These contracts contained interest crediting provisions and maintenance charges. Interest charges associated with the reinsurance contracts commuted were $47 million after-tax and $86 million after-tax in 2005 and 2004. There will be no further interest crediting charges or other charges related to these commuted contracts in future periods.

Unfavorable net prior year development was also recorded related to the Company’s assumed reinsurance operations which are in run-off, workers compensation and excess workers compensation lines, primarily in accident years 2003 and prior, the architects and engineers book of business, pollution exposures and large directors and officers claims.

The impact of catastrophes was $334 million after-tax and $196 million after-tax in 2005 and 2004. This increase was primarily due to 2005 catastrophe impacts resulting from Hurricanes Katrina, Wilma, Rita, Dennis and Ophelia and 2004 catastrophe impacts primarily resulting from Hurricanes Charley, Frances, Ivan and Jeanne. These impacts are net of anticipated reinsurance recoveries, and include the effect of reinstatement premiums and estimated insurance assessments.

Net realized investment results, after-tax, improved $143 million in 2005 as compared with 2004. Net results in 2004 included a loss on the sale of the individual life insurance business of $389 million after-tax, which was partly offset by the 2004 gain of $105 million after-tax on the sale of our investment in Canary Wharf Group PLC (Canary Wharf), a London-based real estate company.

Net earned premiums decreased $640 million in 2005 as compared with 2004. Net earned premiums from the core property and casualty operations decreased by $309 million, as discussed in more detail in the segment discussions below. The remainder of the decrease in earned premiums was primarily due to the sale of the individual life business on April 30, 2004, as well as decreased premiums from CNA Re which exited the reinsurance market in 2003.

Income from discontinued operations increased $42 million in 2005 as compared to 2004, primarily due to a decrease in unfavorable net prior year development, including the effects of commutations of assumed and ceded reinsurance, increased foreign exchange gains and improved investment results primarily related to realized investment gains.

2004 Compared with 2003

Net results increased $1,842 million in 2004 as compared to 2003, due to increased net operating income partially offset by decreased net realized investment results. Net operating results increased $2,303 million in 2004 as compared with 2003. This improvement was due principally to decreased net unfavorable prior year development of $1,757 million after-tax, $356 million after-tax decrease in the bad debt provisions for insurance and reinsurance receivables, $66 million after-tax decrease in interest expense related to additional cessions to corporate aggregate reinsurance treaties and $59 million after-tax decrease in certain insurance related assessments. These favorable impacts to net income in 2004 were partially offset by increased catastrophe losses and decreased net realized investment results. The impact of catastrophes was $196 million after-tax and $93 million after-tax in 2004 and 2003. This increase was primarily due to catastrophe impacts resulting from Hurricanes Charley, Frances, Ivan and Jeanne in 2004. These impacts are net of anticipated reinsurance recoveries, and include the effect of reinstatement premiums and estimated insurance assessments. The Standard Lines and Specialty Lines segments produced a combined ratio of 100.5% and 150.5% for the years ended December 31, 2004 and 2003.

Unfavorable net prior year development of $134 million, including $250 million of unfavorable claim and allocated claim adjustment expense reserve development and $116 million of favorable premium development, was recorded

in 2004. Unfavorable net prior year development of $2,837 million, including $2,296 million of unfavorable claim and allocated claim adjustment expense reserve development and $541 million of unfavorable premium development, was recorded in 2003.

Net realized investment results decreased $438 million after-tax in 2004 as compared with 2003. This decrease in investment results was primarily due to the loss on the sale of the individual life insurance business of $389 million after-tax and losses on derivatives of $55 million after-tax. These decreases were partly offset by a $105 million after-tax gain on the sale of our investment in Canary Wharf, and a reduction in impairment losses for other-than-temporary declines in market values for fixed maturity and equity securities. Impairment losses of $60 million after-tax were recorded in 2004 across various sectors, including an after-tax impairment loss of $36 million related to loans made under a credit facility to a national contractor, while in 2003 impairment losses of $209 million after-tax were recorded across various sectors including the airline, healthcare and energy industries.

Net earned premiums decreased $1,007 million in 2004 as compared with 2003. The decrease in net earned premiums was due primarily to reduced premiums from the individual life and group benefits businesses, as well as CNA Re. Partially offsetting these unfavorable impacts was a $357 million decrease in premiums ceded to corporate aggregate and other reinsurance treaties in 2004 as compared to 2003. The 2003 cessions were principally due to the unfavorable net prior year development recorded in 2003.

Income from discontinued operations decreased $23 million in 2004 as compared to 2003, primarily due to an increase in unfavorable net prior year development, including the effects of commutations of assumed and ceded reinsurance and decreased investment results primarily related to realized investment losses, partially offset by a reduction in expenses and foreign exchange losses.

Net Prior Year Development

The results of operations for the years ended December 31, 2005, 2004 and 2003 were impacted by net prior year development recorded for the property and casualty and the Corporate and Other Non-Core segments. Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals for prior accident years are defined as net prior year development within this MD&A. These changes can be favorable or unfavorable. The development discussed below excludes the impact of the provision for uncollectible reinsurance, but includes the impact of commutations. See Note H to the Consolidated Financial Statements included under Item 8.

We record favorable or unfavorable premium and claim and allocated 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 was fully utilized in 2003, the ceded premiums and losses for an individual segment may change in subsequent years because of the re-estimation of the subject losses or commutations of the underlying contracts. In 2005, we commuted a corporate aggregate reinsurance treaty. See Note H of the Consolidated Financial Statements for further discussion of the corporate aggregate reinsurance treaties.

The following tables summarize net prior year development by segment for the property and casualty segments and the Corporate and Other Non-Core segment for the years ended December 31, 2005, 2004 and 2003. For the Life and Group Non-Core segment $5 million and $7 million of favorable development was recorded in 2005 and 2004, and $62 million of unfavorable development was recorded in 2003.

2005 Net Prior Year Development


							Corporate
	Standard			Specialty			and Other
	Lines			Lines			Non-Core		Total
(In millions)
Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of corporate aggregate reinsurance treaties:
Core (Non-APMT)	$	376		$	42		$	171	$	589
APMT		–			–			63		63

Total		376			42			234		652
Ceded losses related to corporate aggregate reinsurance treaties		183			5			57		245

Pretax unfavorable net prior year development before impact of premium development		559			47			291		897

Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		(101	)		(12	)		11		(102	)
Ceded premiums related to corporate aggregate reinsurance treaties		(6	)		19			4		17

Total premium development		(107	)		7			15		(85	)

Total 2005 unfavorable net prior year development (pretax)	$	452		$	54		$	306	$	812

Total 2005 unfavorable net prior year development (after-tax)	$	294		$	35		$	199	$	528

2004 Net Prior Year Development


							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 corporate aggregate reinsurance treaties:
Core (Non-APMT)	$	107		$	75		$	20		$	202
APMT		–			–			55			55

Total		107			75			75			257
Ceded losses related to corporate aggregate reinsurance treaties		8			(17	)		9			–

Pretax unfavorable net prior year development before impact of premium development		115			58			84			257

Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		(96	)		(33	)		12			(117	)
Ceded premiums related to corporate aggregate reinsurance treaties		(1	)		5			(3	)		1

Total premium development		(97	)		(28	)		9			(116	)

Total 2004 unfavorable net prior year development (pretax)	$	18		$	30		$	93		$	141

Total 2004 unfavorable net prior year development (after-tax)	$	12		$	20		$	60		$	92

2003 Net Prior Year Development


							Corporate
	Standard			Specialty			and Other
	Lines			Lines			Non-Core			Total
(In millions)
Pretax unfavorable net prior year claim and allocated claim adjustment expense development excluding the impact of corporate aggregate reinsurance treaties:
Core (Non-APMT)	$	1,423		$	313		$	346		$	2,082
APMT		–			–			795			795

Total		1,423			313			1,141			2,877
Ceded losses related to corporate aggregate reinsurance treaties		(485	)		(56	)		(102	)		(643	)

Pretax unfavorable net prior year development before impact of premium development		938			257			1,039			2,234

Unfavorable (favorable) premium development, excluding impact of corporate aggregate reinsurance treaties		209			6			(32	)		183
Ceded premiums related to corporate aggregate reinsurance treaties		269			31			58			358

Total premium development		478			37			26			541

Total 2003 unfavorable net prior year development (pretax)	$	1,416		$	294		$	1,065		$	2,775

Total 2003 unfavorable net prior year development (after-tax)	$	920		$	191		$	692		$	1,803

Critical Accounting Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires 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.

Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.

