10-K 1 c48758e10vk.htm 10-K e10vk
 
 
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, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-5823
 
CNA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   36-6169860
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
333 S. Wabash    
Chicago, Illinois   60604
(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:
     
Title of each class   Name of each exchange on
which registered
Common Stock
with a par value
of $2.50 per share
 
New York Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of February 20, 2009, 269,024,408 shares of common stock were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2008 was approximately $692 million based on the closing price of $25.15 per share of the common stock on the New York Stock Exchange on June 30, 2008.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the CNA Financial Corporation Proxy Statement prepared for the 2009 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report.
 
 

 


 

             
Item       Page
Number       Number
           
  Business     3  
 
           
  Risk Factors     9  
 
           
  Unresolved Staff Comments     17  
 
           
  Properties     17  
 
           
  Legal Proceedings     17  
 
           
  Submission of Matters to a Vote of Security Holders     17  
 
           
           
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     18  
 
           
  Selected Financial Data     20  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     21  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     63  
 
           
  Financial Statements and Supplementary Data     66  
 
           
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     142  
 
           
  Controls and Procedures     142  
 
           
  Other Information     142  
 
           
           
  Directors, Executive Officers and Corporate Governance     143  
 
           
  Executive Compensation     143  
 
           
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     144  
 
           
  Certain Relationships and Related Transactions, and Director Independence     144  
 
           
  Principal Accounting Fees and Services     144  
 
           
               
  Exhibits, Financial Statement Schedules     145  

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PART I
ITEM 1. BUSINESS
CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. References to “CNA,” “the Company,” “we,” “our,” “us” or like terms refer to the business of CNA and its subsidiaries. Our property and casualty insurance operations are conducted by Continental Casualty Company (CCC), incorporated in 1897, and The Continental Insurance Company (CIC), organized in 1853, and affiliates. CIC became a subsidiary of ours in 1995 as a result of the acquisition of The Continental Corporation (Continental). Loews Corporation (Loews) owned approximately 90% of our outstanding common stock as of December 31, 2008.
Our ongoing core businesses serve a wide variety of customers, including small, medium and large businesses, associations, professionals, and groups with a broad range of insurance and risk management products and services.
Our insurance products primarily include commercial property and casualty coverages. Our services include risk management, information services, warranty and claims administration. Our products and services are marketed through independent agents, brokers and managing general agents.
Our core business, commercial property and casualty insurance operations, is reported in two business segments: Standard Lines and Specialty Lines. Our non-core operations are managed in two business segments: Life & Group Non-Core and Corporate & Other Non-Core. These segments are managed separately because of differences in their product lines and markets. Discussions of each segment including the products offered, the customers served, the distribution channels used and competition are set forth in the Management’s Discussion and Analysis (MD&A) included under Item 7 and in Note N of the Consolidated Financial Statements included under Item 8.
Competition
The property and casualty insurance industry is highly competitive both as to rate and service. Our consolidated property and casualty subsidiaries compete not only with other stock insurance companies, but also with mutual insurance companies, reinsurance companies and other entities for both producers and customers. We must continuously allocate resources to refine and improve our insurance products and services.
Rates among insurers vary according to the types of insurers and methods of operation. We compete for business not only on the basis of rate, but also on the basis of availability of coverage desired by customers, ratings and quality of service, including claim adjustment services.
There are approximately 2,300 individual companies that sell property and casualty insurance in the United States. Based on 2007 statutory net written premiums, we are the seventh largest commercial insurance writer and the thirteenth largest property and casualty insurance organization in the United States of America.
Regulation
The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Each state has established supervisory agencies with broad administrative powers relative to licensing insurers and agents, approving policy forms, establishing reserve requirements, fixing minimum interest rates for accumulation of surrender values and maximum interest rates of policy loans, prescribing the form and content of statutory financial reports and regulating solvency and the type, quality and amount of investments permitted. Such regulatory powers also extend to premium rate regulations, which require that rates not be excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by insurance subsidiaries, intercompany transfers of assets may be subject to prior notice or approval by the state insurance regulators, depending on the size of such transfers and payments in relation to the financial position of the insurance affiliates making the transfer or payment.
Insurers are also required by the states to provide coverage to insureds who would not otherwise be considered eligible by the insurers. Each state dictates the types of insurance and the level of coverage that

3


 

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.
Further, insurance companies are subject to state guaranty fund and other insurance-related assessments. Guaranty fund assessments are levied by the state departments of insurance to cover claims of insolvent insurers. Other insurance-related assessments are generally levied by state agencies to fund various organizations including disaster relief funds, rating bureaus, insurance departments, and workers’ compensation second injury funds, or by industry organizations that assist in the statistical analysis and ratemaking process.
Reform of the U.S. tort liability system is another issue facing the insurance industry. Over the last decade, many states have passed some type of reform. In recent years, for example, significant state general tort reforms have been enacted in Georgia, Ohio, Mississippi and South Carolina. Specific state legislation addressing state asbestos reform has been passed in Ohio, Georgia, Florida and Texas in past years as well. Although these states’ legislatures have begun to address their litigious environments, some reforms are being challenged in the courts and it will take some time before they are finalized. Even though there has been some tort reform success, new causes of action and theories of damages continue to be proposed in state court actions or by legislatures. For example, some state legislatures are considering legislation addressing direct actions against insurers related to bad faith claims. As a result of this unpredictability in the law, insurance underwriting and rating are expected to continue to be difficult in commercial lines, professional liability and some specialty coverages and therefore could materially adversely affect our results of operations and equity.
Although the federal government and its regulatory agencies do not directly regulate the business of insurance, federal legislative and regulatory initiatives can impact the insurance industry in a variety of ways. These initiatives and legislation include tort reform proposals; proposals addressing natural catastrophe exposures; terrorism risk mechanisms; federal regulation of insurance; various tax proposals affecting insurance companies; and possible regulatory limitations, impositions and restrictions, as well as potential impacts on the fair value determinations of our invested assets, arising from the Emergency Economic Stabilization Act of 2008.
In addition, our domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based capital is a method developed by the National Association of Insurance Commissioners to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of risk-based capital specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual capital is evaluated by a comparison to the risk-based capital results, as determined by the formula. Companies below minimum risk-based capital requirements are classified within certain levels, each of which requires specified corrective action. As of December 31, 2008 and 2007, 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, 2008, we had approximately 9,000 employees and have experienced satisfactory labor relations. We have never had work stoppages due to labor disputes.
We have comprehensive benefit plans for substantially all of our employees, including retirement plans, savings plans, disability programs, group life programs and group healthcare programs. See Note J of the Consolidated Financial Statements included under Item 8 for further discussion of our benefit plans.

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Supplementary Insurance Data
The following table sets forth supplementary insurance data.
Supplementary Insurance Data
                         
Years ended December 31   2008     2007     2006  
Trade Ratios — GAAP basis (a)
                       
Loss and loss adjustment expense ratio
    78.7 %     77.7 %     75.7 %
Expense ratio
    30.1       30.0       30.0  
Dividend ratio
    0.2       0.2       0.3  
 
                 
 
                       
Combined ratio
    109.0 %     107.9 %     106.0 %
 
                 
 
                       
Trade Ratios — Statutory basis (preliminary) (a)
                       
Loss and loss adjustment expense ratio
    83.8 %     79.8 %     78.7 %
Expense ratio
    30.1       30.0       30.2  
Dividend ratio
    0.3       0.3       0.2  
 
                 
 
                       
Combined ratio
    114.2 %     110.1 %     109.1 %
 
                 
 
(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 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 future policy benefits reserves whereas for SAP, ALR is classified as unearned premium reserves. The expense ratio, using amounts determined in accordance with GAAP, is the percentage of underwriting and acquisition expenses (including the amortization of deferred acquisition expenses) to net earned premiums. The expense ratio, using amounts determined in accordance with SAP, is the percentage of acquisition and underwriting expenses (with no deferral of acquisition expenses) to net written premiums. The dividend ratio, using amounts determined in accordance with GAAP, is the ratio of policyholders’ dividends incurred to net earned premiums. The dividend ratio, using amounts determined in accordance with SAP, is the ratio of policyholders’ dividends paid to net earned premiums. The combined ratio is the sum of the loss and loss adjustment expense, expense and dividend ratios.
The following table displays the distribution of direct written premiums for our operations by geographic concentration.
Direct Written Premiums
                         
    Percent of Total
Years ended December 31   2008   2007   2006
California
    9.2 %     9.5 %     9.7 %
New York
    6.9       7.0       7.5  
Florida
    6.5       7.5       8.0  
Texas
    6.2       6.1       5.8  
Illinois
    3.8       3.8       4.2  
New Jersey
    3.8       3.7       4.0  
Pennsylvania
    3.3       3.4       3.4  
Missouri
    3.1       2.9       3.1  
All other states, countries or political subdivisions (a)
    57.2       56.1       54.3  
 
                       
 
                       
Total
    100.0 %     100.0 %     100.0 %
 
                       
 
(a)  
No other individual state, country or political subdivision accounts for more than 3.0% of direct written premiums.
Approximately 7.4%, 6.9% and 5.9% of our direct written premiums were derived from outside of the United States for the years ended December 31, 2008, 2007 and 2006. Premiums from any individual foreign country were not significant.

5


 

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 companies. 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 include the impact of commutations, but exclude the impact of the provision for uncollectible reinsurance.

6


 

Schedule of Loss Reserve Development
                                                                                         
Calendar Year Ended                                                                  
(In millions)   1998     1999 (a)     2000     2001 (b)     2002 (c)     2003     2004     2005     2006     2007     2008  
Originally reported gross reserves for unpaid claim and claim adjustment expenses
  $ 28,506     $ 26,850     $ 26,510     $ 29,649     $ 25,719     $ 31,284     $ 31,204     $ 30,694     $ 29,459     $ 28,415     $ 27,475  
Originally reported ceded recoverable
    5,182       6,091       7,333       11,703       10,490       13,847       13,682       10,438       8,078       6,945       6,213  
 
                                                                 
Originally reported net reserves for unpaid claim and claim adjustment expenses
  $ 23,324     $ 20,759     $ 19,177     $ 17,946     $ 15,229     $ 17,437     $ 17,522     $ 20,256     $ 21,381     $ 21,470     $ 21,262  
 
                                                                 
 
                                                                                       
Cumulative net paid as of:
                                                                                       
One year later
  $ 7,321     $ 6,547     $ 7,686     $ 5,981     $ 5,373     $ 4,382     $ 2,651     $ 3,442     $ 4,436     $ 4,308     $  
Two years later
    12,241       11,937       11,992       10,355       8,768       6,104       4,963       7,022       7,676              
Three years later
    16,020       15,256       15,291       12,954       9,747       7,780       7,825       9,620                    
Four years later
    18,271       18,151       17,333       13,244       10,870       10,085       9,914                          
Five years later
    20,779       19,686       17,775       13,922       12,814       11,834                                
Six years later
    21,970       20,206       18,970       15,493       14,320                                      
Seven years later
    22,564       21,231       20,297       16,769                                            
Eight years later
    23,453       22,373       21,382                                                  
Nine years later
    24,426       23,276                                                        
Ten years later
    25,178                                                              
 
                                                                                       
Net reserves re-estimated as of:
                                                                                       
End of initial year
  $ 23,324     $ 20,759     $ 19,177     $ 17,946     $ 15,229     $ 17,437     $ 17,522     $ 20,256     $ 21,381     $ 21,470     $ 21,262  
One year later
    24,306       21,163       21,502       17,980       17,650       17,671       18,513       20,588       21,601       21,463        
Two years later
    24,134       23,217       21,555       20,533       18,248       19,120       19,044       20,975       21,706              
Three years later
    26,038       23,081       24,058       21,109       19,814       19,760       19,631       21,408                    
Four years later
    25,711       25,590       24,587       22,547       20,384       20,425       20,212                          
Five years later
    27,754       26,000       25,594       22,983       21,076       21,060                                
Six years later
    28,078       26,625       26,023       23,603       21,769                                      
Seven years later
    28,437       27,009       26,585       24,267                                            
Eight years later
    28,705       27,541       27,207                                                  
Nine years later
    29,211       28,035                                                        
Ten years later
    29,674                                                              
 
                                                                 
Total net (deficiency) redundancy
  $ (6,350 )   $ (7,276 )   $ (8,030 )   $ (6,321 )   $ (6,540 )   $ (3,623 )   $ (2,690 )   $ (1,152 )   $ (325 )   $ 7     $  
 
                                                                 
 
                                                                                       
Reconciliation to gross re-estimated reserves:
                                                                                       
Net reserves re-estimated
  $ 29,674     $ 28,035     $ 27,207     $ 24,267     $ 21,769     $ 21,060     $ 20,212     $ 21,408     $ 21,706     $ 21,463     $  
Re-estimated ceded recoverable
    8,178       10,673       11,458       16,965       16,313       14,709       13,576       10,935       8,622       7,277        
 
                                                                 
Total gross re-estimated reserves
  $ 37,852     $ 38,708     $ 38,665     $ 41,232     $ 38,082     $ 35,769     $ 33,788     $ 32,343     $ 30,328     $ 28,740     $  
 
                                                                 
 
                                                                                       
Net (deficiency) redundancy related to:
                                                                                       
Asbestos claims
  $ (2,152 )   $ (1,576 )   $ (1,511 )   $ (739 )   $ (748 )   $ (98 )   $ (43 )   $ (34 )   $ (32 )   $ (27 )   $  
Environmental claims
    (616 )     (616 )     (559 )     (212 )     (207 )     (134 )     (134 )     (83 )     (84 )     (83 )      
 
                                                                 
Total asbestos and environmental
    (2,768 )     (2,192 )     (2,070 )     (951 )     (955 )     (232 )     (177 )     (117 )     (116 )     (110 )      
Other claims
    (3,582 )     (5,084 )     (5,960 )     (5,370 )     (5,585 )     (3,391 )     (2,513 )     (1,035 )     (209 )     117        
 
                                                                 
Total net (deficiency) redundancy
  $ (6,350 )   $ (7,276 )   $ (8,030 )   $ (6,321 )   $ (6,540 )   $ (3,623 )   $ (2,690 )   $ (1,152 )   $ (325 )   $ 7     $  
 
                                                                 

7


 

 
(a)  
Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of $784 million as of December 31, 1999.
 