The accounting estimates discussed below are considered by us to be critical to an understanding of our Consolidated Financial Statements as their application places the most significant demands on our judgment. Note A of the Consolidated Financial Statements included under Item 8 should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations 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. Workers compensation lifetime claim reserves and accident and health claim reserves are calculated using mortality and morbidity assumptions based on our own and industry experience, and are discounted at interest rates that range from 3.5% to 6.5% at December 31, 2005 and 2004. The reserve for unearned premiums on property and casualty and accident and health contracts represents the portion of premiums written related to the unexpired terms of coverage. The inherent risks associated with the reserving process are discussed in the Reserves – Estimates and Uncertainties section below.

Reinsurance

Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported as receivables in the Consolidated Balance Sheets. The ceding of insurance does not discharge us of our primary liability under insurance contracts written by us. An exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities assumed under reinsurance agreements. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, our past experience and current economic conditions.

Reinsurance accounting allows for contractual cash flows to be reflected as premiums and losses, as compared to deposit accounting, which requires cash flows to be reflected as assets and liabilities. To qualify for reinsurance accounting, reinsurance agreements must include risk transfer. Considerable judgment by management may be necessary to determine if risk transfer requirements are met. We believe we have appropriately applied reinsurance accounting principles in our evaluation of risk transfer. However, our evaluation of risk transfer and the resulting accounting could be challenged in connection with regulatory reviews or possible changes in accounting and/or financial reporting rules related to reinsurance, which could materially adversely affect our results of operations and/or equity. Further information on our reinsurance program is included in the Reinsurance section below and Note H of the Consolidated Financial Statements included under Item 8.

Valuation of Investments and Impairment of Securities

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

Our investment portfolio is subject to market declines below book value that may be other-than-temporary. We have an Impairment Committee, which reviews the investment portfolio on a quarterly basis, with ongoing analysis as new information becomes available. Any decline that is determined to be other-than-temporary is recorded as an impairment loss in the results of operations in the period in which the determination occurred. Further information on our process for evaluating impairments is included in Note B of the Consolidated Financial Statements included under Item 8.

Long Term Care Products

Reserves and deferred acquisition costs for our long term care products are based on certain assumptions including morbidity, policy persistency and interest rates. Actual experience may differ from our 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. Our results of operations and/or equity may be materially, adversely affected if actual experience varies significantly from our assumptions.

Pension and Postretirement Benefit Obligations

We make a significant number of assumptions in estimating the liabilities and costs related to our pension and postretirement benefit obligations to employees under our benefit plans. The assumptions that most impact these costs are the discount rate, the expected return on plan assets and the rate of compensation increases. These assumptions are evaluated relative to current market factors such as inflation, interest rates and fiscal and monetary policies. Changes in these assumptions can have a material impact on pension obligations and pension expense.

In determining the discount rate assumption, we utilized current market information provided by our plan actuaries, including a discounted cash flow analysis of our pension and postretirement obligations and general movements in the current market environment. In particular, the basis for our discount rate selection was fixed income debt securities that receive one of the two highest ratings given by a recognized ratings agency. In 2005 and historically, the Moody’s Aa Corporate Bond Index was the benchmark for discount rate selection. The index is used as the basis for the change in discount rate from the last measurement date. Additionally in 2005, we supplemented our discount rate decision with a yield curve analysis. The yield curve was applied to expected future retirement plan payments to adjust the discount rate to reflect the cash flow characteristics of the plans. The yield curve was developed by the plans’ actuaries and is a hypothetical double A yield curve represented by a series of annualized discount rates reflecting bond issues having a rating of Aa or better by Moody’s Investors Service, Inc. or a rating of AA or better by Standard & Poor’s. Based on all available information, it was determined that 5.625% and 5.50% were the appropriate discount rates as of December 31, 2005 to calculate our accrued pension and postretirement liabilities, respectively. Accordingly, the 5.625% and 5.50% rates will also be used to determine our 2006 pension and postretirement expense. At December 31, 2004 the discount rate was 5.875% for both pension and postretirement liabilities.

Further information on our pension and postretirement benefit obligations is included in Note J of the Consolidated Financial Statements included under Item 8.

Legal Proceedings

We are involved in various legal proceedings that have arisen during the ordinary course of business. We evaluate the facts and circumstances of each situation, and when we determine it is necessary, a liability is estimated and recorded. Further information on our legal proceedings and related contingent liabilities is provided in Notes F and G of the Consolidated Financial Statements included under Item 8.

Reserves – Estimates and Uncertainties

We maintain reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled (case reserves) and claims that have been incurred but not reported (IBNR). Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Balance Sheets under the heading “Insurance Reserves.” Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. The carried case and IBNR reserves are provided in the Segment Results section of this MD&A and in Note F of the Consolidated Financial Statements included under Item 8.

The level of reserves we maintain represents our best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that we derive, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain.

Among the many uncertain future events about which we make 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 our evaluation of each type of business. Many of these uncertainties are not precisely quantifiable, particularly on a prospective basis, and require significant judgment on our part.

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

In addition, we are subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social and other environmental conditions change. These issues have had, and may continue to have, a negative effect on our business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Examples of emerging or potential claims and coverage issues include:

•		increases in the number and size of claims relating to injuries from medical products, 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 our claim and claim adjustment expense reserves and could lead to future reserve additions. See the Segment Results sections of this MD&A and Note F of the Consolidated Financial Statements included under Item 8 for a discussion of changes in reserve estimates and the impact on our results of operations.

Our experience has been that establishing reserves for casualty coverages relating to asbestos, environmental pollution and mass tort (APMT) claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others:

•

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

•		inconsistent court decisions and developing legal theories;

•		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 we have issued;

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

•		our 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 our carried loss reserves.

Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment reserves for APMT, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimation techniques and methodologies, many of which involve significant judgments that are required of management. Due to the inherent uncertainties in estimating reserves for APMT claim and claim adjustment expenses and the degree of variability due to, among other things, the factors described above, we may be required to record material changes in our claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge. See the Asbestos and Environmental Pollution and Mass Tort Reserves section of this MD&A and Note F of the Consolidated Financial Statements included under Item 8 for additional information relating to APMT claims and reserves.

Our recorded reserves, including APMT reserves, reflect our best estimate as of a particular point in time based upon known facts, current law and our judgment. The reserve analyses performed by our actuaries result in point estimates. We use 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 our 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 APMT reserves, the reserve analysis performed by our actuaries results in both a point estimate and a range. We use the point estimate as the primary factor in determining the carried reserve but also consider the range given the volatility of APMT exposures, as noted above.

For Standard Lines, the December 31, 2005 carried net claim and claim adjustment expense reserve is slightly higher than the actuarial point estimate. For Specialty Lines, the December 31, 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 2005 accident year. The data from the current accident year 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 December 31, 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, we feel 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, we review our reserve estimates on a regular basis and make adjustments in the period

that the need for such adjustments is determined (see Net Prior Year Development above). These reviews have resulted in our identification of information and trends that have caused us to increase our reserves in prior periods and could lead to the identification of a need for additional material increases in claim and claim adjustment expense reserves, which could materially adversely affect our results of operations, equity, business and insurer financial strength and debt ratings (see the Ratings section of this MD&A).

The following table presents estimated volatility in carried claim and claim adjustment expense reserves for the Standard Lines, Specialty Lines and Corporate and Other Non-Core segments. In addition to the gross carried loss reserves presented below, Claim and Claim Adjustment Expenses as reflected on the Consolidated Balance Sheet include $3,277 million at December 31, 2005, related to the Life and Group Non-Core segment.

Estimated Volatility in Gross Carried Loss Reserves by Segment


	Gross
	Carried		Estimated
	Loss		Volatility in
December 31, 2005 (In millions)	Reserves		Reserves
Standard Lines	$	15,084		+/- 7	%
Specialty Lines		5,205		+/- 7	%
Corporate and Other Non-Core		7,372		+/- 25	%

The estimated volatility noted above does not represent an actuarial range around our gross loss reserves, and it does not represent the range of all possible outcomes. The volatility represents an estimate of the inherent volatility associated with estimating loss reserves for the specific type of business written by each segment, and along with the associated reserve balances, allows for the quantification of potential earnings impacts in future reporting periods. The primary characteristics influencing the estimated level of volatility are the length of the claim settlement period, the potential for changes in medical and other claim costs, changes in the level of litigation or other dispute resolution processes, changes in the legal environment and the potential for different types of injuries emerging. Ceded reinsurance arrangements may reduce the volatility. Since ceded reinsurance arrangements vary by year, volatility in gross reserves may not result in comparable impacts to net income or stockholders’ equity.

Reinsurance

We cede insurance to reinsurers to limit our 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 our primary liabilities. Therefore, a credit exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet the obligations or to the extent that the reinsurer disputes the liabilities assumed under reinsurance agreements. Property and casualty reinsurance coverages are tailored to the specific risk characteristics of each product line and our retained amount varies by type of coverage. Reinsurance contracts are 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 reinsurance contracts are purchased on an excess of loss basis. We also utilize facultative reinsurance in certain lines. In addition, we assume reinsurance as members of various reinsurance pools and associations.

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


Components of reinsurance receivables (In millions)	December 31, 2005			December 31, 2004
Reinsurance receivables related to insurance reserves:
Ceded claim and claim adjustment expense	$	10,605		$	13,879
Ceded future policy benefits		1,193			1,260
Ceded policyholders’ funds		56			65
Billed reinsurance receivables		582			684

Reinsurance receivables		12,436			15,888
Allowance for uncollectible reinsurance		(519	)		(546	)

Reinsurance receivables, net of allowance for uncollectible reinsurance	$	11,917		$	15,342

We attempt to mitigate our credit risk related to reinsurance by entering into reinsurance arrangements 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. Such collateral was approximately $4,277 million and $6,231 million at December 31, 2005 and 2004. Additionally, we may enter into reinsurance agreements with reinsurers that are not rated.

During 2005, we sustained catastrophe losses related to Hurricanes Katrina, Rita and Wilma. We ceded $429 million of these losses to our corporate catastrophe programs. This reinsurance protection cost us premiums of approximately $64 million, which included reinstatement premiums of approximately $27 million. The cost of our 2006 corporate catastrophe reinsurance programs will be approximately $82 million before the impacts of any reinstatement premiums.

The terms of our 2006 programs are different than those of our 2005 programs. The Corporate Property Catastrophe treaty provides coverage for the accumulation of losses between $200 million and $700 million arising out of a single catastrophe occurrence in the United States, its territories and possessions, and Canada. Our co-participation is 25% of the first $125 million layer and 10% in all remaining layers. Our Marine treaty provides $65 million of protection above a $20 million retention on the accumulation of losses arising out of a single catastrophe occurrence.

In addition to these reinsurance treaties, our exposure to aggregation of certain catastrophe events is further mitigated by an Aggregate Property Catastrophe treaty. The Aggregate Property Catastrophe treaty covers 95% of $150 million of losses above a retention of $125 million from named earthquake or wind storm catastrophes in the United States, its territories and possessions, and Canada, which exceed $35 million. For any single event, the maximum that can be applied to our retention or recovered under the treaty is $75 million.

Our overall ceded reinsurance program includes certain finite property and casualty contracts that are entered into and accounted for on a funds withheld basis. Under the funds withheld basis, we record 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. We are 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 us in excess of our 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 significant commuted contracts resulted in an unfavorable impact of $259 million after-tax in 2005, a favorable impact of $18 million after-tax in 2004 and an unfavorable impact of $71 million after-tax in 2003. During 2005, we commuted several of these contracts and as a result, there will be no further interest crediting on these contracts in future periods. The after-tax interest crediting charges related to these significant commuted contracts was $47 million, $86 million and $152 million in 2005, 2004 and 2003, and was reflected as a component of net investment income in our consolidated statements of operations.

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

Further information on our reinsurance program is included in Note H of the Consolidated Financial Statements included under Item 8.

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 this event, but the capacity to withstand the effect of any additional terrorism events was significantly diminished.

The Terrorism Risk Insurance Act of 2002 (TRIA) established a program within the Department of the Treasury under which insurers are required to offer terrorism insurance and the federal government will share the risk of loss by commercial property and casualty insurers arising from future terrorist attacks. Although TRIA expired on December 31, 2005, the Terrorism Risk Insurance Extension Act of 2005 (TRIEA) extended this program through December 31, 2007. Each participating insurance company must pay a deductible, ranging from 17.5% of direct earned premiums from covered commercial insurance lines in 2006 to 20% in 2007, 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 in 2006 and 85% of the excess covered losses in 2007, while companies will retain the remaining 10% in 2006 and the remaining 15% in 2007. Federal reimbursement is available for a certified act of terrorism after March 31, 2006 only if the aggregate industry insured losses resulting from such act exceed $50 million in 2006 or $100 million in 2007. 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 program does not cover life or health insurance products or certain lines of property and casualty insurance such as commercial automobile, surety and professional liability (other than directors and officers liability insurance). The program also does not generally affect state law limitations applying to premiums and policies for terrorism coverage.

While TRIEA provides the property and casualty industry with an increased ability to withstand the effect of a terrorist event through 2007, given the unpredictability of the nature, targets, severity or frequency of potential terrorist events, our results of operations or equity could nevertheless be materially adversely impacted by them. We are attempting to mitigate this exposure through our underwriting practices, as well as policy terms and conditions (where applicable). Under the laws of certain states, we are generally prohibited from excluding terrorism exposure from our primary workers compensation policies. Further, in those states that mandate property insurance coverage of damage from fire following a loss, we are prohibited from excluding terrorism exposure.

Terrorism-related reinsurance losses are also not covered by TRIEA. As a result, our assumed reinsurance arrangements either exclude terrorism coverage or significantly limit the level of coverage.

Over the past several years, we have been underwriting our business to manage our terrorism exposure through strict underwriting standards, risk avoidance measures and conditional terrorism exclusions where permitted by law. There is substantial uncertainty as to our ability to effectively contain our terrorism exposure since, notwithstanding our efforts described above, we continue to issue forms of coverage, in particular, workers’ compensation, that are exposed to risk of loss from a terrorism event.

Restructuring

In 2001, we finalized and approved a plan to restructure the property and casualty segments and Life and Group Non-Core segment, discontinue the variable life and annuity business and consolidate certain real estate locations. The remaining accrual related to this plan was $13 million at December 31, 2005. Approximately $2 million of the remaining accrual, primarily related to lease termination costs, is expected to be paid in 2006.

Further information on the restructuring plan is included in Note O of the Consolidated Financial Statements included under Item 8.

Segment Results

The following discusses the results of operations for our operating segments. Management utilizes the net operating income financial measure to monitor our operations. Net operating income is calculated by excluding from net income the after-tax effects of 1) net realized investment gains or losses, 2) gains or losses from discontinued operations and 3) cumulative effects of changes in accounting principles. See further discussion regarding how we manage our business in Note N of the Consolidated Financial Statements included under Item 8. In evaluating the results of the Standard Lines and Specialty Lines, we utilize the combined ratio, the loss ratio, the expense ratio and the dividend ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of 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.

STANDARD LINES

Business Overview

Standard Lines works with an independent agency distribution system and network of brokers to market a broad range of property and casualty insurance products and services to small, middle-market and large businesses. The Standard Lines operating model focuses on underwriting performance, relationships with selected distribution sources and understanding customer needs.

Standard Lines includes Property, Casualty and CNA Global.

Property provides standard and excess property coverage, as well as boiler and machinery to a wide range of businesses.

Casualty provides standard casualty insurance products such as workers compensation, general and product liability and commercial auto coverage through traditional products to a wide range of businesses. The majority of Casualty customers are small and middle-market businesses, with less than $1 million in annual insurance premiums. Most insurance programs are provided on a guaranteed cost basis; however, Casualty has the capability to offer specialized, loss-sensitive insurance programs to those customers viewed as higher risk and less predictable in exposure.

Excess & Surplus (E&S) is included in Casualty. E&S provides specialized insurance and other financial products for selected commercial risks on both an individual customer and program basis. Customers insured by E&S are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. E&S’s products are distributed throughout the United States through specialist producers, program agents and Property and Casualty’s agents and brokers. E&S has specialized underwriting and claim resources in Chicago, Denver and Columbus.

Property and Casualty’s (P&C) field structure consists of 34 branch locations across the country organized into 4 regions. Each branch provides the marketing, underwriting and risk control expertise on the entire portfolio of products. The Centralized Processing Operation for small and middle-market customers, located in Maitland, Florida, handles policy processing and accounting, and also acts as a call center to optimize customer service. The claims field structure consists of 23 locations organized into two zones, East and West. Also, Standard Lines, primarily through a wholly owned subsidiary, ClaimsPlus, Inc., a third party administrator, provides total risk management services relating to claim and information services to the large commercial insurance marketplace.

CNA Global consists of Marine and Global Standard Lines.

Marine serves domestic and global ocean marine needs, with markets extending across North America, Europe and throughout the world. Marine offers hull, cargo, primary and excess marine liability, marine claims and recovery products and services. Business is sold through national brokers, regional marine specialty brokers and independent agencies.

Global Standard Lines is responsible for coordinating and managing the direct business of our overseas property and casualty operations. This business identifies and capitalizes on strategic indigenous opportunities and currently has operations in Hawaii, Europe, Latin America and Canada.

The following table details results of operations for Standard Lines.