(b)  
Effective January 1, 2001, we established a new life insurance company, CNA Group Life Assurance Company (CNAGLA). Further, on January 1, 2001 $1,055 million of reserves were transferred from CCC to CNAGLA.
 
(c)  
Effective October 31, 2002, we sold CNA Reinsurance Company Limited. As a result of the sale, net reserves were reduced by $1,316 million.
Additional information regarding our property and casualty claim and claim adjustment expense reserves and reserve development is set forth in the MD&A included under Item 7 and in Notes A and F of the Consolidated Financial Statements included under Item 8.
Investments
Information on our investments is set forth in the MD&A included under Item 7 and in Notes A, B, C and D of the Consolidated Financial Statements included under Item 8.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including CNA, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.
We also make available free of charge on or through our internet website (http://www.cna.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Copies of these reports may also be obtained, free of charge, upon written request to: CNA Financial Corporation, 333 S. Wabash Avenue, Chicago, IL 60604, Attn. Jonathan D. Kantor, Executive Vice President, General Counsel and Secretary.

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ITEM 1A. RISK FACTORS
Our business faces many risks. We have described below some of the more significant risks which we face. There may be additional risks that we do not yet know of or that we do not currently perceive to be significant that may also impact our business. Each of the risks and uncertainties described below could lead to events or circumstances that have a material adverse effect on our business, results of operations, financial condition or equity. You should carefully consider and evaluate all of the information included in this Report and any subsequent reports we may file with the Securities and Exchange Commission or make available to the public before investing in any securities we issue.
We may continue to incur significant realized and unrealized investment losses and volatility in net investment income arising from the severe disruption in the capital and credit markets.
We maintain a large portfolio of fixed income and equity securities, including large amounts of corporate and government issued debt securities, collateralized mortgage obligations (CMOs), asset-backed and other structured securities, equity and equity-based securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array of asset classes. Our investment portfolio supports our obligation to pay future insurance claims and provides investment returns which are an important part of our overall profitability.
For more than a year, capital and credit markets have experienced severe levels of volatility, illiquidity, uncertainty and overall disruption. Despite government intervention, market conditions have led to the merger or failure of a number of prominent financial institutions and government sponsored entities, sharply increased unemployment and reduced economic activity. In addition, significant declines in the value of assets and securities that began with the residential sub-prime mortgage crisis have spread to nearly all classes of investments, including most of those held in our investment portfolio. As a result, during 2008 we incurred significant realized and unrealized losses in our investment portfolio and experienced substantial declines in our net investment income which have materially adversely impacted our results of operations and equity.
In addition, certain categories of our investments are particularly subject to significant exposures in the current market environment. Although we normally expect limited partnership investments to provide higher returns over time, since 2008, they have presented greater risk, greater volatility and higher illiquidity than our fixed income investments. Commercial mortgage-backed securities (CMBS) also present greater risks due to the credit deterioration in the commercial real estate market. Notably, even senior tranches of CMBS have experienced significant price erosion due to market concerns involving the valuation and credit performance of commercial real estate. If these economic and market conditions persist, we may continue to experience reduced investment income and to incur substantial additional realized and unrealized losses on our investments. As a result, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted. Additional information on our investment portfolio is included in the MD&A under Item 7 and Note B to the Consolidated Financial Statements included under Item 8.
We may continue to incur underwriting losses as a result of the global economic crisis.
Overall global economic conditions may continue to be recessionary and highly unfavorable. Although many lines of our business have both direct and indirect exposure to this economic crisis, the exposure is especially high for the lines of business that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services. As a result, we have experienced and may continue to experience unanticipated underwriting losses with respect to these lines of business. Additionally, we could experience declines in our premium volume and related insurance losses. Consequently, our results of operations, equity, business and insurer financial strength and debt ratings could be adversely impacted.
Our valuation of investments and impairment of securities requires significant judgment.
Our investment portfolio is exposed to various risks such as interest rate, market and credit risks, many of which are unpredictable. We exercise significant judgment in analyzing these risks and in validating fair values provided by third parties for securities in our investment portfolio that are not regularly traded. We also exercise significant judgment in determining whether the impairment of particular investments is temporary or other-than-temporary. Securities with exposure to sub-prime residential mortgage collateral or Alternative A (Alt-A) collateral are particularly sensitive to fairly small changes in actual collateral performance and assumptions as to future collateral performance.

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During 2008, we incurred significant unrealized losses in our investment portfolio. In addition, we recorded significant other-than-temporary impairment (OTTI) losses primarily in the corporate and other taxable bonds, asset-backed bonds and non-redeemable preferred equity securities sectors.
Due to the inherent uncertainties involved with these types of judgments, we may incur further unrealized losses and conclude that further other-than-temporary write downs of our investments are required. As a result, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted. Additional information on our investment portfolio is included in the MD&A under Item 7 and Note B to the Consolidated Financial Statements included under Item 8.
We are unable to predict the impact on us of governmental efforts taken and proposed to be taken in response to the economic and credit crisis.
The Federal government has implemented various measures, including the establishment of the Troubled Assets Relief Program pursuant to the Emergency Economic Stabilization Act of 2008, in an effort to deal with the ongoing economic and credit crisis. In addition, there are numerous proposals for further legislative and regulatory actions at both the Federal and state levels, particularly with respect to the financial services industry. Since these new laws and regulations could involve critical matters affecting our operations, they may have an impact on our business and our overall financial condition. Due to this significant uncertainty, we are unable to determine whether our actions in response to these governmental efforts will be effective or to predict with any certainty the overall impact these governmental efforts will have on us. As a result, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
We may continue to incur significant losses from our investments in financial institutions.
Our investment portfolio includes preferred stock and hybrid debt securities issued by banks and other financial institutions. To date, government sponsored efforts to recapitalize the financial system both in the United States, as well as overseas, have been inconsistent and unpredictable. The uncertainty surrounding these efforts and their potential impact on existing financial institution securities has caused these securities to experience adverse price movement and rating agency downgrades. If this uncertainty continues or if regulatory decisions negatively affect our investments in financial institutions, we may continue to incur significant losses in our investment portfolio. As a result, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted. Additional information on our investment portfolio is included in the MD&A under Item 7 and Note B to the Consolidated 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 important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries, as well as our public debt, are rated by rating agencies, namely, A.M. Best Company (A.M. Best), Moody’s Investors Service, Inc. (Moody’s) and Standard & Poor’s. Ratings reflect the rating agency’s opinions of an insurance company’s financial strength, capital adequacy, operating performance, strategic position and ability to meet its obligations to policyholders and debtholders.
Due to the intense competitive environment in which we operate, the severe disruption in the capital and credit markets, the uncertainty in determining reserves and the potential for us to take material unfavorable development in the future, and possible changes in the methodology or criteria applied by the rating agencies, the rating agencies may take action to lower our ratings in the future. If our property and casualty insurance financial strength ratings are downgraded below current levels, our business and results of operations could be materially adversely affected. The severity of the impact on our business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of our insurance products to certain markets, and the required collateralization of certain future payment obligations or reserves. Recently, Moody’s and A.M. Best have revised their outlook on us from stable to negative.
In addition, it is possible that a lowering of the debt ratings of Loews by certain of the rating agencies could result in an adverse impact on our ratings, independent of any change in our circumstances. We have entered into several settlement agreements and assumed reinsurance contracts that require collateralization of future

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payment obligations and assumed reserves if our ratings or other specific criteria fall below certain thresholds. The ratings triggers are generally more than one level below our current ratings. Additional information on our ratings and ratings triggers is included in the MD&A under Item 7.
We are subject to extensive federal, state and local governmental regulations that restrict our ability to do business and generate revenues.
The insurance industry is subject to comprehensive and detailed regulation and supervision throughout the United States. Most insurance regulations are designed to protect the interests of our policyholders rather than our investors. Each state in which we do business has established supervisory agencies that regulate the manner in which we do business. Their regulations relate to, among other things, the following:
 
standards of solvency including risk-based capital measurements;
 
 
restrictions on the nature, quality and concentration of investments;
 
 
restrictions on our ability to withdraw from unprofitable lines of insurance or unprofitable market areas;
 
 
the required use of certain methods of accounting and reporting;
 
 
the establishment of reserves for unearned premiums, losses and other purposes;
 
 
potential assessments for funds necessary to settle covered claims against impaired, insolvent or failed private or quasi-governmental insurers;
 
 
licensing of insurers and agents;
 
 
approval of policy forms;
 
 
limitations on the ability of our insurance subsidiaries to pay dividends to us; and
 
 
limitations on the ability to non-renew, cancel or change terms and conditions in policies.
Regulatory powers also extend to premium rate regulations which require that rates not be excessive, inadequate or unfairly discriminatory. The states in which we do business also require us to provide coverage to persons whom we would not otherwise consider eligible. Each state dictates the types of insurance and the level of coverage that must be provided to such involuntary risks. Our share of these involuntary risks is mandatory and generally a function of our respective share of the voluntary market by line of insurance in each state.
Any of these regulations could materially adversely affect our results of operations, equity, business and insurer financial strength and debt ratings.
We are subject to capital adequacy requirements and, if we are unable to maintain or raise sufficient capital to meet these requirements, regulatory agencies may restrict or prohibit us from operating our business.
Insurance companies such as us are subject to risk-based capital standards set by state regulators to help identify companies that merit further regulatory attention. These standards apply specified risk factors to various asset, premium and reserve components of our statutory capital and surplus reported in our statutory basis of accounting financial statements. Current rules require companies to maintain statutory capital and surplus at a specified minimum level determined using the risk-based capital formula. If we do not meet these minimum requirements, state regulators may restrict or prohibit us from operating our business. If we are required to record a material charge against earnings in connection with a change in estimates or circumstances, we may violate these minimum capital adequacy requirements unless we are able to raise sufficient additional capital. Examples of events leading us to record a material charge against earnings include impairment of our investments or unexpectedly poor claims experience.
During the fourth quarter of 2008, we took several actions to replenish our capital position and bolster the statutory surplus of our operating insurance subsidiaries. One of these actions was the November 7, 2008 purchase by Loews of 12,500 shares of our non-voting cumulative preferred stock (2008 Senior Preferred) for $1.25 billion. Loews, which owned approximately 90% of our outstanding common stock as of December 31, 2008, has also provided us with substantial amounts of capital in prior years. Given the ongoing turmoil in the capital and credit markets, we may be limited in our ability to raise significant amounts of capital on favorable terms or at all. In addition, Loews may be restricted in its ability or willingness to provide additional capital support to us. As a result, if we are in need of additional capital, we may be required to attempt to secure this funding from sources other than Loews on terms that are not favorable.