Results of Operations


Years ended December 31 (In millions)	2005			2004			2003
Net written premiums	$	4,382		$	4,582		$	4,563
Net earned premiums		4,410			4,917			4,532
Net investment income		767			496			408
Net operating income (loss)		(41	)		220			(948	)
Net realized investment gains		9			139			234
Net income (loss)		(32	)		359			(714	)

Ratios
Loss and loss adjustment expense		87.5	%		70.8	%		98.0	%
Expense		32.4			34.6			42.7
Dividend		0.4			0.2			2.2

Combined		120.3	%		105.6	%		142.9	%

2005 Compared with 2004

Net written premiums for Standard Lines decreased $200 million in 2005 as compared with 2004. This decrease was primarily driven by decreased premium writings in our casualty lines of business, increased reinstatement premium in 2005 related to catastrophe losses and decreased rates as discussed further below. Net earned premiums decreased $507 million in 2005 as compared with 2004. This decrease was primarily driven by the decline in premiums written. The lower premium is consistent with our strategy of portfolio optimization. Our priority is a diversified portfolio in profitable classes of business.

Standard Lines averaged a rate decrease of 1% for 2005 and a rate increase of 4% for 2004 for the contracts that renewed during those periods. Retention rates of 77% and 70% were achieved for those contracts that were up for renewal.

Net results decreased $391 million in 2005 as compared with 2004. This decrease was attributable to declines in both net operating results and net realized investment gains. See the Investments section of the MD&A for further discussion on net realized investment gains.

Net operating results decreased $261 million in 2005 as compared with 2004. This decrease was due primarily to increased unfavorable net prior year development of $282 million after-tax including $185 million after-tax related to significant commutations in 2005, a $135 million after-tax increase in catastrophe losses, the decreased earned premium as discussed above and decreased current accident year results. These unfavorable items were partially offset by a $271 million increase in net investment income and a decrease in the provision for insurance bad debt. See the Investments section of the MD&A for further discussion on net investment income.

Unfavorable net prior year development of $452 million was recorded in 2005, including $559 million of unfavorable claim and allocated claim adjustment expense reserve development and $107 million of favorable premium development. Unfavorable net prior year development of $18 million, including $115 million of unfavorable claim and allocated claim adjustment expense reserve development and $97 million of favorable premium development, was recorded in 2004. Further information on Standard Lines Net Prior Year Development for 2005 and 2004 is included in Note F of the Consolidated Financial Statements included under Item 8.

During 2005 and 2004, we commuted several significant reinsurance contracts that resulted in unfavorable development of $285 million and $5 million, which is included in the development above, and which were partially offset by the release of previously established allowance for uncollectible reinsurance. These commutations resulted in an unfavorable impact of $173 million after-tax and favorable impact of $4 million after-tax in 2005 and 2004. These contracts contained interest crediting provisions. The interest charges associated with the reinsurance

contracts commuted was $42 million after-tax and $110 million after-tax in 2005 and 2004. There will be no further interest crediting charges related to these commuted contracts in future periods.

The impact of catastrophes was $318 million after-tax and $183 million after-tax for 2005 and 2004. These catastrophe impacts are net of anticipated reinsurance recoveries, and include the effect of reinstatement premiums and estimated insurance assessments.

The combined ratio increased 14.7 points in 2005 as compared with 2004. The loss ratio increased 16.7 points in 2005 as compared with 2004. These increases were primarily due to increased net prior year development, increased catastrophe losses and decreased current accident year results. Catastrophe losses of $470 million and $260 million were recorded in 2005 and 2004.

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

Gross and Net Carried
Claim and Claim Adjustment Expense Reserves


December 31, (In millions)	2005		2004
Gross Case Reserves	$	7,033	$	6,904
Gross IBNR Reserves		8,051		7,398


Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	15,084	$	14,302


Net Case Reserves	$	5,165	$	4,761
Net IBNR Reserves		6,081		4,547


Total Net Carried Claim and Claim Adjustment Expense Reserves	$	11,246	$	9,308

The expense ratio decreased 2.2 points in 2005 as compared with 2004. This decrease in 2005 was primarily due to a decrease in the provision for insurance bad debt.

The dividend ratio increased 0.2 points in 2005 as compared with 2004. The 2004 ratio was impacted by favorable dividend development, partially offset by decreased participation in dividend plans and lower dividend amounts related to the current accident year.

2004 Compared with 2003

Net written premiums for Standard Lines increased $19 million in 2004 as compared with 2003. This increase was primarily driven by decreased ceded premiums of $270 million to corporate aggregate and other reinsurance treaties in 2004 as compared with 2003. The 2003 cessions were principally due to the unfavorable net prior year development recorded in 2003. This favorable impact was partially offset by lower new business due to increased competition, as well as intentional underwriting actions in business classified as high hazard. Specifically impacting retention was the impact of intentional underwriting actions, including reductions in certain silica-related risks and workers compensation policies classified as high hazard.

Standard Lines averaged rate increases of 4% and 16% for 2004 and 2003 for the contracts that renewed during those periods. Retention rates of 70% and 72% were achieved for those contracts that were up for renewal.

Net earned premiums increased $385 million in 2004 as compared with 2003. This increase was primarily driven by decreased ceded premiums of $270 million related to corporate aggregate and other reinsurance treaties.

Net results increased $1,073 million in 2004 as compared with 2003. This increase was attributable to an increase in net operating income, partially offset by a decrease in net realized investment gains. See the Investments section of the MD&A for further discussion on net realized investment gains.

Net operating results increased $1,168 million in 2004 as compared with 2003. This improvement was due primarily to decreased unfavorable net prior year development of $908 million after-tax, a decrease in the bad debt provision recorded for insurance receivables of $57 million after-tax, a decrease in the bad debt provision for reinsurance receivables of $48 million after-tax, decreased dividend development of $45 million after-tax, a decrease in certain insurance related assessments of $35 million after-tax and increased net investment income of $57 million after-tax. The increased net investment income was primarily due to reduced interest charges of $63 million after-tax related to the corporate aggregate and other reinsurance treaties. These favorable items were partially offset by increased catastrophe impacts. The impact of catastrophes was $183 million after-tax and $71 million after-tax for 2004 and 2003, as discussed below. These catastrophe impacts are net of anticipated reinsurance recoveries, and include the effect of reinstatement premiums and estimated insurance assessments. See the Investments section of the MD&A for further discussion on net investment income.

The combined ratio decreased 37.3 points in 2004 as compared with 2003. The loss ratio decreased 27.2 points in 2004 as compared with 2003. These improvements were primarily due to decreased net unfavorable prior year development of $1,398 million and a decrease in the bad debt provision recorded for reinsurance receivables of $74 million. These favorable impacts on the 2004 loss ratio were partially offset by increased catastrophe losses. Catastrophe losses of $260 million and $110 million were recorded in 2004 and 2003. The increased 2004 catastrophe losses were primarily due to a $235 million loss resulting from Hurricanes Charley, Frances, Ivan and Jeanne.

Unfavorable net prior year development of $18 million was recorded in 2004, including $115 million of unfavorable claim and allocated claim adjustment expense reserve development and $97 million of favorable premium development. Unfavorable net prior year development of $1,416 million, including $938 million of unfavorable claim and allocated claim adjustment expense reserve development and $478 million of unfavorable premium development, was recorded in 2003. Further information on Standard Lines Net Prior Year Development for 2004 and 2003 is included in Note F of the Consolidated Financial Statements included under Item 8.

The expense ratio decreased 8.1 points in 2004 as compared with 2003. This decrease in 2004 was primarily due to an increased net earned premium base, an $88 million decrease in the provision for uncollectible insurance receivables, a $54 million decrease in certain insurance related assessments and reduced expenses as a result of expense reduction initiatives as compared with the same period in 2003. Partially offsetting these favorable impacts was $14 million of estimated underwriting assessments related to the 2004 Florida hurricanes.

During 2004, additional bad debt provisions for insurance receivables of $150 million were recorded as compared to $242 million recorded in 2003. The substantial bad debt provisions for insurance receivables in 2004 and 2003 were primarily related to Professional Employer Organization (PEO) accounts. During 2002, Standard Lines ceased writing coverages for PEO businesses, with the last contracts expiring on June 30, 2003. In the third quarter of 2003, we performed a review of PEO accounts to estimate ultimate losses and the indicated recoveries under retrospective premium or high-deductible provisions of the insurance contracts. Based on the 2003 analysis of the credit standing of the individual PEO accounts and the amount of collateral held, we recorded an increase in the bad debt provision. In the third quarter of 2004, the review of PEO accounts was updated and the population of accounts reviewed was expanded to include Temporary Help accounts as well. Payroll audits performed since the last study identified that the exposure base for many accounts was higher than expected. In addition, recovery estimates were updated based on current credit information on the insured. Based on the updated study, we recorded an estimated bad debt provision of $95 million in the third quarter of 2004 for these accounts.