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Our insurance subsidiaries, upon whom we depend for dividends in order to fund our working capital needs, are limited by state regulators in their ability to pay dividends.
We are a holding company and are dependent upon dividends, loans and other sources of cash from our subsidiaries in order to meet our obligations. Dividend payments, however, must be approved by the subsidiaries’ domiciliary state departments of insurance and are generally limited to amounts determined by formula which varies by state. The formula for the majority of the states is the greater of 10% of the prior year statutory surplus or the prior year statutory net income, less the aggregate of all dividends paid during the twelve months prior to the date of payment. Some states, however, have an additional stipulation that dividends cannot exceed the prior year’s earned surplus. If we are restricted, by regulatory rule or otherwise, from paying or receiving inter-company dividends, we may not be able to fund our working capital needs and debt service requirements from available cash. As a result, we would need to look to other sources of capital which may be more expensive or may not be available at all.
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 the MD&A under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.
We are subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social and other environmental conditions change. These issues have had, and may continue to have, a negative effect on our business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims, resulting in further increases in our reserves which can have a material adverse effect on our results of operations and equity. The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. Examples of emerging or potential claims and coverage issues include:
 
increases in the number and size of claims relating to injuries from medical products;
 
 
the effects of accounting and financial reporting scandals and other major corporate governance failures, which have resulted in an increase in the number and size of claims, including director and officer and errors and omissions insurance claims;
 
 
class action litigation relating to claims handling and other practices;
 
 
construction defect claims, including claims for a broad range of additional insured endorsements on policies;
 
 
clergy abuse claims, including passage of legislation to reopen or extend various statutes of limitations; and
 
 
mass tort claims, including bodily injury claims related to silica, welding rods, benzene, lead and various other chemical exposure claims.
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, we review and change our reserve estimates in a regular and ongoing

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process as experience develops and further claims are reported and settled. In addition, we periodically undergo state regulatory financial examinations, including review and analysis of our reserves. If estimated reserves are insufficient for any reason, the required increase in reserves would be recorded as a charge against our earnings for the period in which reserves are determined to be insufficient. These charges could be substantial and could materially adversely affect our results of operations, equity, business and insurer financial strength and debt ratings.
Loss reserves for asbestos and environmental pollution are especially difficult to estimate and may result in more frequent and larger additions to these reserves.
Our experience has been that establishing reserves for casualty coverages relating to asbestos and environmental pollution (which we refer to as A&E) claim and claim adjustment expenses are subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported claims are subject to a higher degree of variability due to a number of additional factors including, among others, the following:
 
coverage issues including whether certain costs are covered under the policies and whether policy limits apply;
 
 
inconsistent court decisions and developing legal theories;
 
 
continuing aggressive tactics of plaintiffs’ lawyers;
 
 
the risks and lack of predictability inherent in major litigation;
 
 
changes in the volume of asbestos and environmental pollution claims;
 
 
the impact of the exhaustion of primary limits and the resulting increase in claims on any umbrella or excess policies we have issued;
 
 
the number and outcome of direct actions against us;
 
 
our ability to recover reinsurance for these claims; and
 
 
changes in the legal and legislative environment in which we operate.
As a result of this higher degree of variability, we have necessarily supplemented traditional actuarial methods and techniques with additional estimating techniques and methodologies, many of which involve significant judgment on our part. Consequently, we may periodically need to record changes in our claim and claim adjustment expense reserves in the future in these areas in amounts that could materially adversely affect our results of operations, equity, business and insurer financial strength and debt ratings. Additional information on A&E claims is included in the MD&A under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.
     Asbestos claims. The estimation of reserves for asbestos claims is particularly difficult in light of the factors noted above. In addition, our ability to estimate the ultimate cost of asbestos claims is further complicated by the following:
 
inconsistency of court decisions and jury attitudes, as well as future court decisions;
 
 
interpretation of 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;

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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.
     Environmental pollution claims. The estimation of reserves for environmental pollution claims is complicated by liability and coverage issues arising from these claims. We and others in the insurance industry are disputing coverage for many such claims. In addition to the coverage issues noted in the asbestos claims section above, key coverage issues in environmental pollution 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.
We may suffer losses from non-routine litigation and arbitration matters which may exceed the reserves we have established.
We face substantial risks of litigation and arbitration beyond ordinary course claims and A&E matters, which may contain assertions in excess of amounts covered by reserves that we have established. These matters may be difficult to assess or quantify and may seek recovery of very large or indeterminate amounts that include punitive or treble damages. Accordingly, unfavorable results in these proceedings could have a material adverse impact on our results of operations, equity, business and insurer financial strength and debt ratings.
Additional information on litigation is included in Notes F and G to the Consolidated Financial Statements included under Item 8.
Catastrophe losses are unpredictable.
Catastrophe losses are an inevitable part of our business. Various events can cause catastrophe losses, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather, and fires, and their frequency and severity are inherently unpredictable. In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been

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associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, and snow. The extent of our losses from catastrophes is a function of both the total amount of our insured exposures in the affected areas and the severity of the events themselves. In addition, as in the case of catastrophe losses generally, it can take a long time for the ultimate cost to us to be finally determined. As our claim experience develops on a particular catastrophe, we may be required to adjust our reserves, or take unfavorable development, to reflect our revised estimates of the total cost of claims. We believe we could incur significant catastrophe losses in the future. Therefore, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted. Additional information on catastrophe losses is included in the MD&A under Item 7 and Note F to the Consolidated Financial Statements included under Item 8.
Our key assumptions used to determine reserves and deferred acquisition costs for our long term care product offerings could vary significantly from actual experience.
Our reserves and deferred acquisition costs for our long term care product offerings are based on certain key assumptions including morbidity, which is the frequency and severity of illness, sickness and diseases contracted, policy persistency, which is the percentage of policies remaining in force, interest rates and future health care cost trends. If actual experience differs from these assumptions, the deferred acquisition asset may not be fully realized and the reserves may not be adequate, requiring us to add to reserves, or take unfavorable development. Therefore, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
We continue to face exposure to losses arising from terrorist acts, despite the passage of the Terrorism Risk Insurance Program Reauthorization Act of 2007.
The Terrorism Risk Insurance Program Reauthorization Act of 2007 extended, until December 31, 2014, the program established within the U.S. Department of Treasury by the Terrorism Risk Insurance Act of 2002. This program requires insurers to offer terrorism coverage and the federal government to share in insured losses arising from acts of terrorism. Given the unpredictability of the nature, targets, severity and frequency of potential terrorist acts, this program does not provide complete protection for future losses derived from acts of terrorism. Further, the laws of certain states restrict our ability to mitigate this residual exposure. For example, some states mandate property insurance coverage of damage from fire following a loss, thereby prohibiting us from excluding terrorism exposure. In addition, some states generally prohibit us from excluding terrorism exposure from our primary workers’ compensation policies. Consequently, there is substantial uncertainty as to our ability to contain our terrorism exposure effectively since we continue to issue forms of coverage, in particular, workers’ compensation, that are exposed to risk of loss from a terrorism act. As a result, our results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted by terrorist act losses.
Our premium writings and profitability are affected by the availability and cost of reinsurance.
We purchase reinsurance to help manage our exposure to risk. Under our reinsurance arrangements, another insurer assumes a specified portion of our claim and claim adjustment expenses in exchange for a specified portion of policy premiums. Market conditions determine the availability and cost of the reinsurance protection we purchase, which affects the level of our business and profitability, as well as the level and types of risk we retain. If we are unable to obtain sufficient reinsurance at a cost we deem acceptable, we may be unwilling to bear the increased risk and would reduce the level of our underwriting commitments. Therefore, our financial results of operations could be materially adversely impacted. Additional information on reinsurance is included in Note H to the Consolidated Financial Statements included under Item 8.
We may not be able to collect amounts owed to us by reinsurers.
We have significant amounts recoverable from reinsurers which are reported as receivables in our balance sheets and are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves. The ceding of insurance does not, however, discharge our primary liability for claims. As a result, we are subject to credit risk relating to our ability to recover amounts due from reinsurers. Certain of our reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies. A continuation or worsening of the current highly unfavorable global economic conditions, along with the severe disruptions in the capital and credit markets, could similarly impact all of our reinsurers. 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

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our results of operations, equity, business and insurer financial strength and debt ratings. Additional information on reinsurance is included in Note H to the Consolidated Financial Statements included under Item 8.
We face intense competition in our industry and may be adversely affected by the cyclical nature of the property and casualty business.
All aspects of the insurance industry are highly competitive and we must continuously allocate resources to refine and improve our insurance products and services. We compete with a large number of stock and mutual insurance companies and other entities for both distributors and customers. Insurers compete on the basis of factors including products, price, services, ratings and financial strength. We may lose business to competitors offering competitive insurance products at lower prices. The property and casualty market is cyclical and has experienced periods characterized by relatively high levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates. As a result, our premium levels, expense ratio, results of operations, equity, business and insurer financial strength and debt ratings could be materially adversely impacted.
We 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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The 333 S. Wabash Avenue building, located in Chicago, Illinois and owned by CCC, a wholly-owned subsidiary of CNAF, serves as our home office. Our subsidiaries own or lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to our principal office locations.
         
    Amount (Square Feet) of Building    
    Owned and Occupied or Leased    
Location   and Occupied by CNA   Principal Usage
333 S. Wabash Avenue, Chicago, Illinois
  845,567   Principal executive offices of CNAF
401 Penn Street, Reading, Pennsylvania
  170,143   Property and casualty insurance offices
2405 Lucien Way, Maitland, Florida
  124,946   Property and casualty insurance offices
40 Wall Street, New York, New York
  107,607   Property and casualty insurance offices
1100 Ward Avenue, Honolulu, Hawaii
  104,478   Property and casualty insurance offices
101 S. Phillips Avenue, Sioux Falls, South Dakota
  81,101   Property and casualty insurance offices
600 N. Pearl Street, Dallas, Texas
  72,240   Property and casualty insurance offices
4267 Meridian Parkway, Aurora, Illinois
  70,004   Data Center
675 Placentia Avenue, Brea, California
  64,939   Property and casualty insurance offices
1249 South River Road, Cranbury, New Jersey
  57,671   Property and casualty insurance offices
We lease the office space described above except for the Chicago, Illinois building, the Reading, Pennsylvania building and the Aurora, Illinois building, which are owned. We consider that our properties are generally in good condition, are well maintained and are suitable and adequate to carry on our business.
ITEM 3. LEGAL PROCEEDINGS
Information on our legal proceedings is set forth in Notes F and G of the Consolidated Financial Statements included under Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and is traded on the Nasdaq, under the symbol CNA.
As of February 20, 2009, we had 269,024,408 shares of common stock outstanding. Approximately 90% of our outstanding common stock is owned by Loews. We had 1,902 stockholders of record as of February 20, 2009 according to the records maintained by our transfer agent.
In November 2008, we issued and Loews purchased $1.25 billion of CNAF non-voting cumulative senior preferred stock, designated the 2008 Senior Preferred Stock (2008 Senior Preferred). The terms of the 2008 Senior Preferred were approved by a special review committee of independent members of CNAF’s Board of Directors. No dividends may be declared on our common stock or any future preferred stock while the 2008 Senior Preferred is outstanding. As such, we have suspended our quarterly common stock dividend payment. We paid $19 million on December 31, 2008, representing the first quarterly dividend payment on the 2008 Senior Preferred. See Note L of the Consolidated Financial Statements included under Item 8 for further details on the 2008 Senior Preferred.
Our Board of Directors has approved an authorization to purchase, in the open market or through privately negotiated transactions, our outstanding common stock, as our management deems appropriate. In the first quarter of 2008, we repurchased a total of 2,649,621 shares at an average price of $26.53 (including commission) per share. Under the terms of the 2008 Senior Preferred discussed above, common stock repurchases are prohibited while the 2008 Senior Preferred is outstanding. No shares of common stock were purchased during 2007.
The table below shows the high and low sales prices for our common stock based on the New York Stock Exchange Composite Transactions.
Common Stock Information
                                                 
    2008   2007
                    Dividends                   Dividends
    High   Low   Declared   High   Low   Declared
Quarter:
                                               
First
  $ 35.04     $ 23.01     $ 0.15     $ 44.29     $ 39.09     $  
Second
    32.15       24.34       0.15       51.96       42.96       0.10  
Third
    30.61       21.88       0.15       49.18       37.12       0.10  
Fourth
    26.70       8.50             41.84       32.26       0.15  

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The following graph compares the total return of our common stock, the Standard & Poor’s (S&P) 500 Index and the S&P 500 Property & Casualty Insurance Index for the five year period from December 31, 2003 through December 31, 2008. The graph assumes that the value of the investment in our common stock and for each index was $100 on December 31, 2003 and that dividends were reinvested.
Stock Price Performance Graph
                                                 
Company / Index   2003   2004   2005   2006   2007   2008
CNA Financial Corporation
    100.00       111.00       135.81       167.30       141.12       69.90  
S&P 500 Index
    100.00       110.88       116.33       134.70       142.10       89.53  
S&P 500 Property & Casualty Insurance Index
    100.00       110.42       127.11       143.47       123.44       87.13  
(PERFORMANCE GRAPH)

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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data. The table should be read in conjunction with Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 Financial Statements and Supplementary Data of this Form 10-K.
Selected Financial Data
                                         
As of and for the Years Ended                              
December 31                              
(In millions, except per share data)   2008     2007     2006     2005     2004  
Results of Operations:
                                       
Revenues
  $ 7,799     $ 9,885     $ 10,376     $ 9,862     $ 9,924  
 
                             
Income (loss) from continuing operations
  $ (308 )   $ 857     $ 1,137     $ 243     $ 446  
Income (loss) from discontinued operations, net of tax
    9       (6 )     (29 )     21       (21 )
 
                             
Net income (loss)
  $ (299 )   $ 851     $ 1,108     $ 264     $ 425  
 
                             
 
                                       
Basic Earnings (Loss) Per Share:
                                       
Income (loss) from continuing operations
  $ (1.21 )   $ 3.15     $ 4.17     $ 0.68     $ 1.49  
Income (loss) from discontinued operations
    0.03       (0.02 )     (0.11 )     0.08       (0.09 )
 
                             
 
Basic earnings (loss) per share available to common stockholders
  $ (1.18 )   $ 3.13     $ 4.06     $ 0.76     $ 1.40  
 
                             
 
                                       
Diluted Earnings (Loss) Per Share:
                                       
Income (loss) from continuing operations
  $ (1.21 )   $ 3.15     $ 4.16     $ 0.68     $ 1.49  
Income (loss) from discontinued operations
    0.03       (0.02 )     (0.11 )     0.08       (0.09 )
 
                             
 
                                       
Diluted earnings (loss) per share available to common stockholders
  $ (1.18 )   $ 3.13     $ 4.05     $ 0.76     $ 1.40  
 
                             
 
                                       
Dividends declared per common share
  $ 0.45     $ 0.35     $     $     $  
 
                             
 
                                       
Financial Condition:
                                       
Total investments
  $ 35,003     $ 41,789     $ 44,096     $ 39,695     $ 39,231  
Total assets
    51,688       56,759       60,283       59,016       62,496  
Insurance reserves
    38,771       40,222       41,080       42,436       43,653  
Long and short term debt
    2,058       2,157       2,156       1,690       2,257  
Stockholders’ equity
    6,877       10,150       9,768       8,950       8,974  
 
                                       
Book value per common share
  $ 20.92     $ 37.36     $ 36.03     $ 31.26     $ 31.63  
 
                                       
Statutory Surplus (preliminary):
                                       
Property and casualty companies (a)
  $ 8,002     $ 8,511     $ 8,137     $ 6,940     $ 6,998  
Life company
    487       471       687       627       1,177  
 
(a)  
Surplus includes the property and casualty companies’ equity ownership of the life company’s capital and surplus.