In 2004, the expense ratio was adversely impacted by an additional $55 million bad debt provision for insurance receivables. The primary drivers of the provision were the completion of updated ultimate loss projections on all large account business where the insured is currently in bankruptcy and a comprehensive review of all billed balances that are past due.

The dividend ratio decreased 2.0 points in 2004 as compared with 2003 due to favorable net prior year dividend development of $23 million in 2004, as compared to unfavorable net prior year dividend development of $46 million in 2003, primarily related to workers compensation products. The favorable 2004 dividend development was related to a review that was completed in 2004 which indicated dividends were lower than prior expectations based on decreased usage of dividend programs.

SPECIALTY LINES

Business Overview

Specialty Lines provides professional, financial and specialty property and casualty products and services through a network of brokers, managing general underwriters and independent agencies. Specialty Lines provides solutions for managing the risks of its clients, including architects, engineers, lawyers, healthcare professionals, financial intermediaries and corporate directors and officers. Product offerings also include surety and fidelity bonds and vehicle and equipment warranty services.

Specialty Lines includes the following business groups: Professional Liability Insurance, Surety and Warranty.

Professional Liability Insurance (CNA Pro) provides management and professional liability insurance and risk management services, primarily in the United States. This unit provides professional liability coverages to various professional firms, including architects and engineers, realtors, non-Big Four accounting firms, law firms and technology firms. CNA Pro also has market positions in directors and officers (D&O), errors and omissions, employment practices, fiduciary and fidelity coverages. Specific areas of focus include larger firms as well as privately held firms and not-for-profit organizations where we offer tailored products for this client segment. Products within CNA Pro are distributed through brokers, agents and managing general underwriters.

CNA Pro, through CNA HealthPro, also offers insurance products to serve the healthcare delivery system. Products are distributed on a national basis through a variety of channels including brokers, agents and managing general underwriters. Key customer segments include long term care facilities, allied healthcare providers, life sciences, dental professionals and mid-size and large healthcare facilities and delivery systems.

Surety consists primarily of CNA Surety and its insurance subsidiaries and offers small, medium and large contract and commercial surety bonds. CNA Surety provides surety and fidelity bonds in all 50 states through a combined network of independent agencies. CNA owns approximately 63% of CNA Surety.

Warranty provides vehicle warranty service contracts that protect individuals and businesses from the financial burden associated with breakdown, under-performance or maintenance of a product.

The following table details results of operations for Specialty Lines.

Results of Operations


Years ended December 31 (In millions)	2005			2004			2003
Net written premiums	$	2,463		$	2,391		$	2,038
Net earned premiums		2,475			2,277			1,840
Net investment income		281			246			201
Net operating income (loss)		336			324			(34	)
Net realized investment gains		12			54			74
Net income		348			378			40

Ratios
Loss and loss adjustment expense		65.3	%		63.3	%		89.6	%
Expense		26.1			26.1			27.6
Dividend		0.2			0.2			0.2

Combined		91.6	%		89.6	%		117.4	%

2005 Compared with 2004

Net written premiums for Specialty Lines increased $72 million in 2005 as compared with 2004. This increase was primarily due to improved production, primarily driven by improved retention across most professional liability insurance lines of business. These favorable impacts were partially offset by increased ceded premiums for certain professional liability lines of business and decreased premiums for the warranty business. Due to a change in the warranty product offering, fees related to the new warranty product are included within other revenues. Written premiums for the warranty line of business decreased $70 million in 2005 as compared to 2004. Net earned premiums increased $198 million in 2005 as compared with 2004, which reflects the increased premium written trend over the past several quarters in Specialty Lines.

Specialty Lines averaged rate increases of 1% and 9% in 2005 and 2004 for the contracts that renewed during those periods. Retention rates of 86% and 83% were achieved for those contracts that were up for renewal.

Net income decreased $30 million in 2005 as compared with 2004. This decrease was due primarily to a $42 million decrease in net realized investment gains partially offset by increased net operating income. See the Investments section of this MD&A for further discussion on net investment income and net realized investment gains.

Net operating income increased $12 million in 2005 as compared with 2004. This increase was primarily driven by an increase in net investment income and increased earned premiums. These increases to operating income were partially offset by decreased current accident year results. Additionally, 2004 results were favorably impacted by the release of a previously established reinsurance bad debt allowance as the result of a significant commutation. Catastrophe impacts were $16 million after-tax and $11 million after-tax for the years ended December 31, 2005 and 2004.

The combined ratio increased 2.0 points in 2005 as compared with 2004. The loss ratio increased 2.0 points. The 2004 loss ratio was favorably impacted by the release of reinsurance bad debt reserve as discussed above. Additionally, the 2005 loss ratio was unfavorably impacted by increased current year accident losses. This was driven by increased surety losses of $110 million related to a national contractor, before the impacts of minority interest, as discussed in further detail in Note S of the Consolidated Financial Statements included under Item 8, partially offset by improved current accident year loss ratios in several professional liability lines of business.

Unfavorable net prior year development was $54 million, including $47 million of unfavorable claim and allocated claim adjustment expense and $7 million of unfavorable premium development, in 2005. Unfavorable net prior year development of $30 million, including $58 million of unfavorable claim and allocated claim adjustment expense development and $28 million of favorable premium development, was recorded for the same period in 2004. Further information on Specialty Lines Net Prior Year Development for 2005 and 2004 is included in Note F of the Consolidated Financial Statements included under Item 8.

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

Gross and Net Carried Claim and Claim Adjustment Expense Reserves


December 31, (In millions)	2005		2004
Gross Case Reserves	$	1,907	$	1,659
Gross IBNR Reserves		3,298		3,201

Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	5,205	$	4,860

Net Case Reserves	$	1,442	$	1,191
Net IBNR Reserves		2,352		2,042

Total Net Carried Claim and Claim Adjustment Expense Reserves	$	3,794	$	3,233

The expense ratio was the same in 2005 as compared with 2004. The 2005 ratio was impacted by a change in estimate related to profit commissions in the warranty line of business, which was offset by the impact of the increased earned premium base.

2004 Compared with 2003

Net written premiums for Specialty Lines increased $353 million and net earned premiums increased $437 million in 2004 as compared with 2003. This increase was primarily due to rate increases and improved retention, principally in Professional Liability Insurance, and decreased premiums ceded to corporate aggregate and other reinsurance treaties of $26 million in 2004 as compared with 2003. The 2003 ceded premiums were principally driven by the unfavorable net prior year reserve development in 2003.

Specialty Lines averaged rate increases of 9% and 29% in 2004 and 2003 for the contracts that renewed during those periods. Retention rates of 83% and 81% were achieved for those contracts that were up for renewal.

Net income increased $338 million in 2004 as compared with 2003. This increase was due primarily to increased net operating income, partially offset by a decrease in realized investment gains. See the Investments section of this MD&A for further discussion on net realized investment gains.

Net operating results improved $358 million in 2004 as compared with 2003. This improvement was due primarily to decreased unfavorable net prior year development of $171 million after-tax, a decrease in the bad debt provision for reinsurance receivables of $78 million after-tax, a decrease in certain insurance related assessments of $8 million after-tax and increased net investment income. These improvements were partially offset by increased catastrophe losses in 2004. The impact of catastrophes was $11 million after-tax and $3 million after-tax in 2004 and 2003, as discussed below. See the Investments section of this MD&A for further discussion on net investment income.

The combined ratio decreased 27.8 points in 2004 as compared with 2003. The loss ratio decreased 26.3 points due principally to decreased unfavorable net prior year development of $264 million, a $120 million decrease in bad debt reserves for uncollectible reinsurance and an improvement in the current net accident year loss ratio. These favorable impacts to the loss ratio were partially offset by increased catastrophe losses. Catastrophe losses of $15 million and $4 million were recorded in 2004 and 2003. The increased catastrophe losses in 2004 were due to $12 million of losses resulting from Hurricanes Charley, Frances, Ivan and Jeanne.

Unfavorable net prior year development was $30 million, including $58 million of unfavorable claim and allocated claim adjustment expense and $28 million of favorable premium development, in 2004. Unfavorable net prior year development of $294 million, including $257 million of unfavorable claim and allocated claim adjustment expense development and $37 million of unfavorable premium development, was recorded for the same period in 2003.

Further information on Specialty Lines Net Prior Year Development for 2004 and 2003 is included in Note F of the Consolidated Financial Statements included under Item 8.

The expense ratio decreased 1.5 points primarily due to the increased earned premium base and a decrease of $12 million in certain insurance related assessments recorded in 2003. Additionally, the expense ratio was favorably impacted by decreased underwriting expenses due to our expense initiatives.