20


 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with Item 1A Risk Factors, Item 6 Selected Financial Data and Item 8 Financial Statements and Supplementary Data of this Form 10-K.
Index to this MD&A
Management’s discussion and analysis of financial condition and results of operations is comprised of the following sections:
       
    Page No.  
Consolidated Operations
  22  
Critical Accounting Estimates
  25  
Reserves — Estimates and Uncertainties
  27  
Segment Results
  33  
Standard Lines
  34  
Specialty Lines
  37  
Life & Group Non-Core
  40  
Corporate & Other Non-Core
  41  
Asbestos and Environmental Pollution (A&E) Reserves
  42  
Investments
  48  
Net Investment Income
  48  
Net Realized Investment Gains (Losses)
  49  
Gross Unrealized Losses
  51  
Duration
  54  
Asset-Backed and Sub-prime Mortgage Exposure
  55  
Short Term Investments
  56  
Separate Accounts
  56  
Liquidity and Capital Resources
  57  
Cash Flows
  57  
Common Stock Dividends
  58  
Share Repurchases
  58  
Liquidity
  58  
Commitments, Contingencies, and Guarantees
  59  
Ratings
  59  
Accounting Pronouncements
  60  
Forward-Looking Statements
  61  

21


 

CONSOLIDATED OPERATIONS
Results of Operations
The following table includes the consolidated results of our operations. For more detailed components of our business operations and the net operating income financial measure, see the segment discussions within this MD&A.
                         
Years ended December 31                  
(In millions, except per share data)   2008     2007     2006  
Revenues
                       
Net earned premiums
  $ 7,151     $ 7,484     $ 7,603  
Net investment income
    1,619       2,433       2,412  
Other revenues
    326       279       275  
 
                 
 
                       
Total operating revenues
    9,096       10,196       10,290  
 
                 
 
                       
Claims, Benefits and Expenses
                       
Net incurred claims and benefits
    5,703       5,995       6,025  
Policyholders’ dividends
    20       14       22  
Amortization of deferred acquisition costs
    1,467       1,520       1,534  
Other insurance related expenses
    694       733       757  
Restructuring and other related charges
                (13 )
Other expenses
    477       401       401  
 
                 
 
                       
Total claims, benefits and expenses
    8,361       8,663       8,726  
 
                 
 
                       
Operating income from continuing operations before income tax and minority interest
    735       1,533       1,564  
Income tax expense on operating income
    (145 )     (425 )     (450 )
Minority interest
    (57 )     (48 )     (44 )
 
                 
 
                       
Net operating income from continuing operations
    533       1,060       1,070  
 
                       
Realized investment gains (losses), net of participating policyholders’ and minority interests
    (1,297 )     (311 )     86  
Income tax (expense) benefit on realized investment gains (losses)
    456       108       (19 )
 
                 
 
                       
Income (loss) from continuing operations
    (308 )     857       1,137  
 
                       
Income (loss) from discontinued operations, net of income tax (expense) benefit of $9, $0 and $7
    9       (6 )     (29 )
 
                 
 
                       
Net income (loss)
  $ (299 )   $ 851     $ 1,108  
 
                 
 
                       
Basic Earnings (Loss) Per Share
                       
 
                       
Income (loss) from continuing operations
  $ (1.21 )   $ 3.15     $ 4.17  
Income (loss) from discontinued operations
    0.03       (0.02 )     (0.11 )
 
                 
 
                       
Basic earnings (loss) per share available to common stockholders
  $ (1.18 )   $ 3.13     $ 4.06  
 
                 
 
                       
Diluted Earnings (Loss) Per Share
                       
 
                       
Income (loss) from continuing operations
  $ (1.21 )   $ 3.15     $ 4.16  
Income (loss) from discontinued operations
    0.03       (0.02 )     (0.11 )
 
                 
 
                       
Diluted earnings (loss) per share available to common stockholders
  $ (1.18 )   $ 3.13     $ 4.05  
 
                 
 
                       
Weighted Average Outstanding Common Stock and Common Stock Equivalents
                       
 
                       
Basic
    269.4       271.5       262.1  
 
                 
Diluted
    269.4       271.8       262.3  
 
                 

22


 

2008 Compared with 2007
Net results decreased $1,150 million in 2008 as compared with 2007. This decrease was due to higher net realized investment losses and decreased net operating income.
Net realized investment losses increased $638 million in 2008 as compared to 2007. The increase was primarily driven by higher impairment losses. See the Investment section of this MD&A for further discussion of net realized investment results.
Net operating income from continuing operations in 2008 decreased $527 million as compared with 2007. The decrease was primarily due to lower net investment income, driven by limited partnership results, and higher catastrophe impacts. Net investment income included a decline in trading portfolio results of $159 million, which was substantially offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio. See the Investments section of this MD&A for further discussion of net investment income. The catastrophe impacts were $239 million after-tax in 2008, as compared to catastrophe losses of $51 million after-tax in 2007. Net operating income from continuing operations in 2007 included an after-tax loss of $108 million in connection with the settlement of an arbitration proceeding (IGI Contingency), as discussed below.
Favorable net prior year development of $80 million was recorded in 2008 related to our Standard Lines, Specialty Lines and Corporate & Other Non-core segments. This amount consisted of $75 million of favorable claim and allocated claim adjustment expense reserve development and $5 million of favorable premium development. Favorable net prior year development of $73 million was recorded in 2007 related to our Standard Lines, Specialty Lines and Corporate & Other Non-core segments. This amount consisted of $38 million of favorable claim and allocated claim adjustment expense reserve development and $35 million of favorable premium development. Further information on Net Prior Year Development for 2008 and 2007 is included in Note F of the Consolidated Financial Statements included under Item 8.
Net earned premiums decreased $333 million in 2008 as compared with 2007, including a $314 million decrease related to Standard Lines and a $7 million decrease related to Specialty Lines. See the Segment Results section of this MD&A for further discussion.
Results from discontinued operations improved $15 million in 2008 as compared to 2007. The 2008 results are primarily driven by the recognition in 2008 of a change in estimate of the tax benefit related to the 2007 sale of our United Kingdom discontinued operations subsidiary. The loss in 2007 was primarily driven by unfavorable net prior year development.
2007 Compared with 2006
Net income decreased $257 million in 2007 as compared with 2006. This decrease was primarily due to decreased net realized investment results.
Net realized investment results decreased by $270 million in 2007 compared with 2006. This decrease was primarily driven by higher impairment losses. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income from continuing operations in 2007 decreased $10 million as compared with 2006. The decrease in net operating income primarily related to the after-tax loss of $108 million related to the settlement of the IGI contingency as discussed in the Life & Group Non-core segment discussion of this MD&A and decreased current accident year underwriting results in our Standard and Specialty Lines segments. The decreased net operating income was partially offset by favorable net prior year development in 2007 as compared to unfavorable net prior year development in 2006 and increased net investment income. The increased net investment income included a decline of net investment income in the trading portfolio of $93 million, a significant portion of which was offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio.

23


 

Favorable net prior year development of $73 million was recorded in 2007 related to our Standard Lines, Specialty Lines and Corporate & Other Non-core segments. This amount consisted of $38 million of favorable claim and allocated claim adjustment expense reserve development and $35 million of favorable premium development. Unfavorable net prior year development of $172 million was recorded in 2006 related to our Standard Lines, Specialty Lines and Corporate & Other Non-core segments. This amount consisted of $233 million of unfavorable claim and allocated claim adjustment expense reserve development and $61 million of favorable premium development. Further information on Net Prior Year Development for 2007 and 2006 is included in Note F of the Consolidated Financial Statements included under Item 8.
Net earned premiums decreased $119 million in 2007 as compared with 2006, including a $178 million decrease related to Standard Lines and a $73 million increase related to Specialty Lines. See the Segment Results section of this MD&A for further discussion.
Results from discontinued operations improved $23 million in 2007 as compared to 2006. The loss in 2007 was primarily driven by unfavorable net prior year development. Results in 2006 reflected a $29 million impairment loss related to the 2007 sale of a portion of the run-off business. Further information on this impairment loss is included in Note P of the Consolidated Financial Statements included under Item 8.

24


 

Critical Accounting Estimates
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the amounts of revenues and expenses reported during the period. Actual results may differ from those estimates.
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.
The accounting estimates discussed below are considered by us to be critical to an understanding of our Consolidated Financial Statements as their application places the most significant demands on our judgment. Note A of the Consolidated Financial Statements included under Item 8 should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations or equity.
Insurance Reserves
Insurance reserves are established for both short and long-duration insurance contracts. Short-duration contracts are primarily related to property and casualty insurance policies where the reserving process is based on actuarial estimates of the amount of loss, including amounts for known and unknown claims. Long-duration contracts typically include traditional life insurance, payout annuities and long term care products and are estimated using actuarial estimates about mortality, morbidity and persistency as well as assumptions about expected investment returns. The reserve for unearned premiums on property and casualty and accident and health contracts represents the portion of premiums written related to the unexpired terms of coverage. The inherent risks associated with the reserving process are discussed in the Reserves — Estimates and Uncertainties section below.
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported as receivables in the Consolidated Balance Sheets. The ceding of insurance does not discharge us of our primary liability under insurance contracts written by us. An exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities assumed under reinsurance agreements. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, our past experience and current economic conditions. Further information on our reinsurance program is included in Note H of the Consolidated Financial Statements included under Item 8.
Valuation of Investments and Impairment of Securities
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the fair value of these assets, it is possible that changes in risks in the near term could have an adverse material impact on our results of operations or equity.
Our investment portfolio is subject to market declines below amortized cost that may be other-than-temporary. A significant judgment in the valuation of investments is the determination of when an other-than-temporary impairment has occurred. We have an Impairment Committee, which reviews the investment portfolio on at least a quarterly basis, with ongoing analysis as new information becomes available. Any decline that is determined to be other-than-temporary is recorded as an other-than-temporary impairment loss in the results of operations in the period in which the determination occurred. Further information on our process for evaluating impairments is included in Note B of the Consolidated Financial Statements included under Item 8.

25


 

Long Term Care Products
Reserves and deferred acquisition costs for our long term care products are based on certain assumptions including morbidity, policy persistency and interest rates. The recoverability of deferred acquisition costs and the adequacy of the reserves are contingent on actual experience related to these key assumptions and other factors such as future health care cost trends. If actual experience differs from these assumptions, the deferred acquisition costs may not be fully realized and the reserves may not be adequate, requiring us to add to reserves, or take unfavorable development. Therefore, our results of operations or equity could be adversely impacted.
Pension and Postretirement Benefit Obligations
We make a significant number of assumptions in estimating the liabilities and costs related to our pension and postretirement benefit obligations to employees under our benefit plans. The assumptions that most impact these costs are the discount rate, the expected return on plan assets and the rate of compensation increases. These assumptions are evaluated relative to current market factors such as inflation, interest rates and fiscal and monetary policies. Changes in these assumptions can have a material impact on pension obligations and pension expense.
To determine the discount rate assumption as of the year-end measurement date for our CNA Retirement Plan and CNA Retiree Health and Group Benefits Plan, we considered the estimated timing of plan benefit payments and available yields on high quality fixed income debt securities. For this purpose, high quality is considered a rating of Aa or better by Moody’s Investors Service, Inc. (Moody’s) or a rating of AA or better from Standard & Poor’s (S&P). We reviewed several yield curves constructed using the cash flow characteristics of the plans as well as bond indices as of the measurement date. The year-over-year change of those data points was also considered. Based on this review, management determined that 6.30% and 6.30% were the appropriate discount rates as of December 31, 2008 to calculate our accrued pension and postretirement liabilities. Accordingly, the 6.30% and 6.30% rates will also be used to determine our 2009 pension and postretirement expense. At December 31, 2007, the discount rates used to calculate our accrued pension and postretirement liabilities were 6.00% and 5.875%.
We recorded a benefit of $14 million in 2008 related to the CNA Retirement Plan and CNA Retiree Health and Group Benefits Plan. Based on our current assumptions and investment performance in 2008, our expense for the CNA Retirement Plan and the CNA Retiree Health and Group Benefits Plan will be approximately $49 million for 2009.
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.
Income Taxes
We account for taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities. Any resulting future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. The assessment of the need for a valuation allowance requires management to make estimates and assumptions about future earnings, reversal of existing temporary differences and available tax planning strategies. If actual experience differs from these estimates and assumptions, the recorded deferred tax asset may not be fully realized resulting in an increase to income tax expense in our results of operations. In addition, the ability to record deferred tax assets in the future could be limited resulting in a higher effective tax rate in that future period.

26


 

Reserves - Estimates and Uncertainties
We maintain reserves to cover our estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled (case reserves) and claims that have been incurred but not reported (IBNR). Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Balance Sheets under the heading “Insurance Reserves.” Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. The carried case and IBNR reserves are provided in the Segment Results section of this MD&A and in Note F of the Consolidated Financial Statements included under Item 8.
The level of reserves we maintain represents our best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that we derive, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain.
We are subject to the uncertain effects of emerging or potential claims and coverage issues that arise as industry practices and legal, judicial, social and other environmental conditions change. These issues have had, and may continue to have, a negative effect on our business by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. Examples of emerging or potential claims and coverage issues include:
 
increases in the number and size of claims relating to injuries from medical products;
 
 
the effects of accounting and financial reporting scandals and other major corporate governance failures, which have resulted in an increase in the number and size of claims, including directors and officers (D&O) and errors and omissions (E&O) insurance claims;
 
 
class action litigation relating to claims handling and other practices;
 
 
construction defect claims, including claims for a broad range of additional insured endorsements on policies;
 
 
clergy abuse claims, including passage of legislation to reopen or extend various statutes of limitations; and
 
 
mass tort claims, including bodily injury claims related to silica, welding rods, benzene, lead and various other chemical exposure claims.
Our experience has been that establishing reserves for casualty coverages relating to asbestos and environmental pollution (A&E) claim and claim adjustment expenses are subject to uncertainties that are greater than those presented by other claims. Estimating the ultimate cost of both reported and unreported A&E claims are subject to a higher degree of variability due to a number of additional factors, including among others:
 
coverage issues, including whether certain costs are covered under the policies and whether policy limits apply;
 
 
inconsistent court decisions and developing legal theories;
 
 
continuing aggressive tactics of plaintiffs’ lawyers;
 
 
the risks and lack of predictability inherent in major litigation;
 
 
changes in the volume of A&E claims;
 
 
the impact of the exhaustion of primary limits and the resulting increase in claims on any umbrella or excess policies we have issued;
 
 
the number and outcome of direct actions against us; and
 
 
our ability to recover reinsurance for A&E claims.

27


 

It is also not possible to predict changes in the legal and legislative environment and the impact on the future development of A&E claims. This development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. It is difficult to predict the ultimate outcome of large coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. A further uncertainty exists as to whether a national privately financed trust to replace litigation of asbestos claims with payments to claimants from the trust will be established and approved through federal legislation, and, if established and approved, whether it will contain funding requirements in excess of our carried loss reserves.
Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment reserves for A&E, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimation techniques and methodologies, many of which involve significant judgments that are required of management. For A&E, we regularly monitor our exposures, including reviews of loss activity, regulatory developments and court rulings. In addition, we perform a comprehensive ground up analysis on our exposures annually. Our actuaries, in conjunction with our specialized claim unit, use various modeling techniques to estimate our overall exposure to known accounts. We use this information and additional modeling techniques to develop loss distributions and claim reporting patterns to determine reserves for accounts that will report A&E exposure in the future. Estimating the average claim size requires analysis of the impact of large losses and claim cost trend based on changes in the cost of repairing or replacing property, changes in the cost of legal fees, judicial decisions, legislative changes, and other factors. Due to the inherent uncertainties in estimating reserves for A&E claim and claim adjustment expenses and the degree of variability due to, among other things, the factors described above, we may be required to record material changes in our claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge. See the A&E Reserves section of this MD&A and Note F of the Consolidated Financial Statements included under Item 8 for additional information relating to A&E claims and reserves.
The impact of these and other unforeseen emerging or potential claims and coverage issues is difficult to predict and could materially adversely affect the adequacy of our claim and claim adjustment expense reserves and could lead to future reserve additions. See the Segment Results sections of this MD&A and Note F of the Consolidated Financial Statements included under Item 8 for a discussion of changes in reserve estimates and the impact on our results of operations.
Establishing Reserve Estimates
In developing claim and claim adjustment expense (“loss” or “losses”) reserve estimates, our actuaries perform detailed reserve analyses that are staggered throughout the year. The data is organized at a “product” level. A product can be a line of business covering a subset of insureds such as commercial automobile liability for small and middle market customers, it can encompass several lines of business provided to a specific set of customers such as dentists, or it can be a particular type of claim such as construction defect. Every product is analyzed at least once during the year, and many products are analyzed multiple times. The analyses generally review losses gross of ceded reinsurance and apply the ceded reinsurance terms to the gross estimates to establish estimates net of reinsurance. In addition to the detailed analyses, we review actual loss emergence for all products each quarter.
The detailed analyses use a variety of generally accepted actuarial methods and techniques to produce a number of estimates of ultimate loss. Our actuaries determine a point estimate of ultimate loss by reviewing the various estimates and assigning weight to each estimate given the characteristics of the product being reviewed. The reserve estimate is the difference between the estimated ultimate loss and the losses paid to date. The difference between the estimated ultimate loss and the case incurred loss (paid loss plus case reserve) is IBNR. IBNR calculated as such includes a provision for development on known cases (supplemental development) as well as a provision for claims that have occurred but have not yet been reported (pure IBNR).

28


 

Most of our business can be characterized as long-tail. For long-tail business, it will generally be several years between the time the business is written and the time when all claims are settled. Our long-tail exposures include commercial automobile liability, workers’ compensation, general liability, medical malpractice, other professional liability coverages, assumed reinsurance run-off and products liability. Short-tail exposures include property, commercial automobile physical damage, marine and warranty. Each of our property/casualty segments, Standard Lines, Specialty Lines and Corporate & Other Non-Core, contain both long-tail and short-tail exposures.
The methods used to project ultimate loss for both long-tail and short-tail exposures include, but are not limited to, the following:
 
Paid Development,
 
Incurred Development,
 
Loss Ratio,
 
Bornhuetter-Ferguson Using Premiums and Paid Loss,
 
Bornhuetter-Ferguson Using Premiums and Incurred Loss, and
 
Average Loss.
The paid development method estimates ultimate losses by reviewing paid loss patterns and applying them to accident years with further expected changes in paid loss. Selection of the paid loss pattern requires analysis of several factors including the impact of inflation on claims costs, the rate at which claims professionals make claim payments and close claims, the impact of judicial decisions, the impact of underwriting changes, the impact of large claim payments and other factors. Claim cost inflation itself requires evaluation of changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors. Because this method assumes that losses are paid at a consistent rate, changes in any of these factors can impact the results. Since the method does not rely on case reserves, it is not directly influenced by changes in the adequacy of case reserves.
For many products, paid loss data for recent periods may be too immature or erratic for accurate predictions. This situation often exists for long-tail exposures. In addition, changes in the factors described above may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most mature point available in the data analyzed often involves considerable uncertainty for long-tail products such as workers’ compensation.
The incurred development method is similar to the paid development method, but it uses case incurred losses instead of paid losses. Since the method uses more data (case reserves in addition to paid losses) than the paid development method, the incurred development patterns may be less variable than paid patterns. However, selection of the incurred loss pattern requires analysis of all of the factors above. In addition, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place, and the use of case incurred losses may not eliminate the issues associated with estimating the incurred loss pattern subsequent to the most mature point available.
The loss ratio method multiplies premiums by an expected loss ratio to produce ultimate loss estimates for each accident year. This method may be useful if loss development patterns are inconsistent, losses emerge very slowly, or there is relatively little loss history from which to estimate future losses. The selection of the expected loss ratio requires analysis of loss ratios from earlier accident years or pricing studies and analysis of inflationary trends, frequency trends, rate changes, underwriting changes, and other applicable factors.
The Bornhuetter-Ferguson using premiums and paid loss method is a combination of the paid development approach and the loss ratio approach. The method normally determines expected loss ratios similar to the approach used to estimate the expected loss ratio for the loss ratio method and requires analysis of the same factors described above. The method assumes that only future losses will develop at the expected loss ratio level. The percent of paid loss to ultimate loss implied from the paid development method is used to determine what percentage of ultimate loss is yet to be paid. The use of the pattern from the paid

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development method requires consideration of all factors listed in the description of the paid development method. The estimate of losses yet to be paid is added to current paid losses to estimate the ultimate loss for each year. This method will react very slowly if actual ultimate loss ratios are different from expectations due to changes not accounted for by the expected loss ratio calculation.
The Bornhuetter-Ferguson using premiums and incurred loss method is similar to the Bornhuetter-Ferguson using premiums and paid loss method except that it uses case incurred losses. The use of case incurred losses instead of paid losses can result in development patterns that are less variable than paid patterns. However, the inclusion of case reserves can lead to distortions if changes in case reserving have taken place, and the method requires analysis of all the factors that need to be reviewed for the loss ratio and incurred development methods.
The average loss method multiplies a projected number of ultimate claims by an estimated ultimate average loss for each accident year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for products where loss development patterns are inconsistent or too variable to be relied on exclusively. In addition, this method can more directly account for changes in coverage that impact the number and size of claims. However, this method can be difficult to apply to situations where very large claims or a substantial number of unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims requires analysis of several factors including the rate at which policyholders report claims to us, the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating the ultimate average loss requires analysis of the impact of large losses and claim cost trend based on changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors.
For other more complex products where the above methods may not produce reliable indications, we use additional methods tailored to the characteristics of the specific situation. Such products include construction defect losses and A&E.
For construction defect losses, our actuaries organize losses by report year. Report year groups claims by the year in which they were reported. To estimate losses from claims that have not been reported, various extrapolation techniques are applied to the pattern of claims that have been reported to estimate the number of claims yet to be reported. This process requires analysis of several factors including the rate at which policyholders report claims to us, the impact of judicial decisions, the impact of underwriting changes and other factors. An average claim size is determined from past experience and applied to the number of unreported claims to estimate reserves for these claims.
For many exposures, especially those that can be considered long-tail, a particular accident year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, our actuaries typically assign more weight to the incurred development method than to the paid development method. As claims continue to settle and the volume of paid loss increases, the actuaries may assign additional weight to the paid development method. For most of our products, even the incurred losses for accident years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, we will not assign any weight to the paid and incurred development methods. We will use loss ratio, Bornhuetter-Ferguson and average loss methods. For short-tail exposures, the paid and incurred development methods can often be relied on sooner primarily because our history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, we may also use loss ratio, Bornhuetter-Ferguson and average loss methods for short-tail exposures.
Periodic Reserve Reviews
The reserve analyses performed by our actuaries result in point estimates. Each quarter, the results of the detailed reserve reviews are summarized and discussed with our senior management to determine the best estimate of reserves. This group considers many factors in making this decision. The factors include, but are not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.