LIFE AND GROUP NON-CORE

Business Overview

The Life and Group Non-Core segment primarily includes the results of the life and group lines of business that have either been sold or placed in run-off. We sold our group benefits business on December 31, 2003, our individual life business on April 30, 2004, our CNA Trust business on August 1, 2004 and our specialty medical business on January 6, 2005. The segment includes operating results for these businesses in periods prior to the sales, the realized gain/loss from the sales and the effects of the shared corporate overhead expenses which continue to be allocated to the sold businesses. We continue to service our existing individual long term care commitments, our payout annuity business and our pension deposit business. We also manage a block of group reinsurance and life settlement contracts. These businesses are being managed as a run-off operation. Our group long term care and Index 500 products, while considered non-core, continue to be actively marketed.

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

Results of Operations


Years ended December 31	2005			2004			2003
(In millions)
Net earned premiums	$	704		$	921		$	2,376
Net investment income		593			692			821
Net operating income (loss)		(51	)		(29	)		113
Net realized investment losses		(19	)		(385	)		(108	)
Net income (loss)		(70	)		(414	)		5

2005 Compared with 2004

Net earned premiums for Life and Group Non-Core decreased $217 million in 2005 as compared with 2004. The premiums in 2004 include $115 million from the individual life business and $165 million from the specialty medical business. The 2005 net earned premiums are primarily from the group and individual long term care business.

Net results improved by $344 million in 2005 as compared with 2004. The improvement in net results related primarily to a $389 million after-tax realized loss on the sale of the individual life business in 2004. Also contributing to the improvement in net results is the reduction in 2005 of significant 2004 items related to the IGI Program as discussed below. Additionally, 2005 results included $13 million after-tax income related to a service agreement with a purchaser for sold businesses. These agreements have expired. These results were partially offset by a decline in net investment income of $99 million. This included a decrease of approximately $64 million from the trading portfolio which was largely net income neutral due to a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio. In addition, it included the absence of favorable results from the sold insurance operations as discussed below. Also unfavorably impacting the 2005 results was a $17 million after-tax provision increase for estimated indemnification liabilities related to the sold individual life business and unfavorable results related to the long term care business. See the Investments section of this MD&A for additional information on net investment income and net realized investment results.

2004 Compared with 2003

Net earned premiums for Life and Group Non-Core decreased $1,455 million in 2004 as compared with 2003. The decrease in net earned premiums was due primarily to the absence of premiums from the group benefits business and reduced premiums for the individual life business. Net earned premiums for the sold life and group businesses

were $115 million and $1,459 million for 2004 and 2003. Net earned premiums also decreased in most of the remaining lines of business which are in runoff, and this decline is expected to continue in the future. Partially offsetting this decrease was an increase in net earned premiums in the specialty medical business, which continued to issue new policies prior to its sale in January 2005.

Net results decreased by $419 million in 2004 as compared with 2003. The decrease in net results related primarily to net realized investment losses, including the realized loss of approximately $389 million after-tax from the sale of the individual life business and reduced results from the group benefits and individual life businesses. Net realized investment losses in 2003 include a loss recorded on the sale of the Group Benefits business of $130 million after-tax. Net results for the sold life and group businesses were losses of $427 million and $36 million, including the loss on sales and the effects of shared corporate overhead expenses, in 2004 and 2003. In addition, results for life settlement contracts declined in 2004. These items were partially offset by reduced increases in individual long term care reserves of $21 million after-tax in 2004 as compared with 2003. Also included in the net results of 2004 and 2003 were the adverse impacts of $26 million after-tax and $33 million after-tax related to certain accident and health exposures (IGI Program) and our past participation in accident and health reinsurance programs.

CORPORATE AND OTHER NON-CORE

Overview

Corporate and Other Non-Core includes the results of certain property and casualty lines of business placed in run-off. CNA Re, formerly a separate property and casualty operating segment, is currently in run-off and is included in the Corporate and Other Non-Core segment. This segment also includes the results related to the centralized adjusting and settlement of APMT claims, as well as the results of our participation in voluntary insurance pools and various other non-insurance operations. Other operations also include interest expense on corporate borrowings and intercompany eliminations.

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

Results of Operations


Years ended December 31	2005			2004		2003
(In millions)
Net investment income	$	251		$	246	$	226
Revenues		311			358		737
Net operating income (loss)		9			84		(835	)
Net realized investment gains (losses)		(12	)		39		85
Net income (loss)		(3	)		123		(750	)

2005 Compared with 2004

Revenues decreased $47 million in 2005 as compared with 2004. The decrease in revenues was due primarily to reduced net earned premiums in CNA Re of $134 million due to the exit from the assumed reinsurance business in 2003 and decreased net realized investment results. Partially offsetting these decreases was $121 million of interest related to a federal income tax settlement. See Note E to the Consolidated Financial Statements included under Item 8 for further information.

As previously disclosed, we sold our personal insurance business to The 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 of our insurance subsidiaries at the fair market value as of the exercise date. Royalty fees earned for the years ended December 31, 2005 and 2004 for personal insurance policies 100% reinsured with Allstate were approximately $22 million and $29 million. The royalty fee arrangement terminated on September 30, 2005. Additionally, Allstate exercised its option and purchased the five subsidiaries during the fourth quarter of 2005. This transaction resulted in a realized gain of $8 million. See Note P of the Consolidated Financial Statements included under Item 8 for further information regarding this transaction.

Net results decreased $126 million in 2005 as compared with 2004. The decrease in net results was due primarily to a $139 million after-tax increase in unfavorable net prior year development related primarily to commutations and reserve strengthening, a $51 million decrease in net realized investment results and a decrease in the provision recorded for uncollectible reinsurance. Net realized investment results for the year ended December 31, 2005 and 2004 included a $22 million after-tax and $36 million after-tax impairment related to a national contractor. See Note S to the Consolidated Financial Statements included under Item 8 for additional information regarding the national contractor. Partially offsetting these decreases was a $115 million after-tax increase in net income related to a federal income tax settlement and release of federal income tax reserves.

Unfavorable net prior year development of $306 million was recorded during 2005, including $291 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $15 million of unfavorable premium development. Unfavorable net prior year development of $93 million was recorded in 2004, including $84 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $9 million of unfavorable premium development. Further information on Corporate and Other Non-Core’s Net Prior Year Development for 2005 and 2004 is included in Note F of the Consolidated Financial Statements included under Item 8.

During 2005 and 2004, we commuted several significant reinsurance contracts that resulted in unfavorable development of $118 million and $39 million, which is included in the development above, and which was partially offset by the release in 2004 of a previously established allowance for uncollectible reinsurance. These commutations resulted in unfavorable impacts of $71 million after-tax and $5 million after-tax in 2005 and 2004. These contracts contained interest crediting provisions and maintenance charges. Interest charges associated with the reinsurance contracts commuted were $13 million after-tax and $11 million after-tax in 2005 and 2004. There will be no further interest crediting charges or other charges related to these commuted contracts in future periods.

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

Gross and Net Carried
Claim and Claim Adjustment Expense Reserves


December 31,	2005		2004
(In millions)
Gross Case Reserves	$	3,297	$	3,806
Gross IBNR Reserves		4,075		4,875

Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	7,372	$	8,681

Net Case Reserves	$	1,554	$	1,588
Net IBNR Reserves		1,902		1,691

Total Net Carried Claim and Claim Adjustment Expense Reserves	$	3,456	$	3,279

2004 Compared with 2003

Revenues decreased $379 million in 2004 as compared with 2003. The decrease in revenues was due primarily to reduced net earned premiums in CNA Re due to the exit of the assumed reinsurance market in October of 2003 and decreased realized investment gains of $62 million pretax. CNA Re had earned premiums of $125 million and $536 million in 2004 and 2003. See the Investments section of this MD&A for additional information on net realized investment gains (losses) and net investment income.

Net income increased $873 million in 2004 as compared with 2003. The increase in net income was due primarily to a $632 million after-tax decrease in unfavorable net prior year development, a $168 million after-tax decrease in the provision for uncollectible reinsurance receivables, the absence in 2004 of a $44 million after-tax increase in unallocated loss adjustment expense (ULAE) reserves recorded in 2003 and a $16 million after-tax decrease in

certain insurance related assessments. Additionally, the net results were favorably impacted by $14 million after-tax of non-recurring income related to a release of purchase accounting reserves related to real estate leases assumed in connection with the 1995 acquisition of Continental.

Unfavorable net prior year development of $93 million was recorded during 2004, including $84 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $9 million of unfavorable premium development. Unfavorable net prior year development of $1,065 million was recorded in 2003, including $1,039 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $26 million of unfavorable premium development. Further information on Corporate and Other Non-Core’s Net Prior Year Development for 2004 and 2003 is included in Note F of the Consolidated Financial Statements included under Item 8.