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Our recorded reserves reflect our best estimate as of a particular point in time based upon known facts, current law and our judgment. The carried reserve may differ from the actuarial point estimate as the result of our consideration of the factors noted above as well as the potential volatility of the projections associated with the specific product being analyzed and other factors impacting claims costs that may not be quantifiable through traditional actuarial analysis. This process results in management’s best estimate which is then recorded as the loss reserve.
Currently, our reserves are slightly higher than the actuarial point estimate. We do not establish a specific provision for uncertainty. For Standard Lines, the difference between our reserves and the actuarial point estimate is primarily due to the three most recent accident years because the claim data from these accident years is very immature. For Specialty Lines, the difference between our reserves and the actuarial point estimate is spread more broadly across accident years reflecting the volatility of claim outcomes. We believe it is prudent to wait until actual experience confirms that the loss reserves should be adjusted. For Corporate & Other Non-Core, the carried reserve is slightly higher than the actuarial point estimate. For A&E exposures, we feel it is prudent, based on the history of developments in this area and the volatility associated with the reserves, to be above the point estimate until the ultimate outcome of the issues associated with these exposures is clearer.
The key assumptions fundamental to the reserving process are often different for various products and accident years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the paid development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims. As a result, the effect on reserve estimates of a particular change in assumptions usually cannot be specifically quantified, and changes in these assumptions cannot be tracked over time.
Our recorded reserves are management’s best estimate. In order to provide an indication of the variability associated with our net reserves, the following discussion provides a sensitivity analysis that shows the approximate estimated impact of variations in the most significant factor affecting our reserve estimates for particular types of business. These significant factors are the ones that could most likely materially impact the reserves. This discussion covers the major types of business for which we believe a material deviation to our reserves is reasonably possible. There can be no assurance that actual experience will be consistent with the current assumptions or with the variation indicated by the discussion. In addition, there can be no assurance that other factors and assumptions will not have a material impact on our reserves.
Within Standard Lines, the two types of business for which we believe a material deviation to our net reserves is reasonably possible are workers’ compensation and general liability.
For Standard Lines workers’ compensation, since many years will pass from the time the business is written until all claim payments have been made, claim cost inflation on claim payments is the most significant factor affecting workers’ compensation reserve estimates. Workers’ compensation claim cost inflation is driven by the cost of medical care, the cost of wage replacement, expected claimant lifetimes, judicial decisions, legislative changes and other factors. If estimated workers’ compensation claim cost inflation increases by 100 basis points for the entire period over which claim payments will be made, we estimate that our net reserves would increase by approximately $500 million. If estimated workers’ compensation claim cost inflation decreases by 100 basis points for the entire period over which claim payments will be made, we estimate that our net reserves would decrease by approximately $450 million. Our net reserves for Standard Lines workers’ compensation were approximately $4.8 billion at December 31, 2008.
For Standard Lines general liability, the predominant method used for estimating reserves is the incurred development method. Changes in the cost to repair or replace property, the cost of medical care, the cost of wage replacement, judicial decisions, legislation and other factors all impact the pattern selected in this method. The pattern selected results in the incurred development factor that estimates future changes in case incurred loss. If the estimated incurred development factor for general liability increases by 12%, we estimate that our net reserves would increase by approximately $250 million. If the estimated incurred development factor for general liability decreases by 10%, we estimate that our net reserves would decrease

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by approximately $200 million. Our net reserves for Standard Lines general liability were approximately $3.3 billion at December 31, 2008.
Within Specialty Lines, we believe a material deviation to our net reserves is reasonably possible for professional liability and related business in the U.S. Specialty Lines group. This business includes professional liability coverages provided to various professional firms, including architects, realtors, small and mid-sized accounting firms, law firms and technology firms. This business also includes D&O, employment practices, fiduciary and fidelity coverages as well as insurance products serving the healthcare delivery system. The most significant factor affecting reserve estimates for this business is claim severity. Claim severity is driven by the cost of medical care, the cost of wage replacement, legal fees, judicial decisions, legislation and other factors. Underwriting and claim handling decisions such as the classes of business written and individual claim settlement decisions can also impact claim severity. If the estimated claim severity increases by 9%, we estimate that the net reserves would increase by approximately $400 million. If the estimated claim severity decreases by 3%, we estimate that net reserves would decrease by approximately $150 million. Our net reserves for this business were approximately $4.8 billion at December 31, 2008.
Within Corporate & Other Non-Core, the two types of business for which we believe a material deviation to our net reserves is reasonably possible are CNA Re and A&E.
For CNA Re, the predominant method used for estimating reserves is the incurred development method. Changes in the cost to repair or replace property, the cost of medical care, the cost of wage replacement, the rate at which ceding companies report claims, judicial decisions, legislation and other factors all impact the incurred development pattern for CNA Re. The pattern selected results in the incurred development factor that estimates future changes in case incurred loss. If the estimated incurred development factor for CNA Re increases by 24%, we estimate that our net reserves for CNA Re would increase by approximately $125 million. If the estimated incurred development factor for CNA Re decreases by 18%, we estimate that our net reserves would decrease by approximately $100 million. Our net reserves for CNA Re were approximately $0.7 billion at December 31, 2008.
For A&E, the most significant factor affecting reserve estimates is overall account size trend. Overall account size trend for A&E reflects the combined impact of economic trends (inflation), changes in the types of defendants involved, the expected mix of asbestos disease types, judicial decisions, legislation and other factors. If the estimated overall account size trend for A&E increases by 400 basis points, we estimate that our A&E net reserves would increase by approximately $250 million. If the estimated overall account size trend for A&E decreases by 400 basis points, we estimate that our A&E net reserves would decrease by approximately $150 million. Our net reserves for A&E were approximately $1.5 billion at December 31, 2008.
Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, we regularly review the adequacy of our reserves and reassess our reserve estimates as historical loss experience develops, additional claims are reported and settled and additional information becomes available in subsequent periods.
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, we review our reserve estimates on a regular basis and make adjustments in the period that the need for such adjustments is determined. These reviews have resulted in our identification of information and trends that have caused us to increase our reserves in prior periods and could lead to the identification of a need for additional material increases in claim and claim adjustment expense reserves, which could materially adversely affect our results of operations, equity, business and insurer financial strength and debt ratings. See the Ratings section of this MD&A for further information regarding our financial strength and debt ratings.

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Segment Results
The following discusses the results of continuing operations for our operating segments.
CNA’s core property and casualty commercial insurance operations are reported in two business segments: Standard Lines and Specialty Lines. Standard Lines includes standard property and casualty coverages sold to small businesses and middle market entities and organizations in the U.S. primarily through an independent agency distribution system. Standard Lines also includes commercial insurance and risk management products sold to large corporations in the U.S. primarily through insurance brokers. Specialty Lines provides a broad array of professional, financial and specialty property and casualty products and services, including excess and surplus lines, primarily through insurance brokers and managing general underwriters. Specialty Lines also includes insurance coverages sold globally through our foreign operations (CNA Global).
Our property and casualty field structure consists of 32 branch locations across the country organized into 2 territories. The Centralized Processing Operation for small and middle-market customers, located in Maitland, Florida, handles policy processing, billing and collection activities, and also acts as a call center to optimize customer service. The claims structure consists of a centralized claim center designed to efficiently handle property damage and medical only claims and 14 claim office locations around the country handling the more complex claims.
We utilize the net operating income financial measure to monitor our operations. Net operating income is calculated by excluding from net income the after-tax effects of 1) net realized investment gains or losses, 2) income or loss from discontinued operations and 3) any cumulative effects of changes in accounting principles. See further discussion regarding how we manage our business in Note N of the Consolidated Financial Statements included under Item 8. In evaluating the results of our Standard Lines and Specialty Lines segments, we utilize the loss ratio, the expense ratio, the dividend ratio, and the combined ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios.
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development within this MD&A. These changes can be favorable or unfavorable. Net prior year development does not include the impact of related acquisition expenses. Further information on our reserves is provided in Note F of the Consolidated Financial Statements included under Item 8.

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STANDARD LINES
Business Overview
Standard Lines works with an independent agency distribution system and network of brokers to market a broad range of property and casualty insurance products and services domestically, primarily to small, middle-market and large businesses and organizations. The Standard Lines operating model focuses on underwriting performance, relationships with selected distribution sources and understanding customer needs. Property products provide standard and excess property coverages, as well as marine coverage, and boiler and machinery. Casualty products provide standard casualty insurance products such as workers’ compensation, general and product liability and commercial auto coverage through traditional products. Most insurance programs are provided on a guaranteed cost basis; however, we also offer specialized loss-sensitive insurance programs to those customers viewed as higher risk and less predictable in exposure.
These property and casualty products are offered as part of our Business and Commercial insurance groups. Our Business insurance group serves our smaller commercial accounts and the Commercial insurance group serves our middle markets and our larger risks. In addition, Standard Lines provides total risk management services relating to claim and information services to the large commercial insurance marketplace, through a wholly-owned subsidiary, CNA ClaimPlus, Inc., a third party administrator.
The following table details results of operations for Standard Lines.
Results of Operations
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Net written premiums
  $ 3,054     $ 3,267     $ 3,598  
Net earned premiums
    3,065       3,379       3,557  
Net investment income
    506       878       840  
Net operating income
    221       602       446  
Net realized investment gains (losses), after-tax
    (317 )     (97 )     48  
Net income (loss)
    (96 )     505       494  
 
                       
Ratios
                       
Loss and loss adjustment expense
    75.4 %     67.4 %     72.5 %
Expense
    31.6       32.5       31.6  
Dividend
          0.2       0.5  
 
                 
 
                       
Combined
    107.0 %     100.1 %     104.6 %
 
                 
2008 Compared with 2007
Net written premiums for Standard Lines decreased $213 million in 2008 as compared with 2007. Premiums written in 2008 were unfavorably impacted by competitive market conditions resulting in decreased production, as compared with 2007, across both our Business and Commercial Insurance groups. The competitive market conditions may put ongoing pressure on premium and income levels, and the expense ratio. This unfavorable impact was partially offset by decreased ceded premiums. Net earned premiums decreased $314 million in 2008 as compared with 2007, consistent with the decreased net written premiums.
Standard Lines averaged rate decreases of 5% for 2008, as compared to decreases of 4% for 2007 for the contracts that renewed during those periods. Retention rates of 82% and 78% were achieved for those contracts that were available for renewal in each period.
Net results decreased $601 million in 2008 as compared with 2007. This decrease was attributable to decreased net operating income and higher net realized investment losses. See the Investments section of this MD&A for further discussion of the net realized investment results and net investment income.
Net operating income decreased $381 million in 2008 as compared with 2007. This decrease was primarily driven by significantly lower net investment income and higher catastrophe impacts. The catastrophe impacts were $227 million after-tax in 2008, which included a $7 million after-tax catastrophe-related insurance assessment, as compared to catastrophe losses of $48 million after-tax in 2007.

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In 2008, the amount due from policyholders related to losses under deductible policies within Standard Lines was reduced by $90 million for insolvent insureds. The reduction of this amount, which is reflected as unfavorable net prior year reserve development, had no effect on 2008 results of operations as the Company had previously recognized provisions in prior years. These impacts were reported in Insurance claims and policyholders’ benefits in the 2008 Consolidated Statement of Operations.
The combined ratio increased 6.9 points in 2008 as compared with 2007. The loss ratio increased 8.0 points primarily due to increased catastrophe losses. Catastrophes losses related to 2008 events had an adverse impact of 11.1 points on the loss ratio in 2008 compared with an adverse impact of 2.2 points in 2007.
The expense ratio decreased 0.9 points in 2008 as compared with 2007 primarily related to changes in the assessment rates imposed by certain states for insurance-related assessments. The dividend ratio decreased 0.2 points in 2008 as compared with 2007 due to increased favorable dividend development in the workers’ compensation line of business.
Favorable net prior year development of $18 million was recorded in 2008, including $34 million of favorable claim and allocated claim adjustment expense reserve development and $16 million of unfavorable premium development. Excluding the impact of the $90 million of unfavorable net prior year reserve development discussed above, which had no net impact on the 2008 results of operations, favorable net prior year development was $108 million. Favorable net prior year development of $123 million, including $104 million of favorable claim and allocated claim adjustment expense reserve development and $19 million of favorable premium development, was recorded in 2007. Further information on Standard Lines net prior year development for 2008 and 2007 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, 2008 and 2007 for Standard Lines.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2008     2007  
(In millions)                
Gross Case Reserves
  $ 6,158     $ 5,988  
Gross IBNR Reserves
    5,890       6,060  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 12,048     $ 12,048  
 
           
Net Case Reserves
  $ 4,995     $ 4,750  
Net IBNR Reserves
    4,875       5,170  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 9,870     $ 9,920  
 
           
2007 Compared with 2006
Net written premiums for Standard Lines decreased $331 million in 2007 as compared with 2006, primarily due to decreased production. The decreased production reflected our disciplined participation in the competitive market. Net earned premiums decreased $178 million in 2007 as compared with 2006, consistent with the decreased premiums written.
Standard Lines averaged rate decreases of 4% for 2007, as compared to flat rates for 2006 for the contracts that renewed during those periods. Retention rates of 78% and 81% were achieved for those contracts that were available for renewal in each period.
Net income increased $11 million in 2007 as compared with 2006. This increase was primarily attributable to improved net operating income, offset by decreased net realized investment results. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income increased $156 million in 2007 as compared with 2006. This increase was primarily driven by favorable net prior year development in 2007 as compared to unfavorable net prior year development in 2006 and increased net investment income. These favorable impacts were partially offset by decreased

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current accident year underwriting results including increased catastrophe losses. Catastrophe losses were $48 million after-tax in 2007, as compared to $35 million after-tax in 2006.
The combined ratio improved 4.5 points in 2007 as compared with 2006. The loss ratio improved 5.1 points primarily due to favorable net prior year development in 2007 as compared to unfavorable net prior year development in 2006. This favorable impact was partially offset by higher current accident year loss ratios primarily related to the decline in rates.
The dividend ratio improved 0.3 points in 2007 as compared with 2006 due to favorable dividend development in the workers’ compensation line of business.
The expense ratio increased 0.9 points in 2007 as compared with 2006, primarily reflecting the impact of declining earned premiums.
Favorable net prior year development of $123 million was recorded in 2007, including $104 million of favorable claim and allocated claim adjustment expense reserve development and $19 million of favorable premium development. Unfavorable net prior year development of $150 million, including $208 million of unfavorable claim and allocated claim adjustment expense reserve development and $58 million of favorable premium development, was recorded in 2006. Further information on Standard Lines Net Prior Year Development for 2007 and 2006 is included in Note F of the Consolidated Financial Statements included under Item 8.