Many ceding companies have sought provisions for the collateralization of assumed reserves in the event of a financial strength ratings downgrade or other triggers. Before exiting the reinsurance market, CNA Re had been impacted by this trend and had entered into several contracts with rating or other triggers. See the Ratings section of this MD&A for more information.

APMT Reserves

Our property and casualty insurance subsidiaries have actual and potential exposures related to asbestos, environmental pollution and mass tort (APMT) claims.

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

In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others: the number and outcome of direct actions against us; coverage issues, including whether certain costs are covered under the policies and whether policy limits apply; allocation of liability among numerous parties, some of whom may be in bankruptcy proceedings, and in particular the application of “joint and several” liability to specific insurers on a risk; inconsistent court decisions and developing legal theories; 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; liability against our policyholders in environmental matters; broadened scope of clean-up resulting in increased liability to our policyholders; 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 our ability to recover reinsurance for asbestos, pollution and mass tort claims.

Due to the inherent uncertainties in estimating claim and claim adjustment expense reserves for APMT and due to the significant uncertainties described related to APMT claims, our ultimate liability for these cases, both individually and in aggregate, may exceed the recorded reserves. Any such potential additional liability, or any range of potential additional amounts, cannot be reasonably estimated currently, but could be material to our business, results of operations, equity, insurer financial strength and debt ratings. Due to, among other things, the factors described above, it may be necessary for us to record material changes in our APMT claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge.

We have regularly performed ground up reviews of all open APMT claims to evaluate the adequacy of our APMT reserves. In performing our comprehensive ground up analysis, we consider input from our professionals with direct responsibility for the claims, inside and outside counsel with responsibility for our representation, and our actuarial staff. These professionals 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 we issued, including such factors as aggregate or per occurrence limits, whether the policy is primary, umbrella or excess, and the existence of policyholder retentions and/or deductibles; the existence of other insurance; and reinsurance arrangements.

The following table provides data related to our APMT claim and claim adjustment expense reserves.

APMT Reserves


	December 31, 2005						December 31, 2004

				Environmental						Environmental
				Pollution and						Pollution and
	Asbestos			Mass Tort			Asbestos			Mass Tort
(In millions)
Gross reserves	$	2,992		$	680		$	3,218		$	755
Ceded reserves		(1,438	)		(257	)		(1,532	)		(258	)

Net reserves	$	1,554		$	423		$	1,686		$	497

Asbestos

In the past several years, we have 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 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, we continue 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 also increased substantially in 2003, but the rate of increase has moderated in 2004 and 2005.

We have resolved a number of our large asbestos accounts by negotiating settlement agreements. Structured settlement agreements provide for payments over multiple years as set forth in each individual agreement. 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.

We have also used coverage in place agreements to resolve large asbestos exposures. Coverage in place agreements are typically agreements between us and our policyholders identifying the policies and the terms for payment of asbestos related liabilities. Claims payments are contingent on presentation of adequate documentation showing exposure during the policy periods and other documentation supporting the demand for claims payment. Coverage in place agreements may have annual payment caps. Coverage in place agreements are evaluated based on claims filings trends and severities.

We categorize active asbestos accounts as large or small accounts. We define a large account as an active account with more than $100,000 of cumulative paid losses. We have made closing large accounts a significant management priority. Small accounts are defined as active accounts with $100,000 or less of cumulative paid losses. Approximately 81% and 83% of our total active asbestos accounts are classified as small accounts at December 31, 2005 and December 31, 2004. Small accounts are typically representative of policyholders with limited connection to asbestos.

We also evaluate our asbestos liabilities arising from our assumed reinsurance business and our participation in various pools, including Excess & Casualty Reinsurance Association (ECRA).

IBNR reserves relate to potential development on accounts that have not settled and potential future claims from unidentified policyholders.

The tables below depict our overall pending asbestos accounts and associated reserves at December 31, 2005 and December 31, 2004.

Pending Asbestos Accounts and Associated Reserves

December 31, 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	$	30	$	167		11	%
Wellington		4		2		15		1
Coverage in place		34		13		58		4
Fibreboard		1		–		54		3

Total with settlement agreements		52		45		294		19

Other policyholders with active accounts
Large asbestos accounts		199		68		273		17
Small asbestos accounts		1,073		23		135		9

Total other policyholders		1,272		91		408		26

Assumed reinsurance and pools		–		6		143		9
Unassigned IBNR		–		–		709		46

Total		1,324	$	142	$	1,554		100	%

Pending Asbestos Accounts and Associated Reserves

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	%

Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. We have such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called “non-products” liability coverage contained within their policies rather than products liability coverage, and that the claimed “non-products” coverage is not subject to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what

extent, if any, the attempts to assert “non-products” claims outside the products liability aggregate will succeed. Our policies also contain other limits applicable to these claims, and we have additional coverage defenses to certain claims. We have attempted to manage our asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to us. Where we cannot settle a claim on acceptable terms, we aggressively litigate the claim. A recent court ruling by the United States Court of Appeals for the Fourth Circuit has supported certain of our positions with respect to coverage for “non-products” claims. However, adverse developments with respect to such matters could have a material adverse effect on our results of operations and/or equity.

As a result of the uncertainties and complexities involved, reserves for asbestos claims cannot be estimated with traditional actuarial techniques that rely on historical accident year loss development factors. In establishing asbestos reserves, we evaluate the exposure presented by each insured. As part of this evaluation, we consider the available insurance coverage; limits and deductibles; the potential role of other insurance, particularly underlying coverage below any of our excess liability policies; and applicable coverage defenses, including asbestos exclusions. Estimation of asbestos-related claim and claim adjustment expense reserves involves a high degree of judgment on 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.

We are 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 us, 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 us.

We are involved in significant asbestos-related claim litigation, which is described in Note F of the Consolidated Financial Statements included under Item 8.

Environmental Pollution and Mass Tort

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

A number of proposals to modify Superfund have been made by various parties. However, no modifications were enacted by Congress during 2005, and it is unclear what positions Congress or the Administration will take and what legislation, if any, will result in the future. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental cleanup may be significantly reduced in favor of state action. Substantial changes in the federal statute or the activity of the EPA may cause states to reconsider their environmental cleanup statutes and regulations. There can be no meaningful prediction of the pattern of regulation that would result or the possible effect upon our results of operations or equity.

Many policyholders have made claims against us for defense costs and indemnification in connection with environmental pollution matters. The vast majority of these claims relate to accident years 1989 and prior, which

coincides with our adoption of the Simplified Commercial General Liability coverage form, which includes what is referred to in the industry as absolute pollution exclusion. We and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether cleanup costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and the definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues. We noted adverse development in various pollution accounts in our most recent ground up review. In the course of our review, we did not observe a negative trend or deterioration in the underlying pollution claims environment. Rather, individual account estimates changed due to changes in liability and/or coverage circumstances particular to those accounts. As a result, we increased pollution reserves by $50 million in 2005. We have made resolution of large environmental pollution exposures a management priority. We have resolved a number of our large environmental accounts by negotiating settlement agreements. In our settlements, we sought to resolve those exposures and obtain the broadest release language to avoid future claims from the same policyholders seeking coverage for sites or claims that had not emerged at the time we settled with our policyholder. While the terms of each settlement agreement vary, we sought to obtain broad environmental releases that include known and unknown sites, claims and policies. The broad scope of the release provisions contained in those settlement agreements should, in many cases, prevent future exposure from settled policyholders. It remains uncertain, however, whether a court interpreting the language of the settlement agreements will adhere to the intent of the parties and uphold the broad scope of language of the agreements.

We classify our environmental pollution accounts into several categories, which include structured settlements, coverage in place agreements and active accounts. Structured settlement agreements provide for payments over multiple years as set forth in each individual agreement.

We have also used coverage in place agreements to resolve pollution exposures. Coverage in place agreements are typically agreements between us and our policyholders identifying the policies and the terms for payment of pollution related liabilities. Claims payments are contingent on presentation of adequate documentation of damages during the policy periods and other documentation supporting the demand for claims payment. Coverage in place agreements may have annual payment caps.

We categorize active accounts as large or small accounts in the pollution area. We define a large account as an active account with more than $100,000 cumulative paid losses. We have made closing large accounts a significant management priority. Small accounts are defined as active accounts with $100,000 or less cumulative paid losses.

We also evaluate our environmental pollution exposures arising from our assumed reinsurance and our participation in various pools, including ECRA.

We carry unassigned IBNR reserves for environmental pollution. These reserves relate to potential development on accounts that have not settled and potential future claims from unidentified policyholders.

The charts below depict our overall pending environmental pollution accounts and associated reserves at December 31, 2005 and 2004.

At December 31, 2005


					Net
					Environmental		Percent of
			Net Paid Losses		Pollution		Environmental
	Number of		in 2005		Reserves		Pollution Net
	Policyholders		(In millions)		(In millions)		Reserve

Policyholders with Settlement Agreements
Structured settlements		6	$	10	$	17		5	%
Coverage in place		16		10		23		7

Total with Settlement Agreements		22		20		40		12

Other Policyholders with Active Accounts
Large pollution accounts		120		18		63		19
Small pollution accounts		362		15		50		15

Total Other Policyholders		482		33		113		34

Assumed Reinsurance & Pools		–		3		33		10
Unassigned IBNR		–		–		150		44

Total		504	$	56	$	336		100	%

At December 31, 2004


					Net
					Environmental		Percent of
			Net Paid Losses		Pollution		Environmental
	Number of		in 2004		Reserves		Pollution Net
	Policyholders		(In millions)		(In millions)		Reserve

Policyholders with Settlement Agreements
Structured settlements		2	$	14	$	5		1	%
Coverage in place		15		5		16		5

Total with Settlement Agreements		17		19		21		6

Other Policyholders with Active Accounts
Large pollution accounts		134		18		75		22
Small pollution accounts		405		14		47		14

Total Other Policyholders		539		32		122		36

Assumed Reinsurance & Pools		–		2		36		10
Unassigned IBNR		–		–		163		48


Total		556	$	53	$	342		100	%

In 2003, we 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. Since 2003, 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. Moreover, judicial interpretations regarding application of various tort defenses, including application of various theories of joint and several liabilities, impede our ability to estimate the ultimate liability for such claims.

INVESTMENTS

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

Net Investment Income


Years ended December 31	2005			2004			2003
(In millions)
Fixed maturity securities	$	1,608		$	1,571		$	1,651
Short term investments		147			56			63
Limited partnerships		254			212			221
Equity securities		25			14			19
Income from trading portfolio (a)		47			110			–
Interest on funds withheld and other deposits		(166	)		(261	)		(335	)
Other		20			18			85

Gross investment income		1,935			1,720			1,704
Investment expense		(43	)		(40	)		(48	)

Net investment income	$	1,892		$	1,680		$	1,656

(a) The change in net unrealized gains (losses) on trading securities, included in net investment income, was $(7) million and $2 million for the years ended December 31, 2005 and 2004.

Net investment income increased in 2005 as compared with 2004. This increase was due to the reduced interest expense on funds withheld and other deposits and improved results across all other available-for-sale asset classes, especially short-term investments which reflect the improved period over period yields. This improvement was

partly offset by decreases in investment income from the trading portfolio. During 2005, we commuted several significant reinsurance contracts which contained interest crediting provisions and as a result, there will be no further interest expense on funds withheld on the commuted contracts in future periods. The pre-tax interest expense on funds withheld related to these significant commuted contracts was $72 million, $132 million and $235 million in 2005, 2004, and 2003, and was reflected as a component of net investment income in our consolidated statements of operations. See Note H of the Consolidated Financial Statements included under Item 8 for additional information for interest costs on funds withheld and other deposits.

Net investment income was slightly higher in 2004 as compared with 2003. This increase was due primarily to the reduced interest expense on funds withheld and other deposits. The interest costs on funds withheld and other deposits increased in 2003 as a result of additional cessions to the corporate aggregate reinsurance and other treaties due to adverse net prior year development. This improvement in 2004 was partly offset by decreases in investment income across all other available-for-sale asset classes which is largely the result of the impacts of the group benefits and individual life sale transactions that are described in Note P of the Consolidated Financial Statements included under Item 8. Also, the net investment income of the trading portfolio positively impacted results for 2004.

The bond segment of the investment portfolio yielded 4.9% in 2005, 4.6% in 2004 and 5.1% in 2003.

Net Realized Investment Gains (Losses)

The components of net realized investment results are presented in the following table.

Net Realized Investment Gains (Losses)


Years ended December 31	2005			2004			2003
(In millions)
Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds	$	(33	)	$	10		$	(70	)
Corporate and other taxable bonds		(86	)		123			380
Tax-exempt bonds		12			42			97
Asset-backed bonds		14			53			42
Redeemable preferred stock		3			19			(12	)

Total fixed maturity securities		(90	)		247			437
Equity securities		38			202			114
Derivative securities		49			(84	)		78
Short-term investments		–			(3	)		3
Other, including dispositions of businesses, net of participating policyholders’ interest		(10	)		(601	)		(168	)

Realized investment gains (losses) before allocation to participating policyholders’ and minority interests		(13	)		(239	)		464
Allocated to participating policyholders’ and minority interests		3			(9	)		(4	)

Income tax (expense) benefit		—			95			(175	)

Net realized investment gains (losses), net of participating policyholders’ and minority interests	$	(10	)	$	(153	)	$	285

Net realized investment results improved $143 million after-tax in 2005 as compared with 2004. This improvement is primarily the result of a 2004 loss of $389 million after-tax for the sale of the individual life insurance business, partly offset by reduced gains for equities securities. Equity results in 2004 included a gain of $105 million after-tax related to our investment in Canary Wharf Group PLC (Canary Wharf), a London-based real estate company. Also impacting results for 2005 versus 2004 were decreased results in the overall fixed maturity asset class partly offset by improved results for the derivatives asset class. Impairment losses of $70 million after-tax were recorded in 2005 across various sectors, including an after-tax impairment loss of $22 million related to loans made under a credit facility to a national contractor, that are classified as fixed maturities. Impairment losses of $60 million after-tax were recorded in 2004 across various sectors, including an after-tax impairment loss of $36 million related to loans to the national contractor. For additional information on loans to the national contractor, see Note S of the Consolidated Financial Statements included under Item 8.

Net realized investment results decreased $438 million after-tax in 2004 as compared with 2003. This decrease in net realized investment results was primarily due to the loss on the sale of the individual life insurance business of $389 million after-tax, losses on derivatives of $55 million after-tax and reduced fixed maturity gains. The derivative securities losses recorded in 2004 were primarily due to derivative securities held to mitigate the effect of changes in long term interest rates on the value of the fixed maturity portfolio. These decreases were partly offset by a $105 million after-tax gain related to our investment in Canary Wharf, and a reduction in impairment losses for other-than-temporary declines in market values for fixed maturity and equity securities. In 2003, impairment losses of $209 million after-tax were recorded across various sectors including the airline, healthcare and energy industries.

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. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions, and the domestic and global economic conditions, are some of the factors that may enter into a decision to move between asset classes. Based on our consideration of these factors, in the course of normal investment activity we may, in pursuit of the total return objective, be willing to sell securities that, in our analysis, are overvalued on a risk adjusted basis relative to other opportunities that are available at the time in the market; in turn we may purchase other securities that, according to our analysis, are undervalued in relation to other securities in the market. In making these value decisions, securities may be bought and sold that shift the investment portfolio between asset


Item		Page
Number		Number
	PART I
1.	Business	3
1A.	Risk Factors	9
1B.	Unresolved Staff Comments	16
2.	Properties	16
3.	Legal Proceedings	16
4.	Submission of Matters to a Vote of Security Holders	16
	PART II
5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
6.	Selected Financial Data	18
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
7A.	Quantitative and Qualitative Disclosures about Market Risk	66
8.	Financial Statements and Supplementary Data	71
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	158
9A.	Controls and Procedures	158
9B.	Other Information	159
	PART III
10.	Directors and Executive Officers of the Registrant	160
11.	Executive Compensation	160
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	161
13.	Certain Relationships and Related Transactions	161
14.	Principal Accounting Fees and Services	161
	PART IV
15.	Exhibits and Financial Statement Schedules	162
Consent of Independent Registered Public Accounting Firm
Section 302 Certification
Seection 302 Certification
Section 1350 Certification
Section 1350 Certification


	Page No.
Consolidated Operations		21
Net Prior Year Development		23
Critical Accounting Estimates		26
Reserves – Estimates and Uncertainties		28
Reinsurance		30
Terrorism Insurance		32
Restructuring		32
Segment Results		33
Standard Lines		33
Specialty Lines		37
Life and Group Non-Core		40
Corporate and Other Non-Core		41
Asbestos and Environmental Pollution and Mass Tort (APMT) Reserves		43
Investments		49
Net Investment Income		49
Net Realized Investment Gains (Losses)		51
Valuation and Impairment of Investments		54
Liquidity and Capital Resources		57
Cash Flows		57
Commitments, Contingencies, and Guarantees		58
Regulatory Matters		59
Ratings		60
Dividends from Subsidiaries		61
Loews		62
Accounting Pronouncements		62
Forward-Looking Statements		63