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SPECIALTY LINES
Business Overview
Specialty Lines provides professional, financial and specialty property and casualty products and services, both domestically and abroad, through a network of brokers, managing general underwriters and independent agencies. Specialty Lines provides solutions for managing the risks of its clients, including architects, lawyers, accountants, healthcare professionals, financial intermediaries and public and private companies. Product offerings also include surety and fidelity bonds, and vehicle warranty services.
Specialty Lines includes the following business groups:
U.S. Specialty Lines provides management and professional liability insurance and risk management services and other specialized property and casualty coverages, primarily in the United States. This group provides professional liability coverages to various professional firms, including architects, realtors, small and mid-sized accounting firms, law firms and technology firms. U.S. Specialty Lines also provides D&O, employment practices, fiduciary and fidelity coverages. Specific areas of focus include small and mid-size firms as well as privately held firms and not-for-profit organizations where tailored products for this client segment are offered. Products within U.S. Specialty Lines are distributed through brokers, agents and managing general underwriters.
U.S. Specialty Lines, through CNA HealthPro, also offers insurance products to serve the healthcare delivery system. Products, which include professional liability as well as associated standard property and casualty coverages, are distributed on a national basis through a variety of channels including brokers, agents and managing general underwriters. Key customer segments include long term care facilities, allied healthcare providers, life sciences, dental professionals and mid-size and large healthcare facilities and delivery systems.
Also included in U.S. Specialty Lines is Excess and Surplus (E&S). E&S provides specialized insurance and other financial products for selected commercial risks on both an individual customer and program basis. Customers insured by E&S are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. E&S’s products are distributed throughout the United States through specialist producers, program agents and brokers.
Surety consists primarily of CNA Surety and its insurance subsidiaries and offers small, medium and large contract and commercial surety bonds. CNA Surety provides surety and fidelity bonds in all 50 states through a combined network of independent agencies. CNA owns approximately 62% of CNA Surety.
Warranty provides vehicle warranty service contracts and related products that protect individuals from the financial burden associated with mechanical breakdown. Products are distributed through independent agents.
CNA Global consists of subsidiaries operating in Europe, Latin America, Canada and Hawaii. These affiliates offer property and casualty insurance, through brokers, managing general underwriters and independent agencies, to small and medium size businesses and capitalize on strategic indigenous opportunities.

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The following table details results of operations for Specialty Lines.
Results of Operations
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Net written premiums
  $ 3,435     $ 3,506     $ 3,431  
Net earned premiums
    3,477       3,484       3,411  
Net investment income
    451       621       554  
Net operating income
    482       619       635  
Net realized investment gains (losses), after-tax
    (185 )     (53 )     25  
Net income
    297       566       660  
 
                       
Ratios
                       
Loss and loss adjustment expense
    61.9 %     62.8 %     60.4 %
Expense
    27.8       26.7       27.4  
Dividend
    0.4       0.2       0.1  
 
                 
 
                       
Combined
    90.1 %     89.7 %     87.9 %
 
                 
2008 Compared with 2007
Net written premiums for Specialty Lines decreased $71 million in 2008 as compared with 2007. Premiums written in 2008 were unfavorably impacted by competitive market conditions resulting in decreased production, as compared with 2007, primarily in U.S. Specialty Lines. These competitive market conditions may put ongoing pressure on premium and income levels, and the expense ratio. The unfavorable impact in premiums written was partially offset by decreased ceded premiums primarily due to decreased use of reinsurance. Net earned premiums decreased $7 million as compared with the same period in 2007, consistent with the decrease in net written premiums.
Specialty Lines averaged rate decreases of 3% for 2008 and 2007 for the contracts that renewed during those periods. Retention rates of 84% and 83% were achieved for those contracts that were up for renewal in each period.
Net income decreased $269 million in 2008 as compared with 2007. This decrease was primarily attributable to lower net operating income and higher net realized investment losses. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income decreased $137 million in 2008 as compared with 2007. This decrease was primarily driven by significantly lower net investment income, decreased current accident year underwriting results and increased foreign currency transaction losses. These unfavorable results were partially offset by increased favorable net prior year development.
The combined ratio increased 0.4 points in 2008 as compared with 2007. The loss ratio improved 0.9 points, primarily due to increased favorable net prior year development in 2008 as compared to 2007. This was partially offset by higher current accident year loss ratios recorded primarily in our E&O and D&O coverages for financial institutions due to the current financial markets credit crisis.
The expense ratio increased 1.1 points in 2008 as compared with 2007. The increase primarily related to increased underwriting expenses and reduced ceding commissions.
Favorable net prior year development of $184 million was recorded in 2008, including $164 million of favorable claim and allocated claim adjustment expense reserve development and $20 million of favorable premium development. Favorable net prior year development of $36 million was recorded in 2007, including $25 million of favorable claim and allocated claim adjustment expense reserve development and $11 million of favorable premium development. Further information on Specialty Lines Net Prior Year Development for 2008 and 2007 is included in Note F of the Consolidated Financial Statements included under Item 8.

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The following table summarizes the gross and net carried reserves as of December 31, 2008 and 2007 for Specialty Lines.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2008     2007  
(In millions)                
Gross Case Reserves
  $ 2,719     $ 2,585  
Gross IBNR Reserves
    5,563       5,818  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 8,282     $ 8,403  
 
           
 
               
Net Case Reserves
  $ 2,149     $ 2,090  
Net IBNR Reserves
    4,694       4,527  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 6,843     $ 6,617  
 
           
2007 Compared with 2006
Net written premiums for Specialty Lines increased $75 million in 2007 as compared with 2006. Premiums written were unfavorably impacted by decreased production as compared with the same period in 2006. The decreased production reflected our disciplined participation in a competitive market. This unfavorable impact was more than offset by decreased ceded premiums. The U.S. Specialty Lines reinsurance structure was primarily quota share reinsurance through April 2007. We elected not to renew this coverage upon its expiration. With our diversification in the previously reinsured lines of business and our management of the gross limits on the business written, we did not believe the cost of renewing the program was commensurate with its projected benefit. Net earned premiums increased $73 million as compared with the same period in 2006, consistent with the increased net premiums written.
Specialty Lines averaged rate decreases of 3% for 2007, as compared to decreases of 1% for 2006 for the contracts that renewed during those periods. Retention rates of 83% and 85% were achieved for those contracts that were up for renewal in each period.
Net income decreased $94 million in 2007 as compared with 2006. This decrease was primarily attributable to decreases in net realized investment results. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net operating income decreased $16 million in 2007 as compared with 2006. This decrease was primarily driven by decreased current accident year underwriting results and less favorable net prior year development. These decreases were partially offset by increased net investment income and favorable experience in the warranty line of business.
The combined ratio increased 1.8 points in 2007 as compared with 2006. The loss ratio increased 2.4 points, primarily due to higher current accident year losses related to the decline in rates and less favorable net prior year development as discussed below.
The expense ratio improved 0.7 points in 2007 as compared with 2006. This improvement was primarily due to a favorable change in estimate related to dealer profit commissions in the warranty line of business.
Favorable net prior year development of $36 million was recorded in 2007, including $25 million of favorable claim and allocated claim adjustment expense reserve development and $11 million of favorable premium development. Favorable net prior year development of $66 million, including $61 million of favorable claim and allocated claim adjustment expense reserve development and $5 million of favorable premium development, was recorded in 2006. Further information on Specialty Lines Net Prior Year Development for 2007 and 2006 is included in Note F of the Consolidated Financial Statements included under Item 8.

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LIFE & GROUP NON-CORE
Business Overview
The Life & Group Non-Core segment primarily includes the results of the life and group lines of business that have either been sold or placed in run-off. We continue to service our existing individual long term care commitments, our payout annuity business and our pension deposit business. We also manage a block of group reinsurance and life settlement contracts. These businesses are being managed as a run-off operation. Our group long term care business, while considered non-core, continues to be actively marketed. During 2008, we exited the indexed group annuity portion of our pension deposit business.
The following table summarizes the results of operations for Life & Group Non-Core.
Results of Operations
                         
Years ended December 31   2008   2007   2006
(In millions)                        
Net earned premiums
  $ 612     $ 618     $ 641  
Net investment income
    484       622       698  
Net operating loss
    (108 )     (159 )     (14 )
Net realized investment losses, after-tax
    (236 )     (36 )     (33 )
Net loss
    (344 )     (195 )     (47 )
2008 Compared with 2007
Net earned premiums for Life & Group Non-Core decreased $6 million in 2008 as compared with 2007. Net earned premiums relate primarily to the group and individual long term care businesses.
Net loss increased $149 million in 2008 as compared with 2007. The increase in net loss was primarily due to increased net realized investment losses and adverse investment performance on a portion of our pension deposit business. Certain of the separate account investment contracts related to the Company’s pension deposit business guarantee principal and a minimum rate of interest, for which the Company recorded a pretax liability of $68 million in Policyholders’ funds during 2008 due to the performance of the related assets supporting the business. The net loss in 2007 included an after-tax loss of $108 million related to the settlement of the IGI Contingency, as discussed below. The decreased net investment income included a decline of trading portfolio results of $157 million, which was substantially offset by a corresponding decrease in the policyholders’ fund reserves supported by the trading portfolio. The trading portfolio supported the indexed group annuity portion of our pension deposit business. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
The indexed group annuity portion of our pension deposit business had a net loss of $22 million and $14 million for 2008 and 2007. The related assets were $720 million and related liabilities were $688 million at December 31, 2007. During 2008, we settled these liabilities with policyholders with no material impact to results of operations.
2007 Compared with 2006
Net earned premiums for Life & Group Non-Core decreased $23 million in 2007 as compared with 2006.
Net loss increased $148 million in 2007 as compared with 2006. The increase in net loss was primarily due to the after-tax loss of $108 million related to the settlement of the IGI contingency. The IGI contingency related to reinsurance arrangements with respect to personal accident insurance coverages provided between 1997 and 1999 which were the subject of arbitration proceedings. We reached agreement in 2007 to settle the arbitration matter for a one-time payment of $250 million, which resulted in an incurred loss, net of reinsurance, of $167 million pretax. The decreased net investment income included a decline of net investment income in the trading portfolio of $92 million, a significant portion of which was offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio. The trading portfolio supports our pension deposit business, which experienced a decline in net results of $33 million in 2007 compared to 2006. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.

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CORPORATE & OTHER NON-CORE
Overview
Corporate & Other Non-Core primarily includes certain corporate expenses, including interest on corporate debt, and the results of certain property and casualty business primarily in run-off, including CNA Re. This segment also includes the results related to the centralized adjusting and settlement of A&E claims.
The following table summarizes the results of operations for the Corporate & Other Non-Core segment, including A&E and intrasegment eliminations.
Results of Operations
                         
Years ended December 31   2008   2007   2006
(In millions)                        
Net investment income
  $ 178     $ 312     $ 320  
Revenues
    30       298       355  
Net operating income (loss)
    (62 )     (2 )     3  
Net realized investment gains (losses), after-tax
    (103 )     (17 )     27  
Net income (loss)
    (165 )     (19 )     30  
2008 Compared with 2007
Revenues decreased $268 million in 2008 as compared with 2007. Revenues were unfavorably impacted by lower net investment income and higher net realized investment losses. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net results decreased $146 million in 2008 as compared with 2007. The decrease was primarily due to decreased revenues as discussed above and expenses associated with a legal contingency. These unfavorable impacts were partially offset by a $27 million release from the allowance for uncollectible reinsurance receivables arising from a change in estimate. In addition, the 2007 results included current accident year losses related to certain mass torts.
Unfavorable net prior year development of $122 million was recorded during 2008, including $123 million of unfavorable claim and allocated claim adjustment expense reserve development and $1 million of favorable premium development. Unfavorable net prior year development of $86 million was recorded in 2007, including $91 million of unfavorable claim and allocated claim adjustment expense reserve development and $5 million of favorable premium development. Further information on Corporate & Other Non-Core’s net prior year development for 2008 and 2007 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, 2008 and 2007 for Corporate & Other Non-Core.
Gross and Net Carried
Claim and Claim Adjustment Expense Reserves
                 
December 31   2008     2007  
(In millions)                
Gross Case Reserves
  $ 1,823     $ 2,159  
Gross IBNR Reserves
    2,578       2,951  
 
           
 
               
Total Gross Carried Claim and Claim Adjustment Expense Reserves
  $ 4,401     $ 5,110  
 
           
 
Net Case Reserves
  $ 1,126     $ 1,328  
Net IBNR Reserves
    1,561       1,787  
 
           
 
               
Total Net Carried Claim and Claim Adjustment Expense Reserves
  $ 2,687     $ 3,115  
 
           

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2007 Compared with 2006
Revenues decreased $57 million in 2007 as compared with 2006. Revenues were unfavorably impacted by decreased net realized investment results. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.
Net results decreased $49 million in 2007 as compared with 2006. The decrease in net results was primarily due to decreased revenues as discussed above, increased current accident year losses related to certain mass torts and an increase in interest costs on corporate debt. In addition, the 2006 results included a release of a restructuring accrual. These unfavorable impacts were partially offset by a change in estimate related to federal taxes and lower expenses.
Unfavorable net prior year development of $86 million was recorded during 2007, including $91 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $5 million of favorable premium development. Unfavorable net prior year development of $88 million was recorded in 2006, including $86 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $2 million of unfavorable premium development.
A&E Reserves
Our property and casualty insurance subsidiaries have actual and potential exposures related to asbestos and environmental pollution (A&E) claims.
Establishing reserves for A&E claim and claim adjustment expenses is subject to uncertainties that are greater than those presented by other claims. Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment expense reserves for A&E, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial, and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimating techniques and methodologies, many of which involve significant judgments that are required on our part. Accordingly, a high degree of uncertainty remains for our ultimate liability for A&E claim and claim adjustment expenses.
In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported A&E claims is subject to a higher degree of variability due to a number of additional factors, including among others: the number and outcome of direct actions against us; coverage issues, including whether certain costs are covered under the policies and whether policy limits apply; allocation of liability among numerous parties, some of whom may be in bankruptcy proceedings, and in particular the application of “joint and several” liability to specific insurers on a risk; inconsistent court decisions and developing legal theories; continuing aggressive tactics of plaintiffs’ lawyers; the risks and lack of predictability inherent in major litigation; enactment of state and federal legislation to address asbestos claims; the potential for increases and decreases in A&E claims which cannot now be anticipated; the potential for increases and decreases in costs to defend A&E claims; the possibility of expanding theories of liability against our policyholders in A&E matters; possible exhaustion of underlying umbrella and excess coverage; and future developments pertaining to our ability to recover reinsurance for A&E claims.
Due to the inherent uncertainties in estimating claim and claim adjustment expense reserves for A&E and due to the significant uncertainties described related to A&E claims, our ultimate liability for these cases, both individually and in aggregate, may exceed the recorded reserves. Any such potential additional liability, or any range of potential additional amounts, cannot be reasonably estimated currently, but could be material to our business, results of operations, equity, and insurer financial strength and debt ratings. Due to, among other things, the factors described above, it may be necessary for us to record material changes in our A&E claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge.
We have annually performed ground up reviews of all open A&E claims to evaluate the adequacy of our A&E reserves. In performing our comprehensive ground up analysis, we consider input from our professionals with direct responsibility for the claims, inside and outside counsel with responsibility for our representation and our actuarial staff. These professionals consider, among many factors, the

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policyholder’s present and predicted future exposures, including such factors as claims volume, trial conditions, prior settlement history, settlement demands and defense costs; the impact of asbestos defendant bankruptcies on the policyholder; facts or allegations regarding the policies we issued or are alleged to have issued, including such factors as aggregate or per occurrence limits, whether the policy is primary, umbrella or excess, and the existence of policyholder retentions and/or deductibles; the policyholders’ allegations; the existence of other insurance; and reinsurance arrangements.
Further information on A&E claim and claim adjustment expense reserves and net prior year development is included in Note F of the Consolidated Financial Statements included under Item 8.
The following table provides data related to our A&E claim and claim adjustment expense reserves.
A&E Reserves
                                 
    December 31, 2008     December 31, 2007  
            Environmental             Environmental  
    Asbestos     Pollution     Asbestos     Pollution  
(In millions)                          
Gross reserves
  $ 2,112     $ 392     $ 2,352     $ 367  
Ceded reserves
    (910 )     (130 )     (1,030 )     (125 )
 
                       
 
                               
Net reserves
  $ 1,202     $ 262     $ 1,322     $ 242  
 
                       
Asbestos
In the past several years, we experienced, at certain points in time, significant increases in claim counts for asbestos-related claims. The factors that led to these increases included, among other things, intensive advertising campaigns by lawyers for asbestos claimants, mass medical screening programs sponsored by plaintiff lawyers and the addition of new defendants such as the distributors and installers of products containing asbestos. In recent years, the rate of new filings has decreased. Various challenges to mass screening claimants have been successful. Historically, the majority of asbestos bodily injury claims have been filed by persons exhibiting few, if any, disease symptoms. Studies have concluded that the percentage of unimpaired claimants to total claimants ranges between 66% and up to 90%. Some courts and some state statutes mandate that so-called “unimpaired” claimants may not recover unless at some point the claimant’s condition worsens to the point of impairment. Some plaintiffs classified as “unimpaired” continue to challenge those orders and statutes. Therefore, the ultimate impact of the orders and statutes on future asbestos claims remains uncertain.
Despite the decrease in new claim filings in recent years, there are several factors, in our view, negatively impacting asbestos claim trends. Plaintiff attorneys who previously sued entities that are now bankrupt continue to seek other viable targets. As plaintiff attorneys named additional defendants to new and existing asbestos bodily injury lawsuits, we experienced an increase in the total number of policyholders with current asbestos claims. Companies with few or no previous asbestos claims are becoming targets in asbestos litigation and, although they may have little or no liability, nevertheless must be defended. Additionally, plaintiff attorneys and trustees for future claimants are demanding that policy limits be paid lump-sum into the bankruptcy asbestos trusts prior to presentation of valid claims and medical proof of these claims. Various challenges to these practices have succeeded in litigation, and are continuing to be litigated. Plaintiff attorneys and trustees for future claimants are also attempting to devise claims payment procedures for bankruptcy trusts that would allow asbestos claims to be paid under lax standards for injury, exposure and causation. This also presents the potential for exhausting policy limits in an accelerated fashion. Challenges to these practices are being mounted, though the ultimate impact or success of these tactics remains uncertain.
We have resolved a number of our large asbestos accounts by negotiating settlement agreements. Structured settlement agreements provide for payments over multiple years as set forth in each individual agreement.
In 1985, 47 asbestos producers and their insurers, including The Continental Insurance Company (CIC), executed the Wellington Agreement. The agreement was intended to resolve all issues and litigation related to coverage for asbestos exposures. Under this agreement, signatory insurers committed scheduled policy limits and made the limits available to pay asbestos claims based upon coverage blocks designated

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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 with our policyholders identifying the policies and the terms for payment of asbestos related liabilities. Claim payments are contingent on presentation of documentation supporting the demand for claim payment. Coverage in place agreements may have annual payment caps. Coverage in place agreements are evaluated based on claims filings trends and severities.
We categorize active asbestos accounts as large or small accounts. We define a large account as an active account with more than $100 thousand of cumulative paid losses. We have made resolving large accounts a significant management priority. Small accounts are defined as active accounts with $100 thousand or less of cumulative paid losses. Approximately 81% of our total active asbestos accounts are classified as small accounts at December 31, 2008 and 2007.
We also evaluate our asbestos liabilities arising from our assumed reinsurance business and our participation in various pools, including Excess & Casualty Reinsurance Association (ECRA).
We carry unassigned IBNR reserves for asbestos. These 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, 2008 and 2007.
Pending Asbestos Accounts and Associated Reserves
                                 
            Net Paid Losses     Net Asbestos     Percent of  
    Number of     in 2008     Reserves     Asbestos  
    Policyholders     (In millions)     (In millions)     Net Reserves  
December 31, 2008                                
Policyholders with settlement agreements
                               
Structured settlements
    18     $ 17     $ 133       11 %
Wellington
    3       1       11       1  
Coverage in place
    36       16       94       8  
 
                       
 
                               
Total with settlement agreements
    57       34       238       20  
 
                       
 
                               
Other policyholders with active accounts
                               
Large asbestos accounts
    236       62       234       19  
Small asbestos accounts
    1,009       32       91       8  
 
                       
 
                               
Total other policyholders
    1,245       94       325       27  
 
                       
 
                               
Assumed reinsurance and pools
          19       114       9  
Unassigned IBNR
                525       44  
 
                       
 
                               
Total
    1,302     $ 147     $ 1,202       100 %
 
                       

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Pending Asbestos Accounts and Associated Reserves
                                 
            Net Paid Losses     Net Asbestos     Percent of  
    Number of     in 2007     Reserves     Asbestos  
December 31, 2007   Policyholders     (In millions)     (In millions)     Net Reserves  
Policyholders with settlement agreements
                               
Structured settlements
    14     $ 29     $ 151       11 %
Wellington
    3       1       12       1  
Coverage in place
    34       38       100       8  
 
                       
 
                               
Total with settlement agreements
    51       68       263       20  
 
                       
 
                               
Other policyholders with active accounts
                               
Large asbestos accounts
    233       45       237       18  
Small asbestos accounts
    1,005       15       93       7  
 
                       
 
                               
Total other policyholders
    1,238       60       330       25  
 
                       
 
                               
Assumed reinsurance and pools
          8       133       10  
Unassigned IBNR
                596       45  
 
                       
 
                               
Total
    1,289     $ 136     $ 1,322       100 %
 
                       
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. However, adverse developments with respect to such matters could have a material adverse effect on our results of operations and/or equity.
As a result of the uncertainties and complexities involved, reserves for asbestos claims cannot be estimated with traditional actuarial techniques that rely on historical accident year loss development factors. In establishing asbestos reserves, we evaluate the exposure presented by each insured. As part of this evaluation, we consider the available insurance coverage; limits and deductibles; the potential role of other insurance, particularly underlying coverage below any of our excess liability policies; and applicable coverage defenses, including asbestos exclusions. Estimation of asbestos-related claim and claim adjustment expense reserves involves a high degree of judgment on our part and consideration of many complex factors, including: inconsistency of court decisions, jury attitudes and future court decisions; specific policy provisions; allocation of liability among insurers and insureds; missing policies and proof of coverage; the proliferation of bankruptcy proceedings and attendant uncertainties; novel theories asserted by policyholders and their counsel; the targeting of a broader range of businesses and entities as defendants; the uncertainty as to which other insureds may be targeted in the future and the uncertainties inherent in predicting the number of future claims; volatility in claim numbers and settlement demands; increases in the number of non-impaired claimants and the extent to which they can be precluded from making claims; the efforts by insureds to obtain coverage not subject to aggregate limits; long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims; medical inflation trends; the mix of asbestos-related diseases presented and the ability to recover reinsurance.

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We are involved in significant asbestos-related claim litigation, which is described in Note F of the Consolidated Financial Statements included under Item 8.
Environmental Pollution
Environmental pollution cleanup is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry has been involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and restoration by “Potentially Responsible Parties” (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs fail to do so and assign liability to PRPs. The extent of liability to be allocated to a PRP is dependent upon a variety of factors. Further, the number of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been identified by the Environmental Protection Agency (EPA) and included on its National Priorities List (NPL). State authorities have designated many cleanup sites as well.
Many policyholders have made claims against us for defense costs and indemnification in connection with environmental pollution matters. The vast majority of these claims relate to accident years 1989 and prior, which coincides with our adoption of the Simplified Commercial General Liability coverage form, which includes what is referred to in the industry as absolute pollution exclusion. We and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether cleanup costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and the definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues.
We have made resolution of large environmental pollution exposures a management priority. We have resolved a number of our large environmental accounts by negotiating settlement agreements. In our settlements, we sought to resolve those exposures and obtain the broadest release language to avoid future claims from the same policyholders seeking coverage for sites or claims that had not emerged at the time we settled with our policyholder. While the terms of each settlement agreement vary, we sought to obtain broad environmental releases that include known and unknown sites, claims and policies. The broad scope of the release provisions contained in those settlement agreements should, in many cases, prevent future exposure from settled policyholders. It remains uncertain, however, whether a court interpreting the language of the settlement agreements will adhere to the intent of the parties and uphold the broad scope of language of the agreements.
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 with our policyholders identifying the policies and the terms for payment of pollution related liabilities. Claim payments are contingent on presentation of adequate documentation of damages during the policy periods and other documentation supporting the demand for claim payment. Coverage in place agreements may have annual payment caps.
We categorize active accounts as large or small accounts in the pollution area. We define a large account as an active account with more than $100 thousand cumulative paid losses. We have made closing large accounts a significant management priority. Small accounts are defined as active accounts with $100 thousand or less of cumulative paid losses. Approximately 73% of our total active pollution accounts are classified as small accounts as of December 31, 2008 and 2007.
We also evaluate our environmental pollution exposures arising from our assumed reinsurance and our participation in various pools, including ECRA.
We carry unassigned IBNR reserves for environmental pollution. These reserves relate to potential development on accounts that have not settled and potential future claims from unidentified policyholders.

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The tables below depict our overall pending environmental pollution accounts and associated reserves at December 31, 2008 and 2007.
Pending Environmental Pollution Accounts and Associated Reserves
                                 
                    Net        
                    Environmental     Percent of  
            Net Paid Losses     Pollution     Environmental  
    Number of     in 2008     Reserves     Pollution Net  
December 31, 2008   Policyholders     (In millions)     (In millions)     Reserve  
Policyholders with settlement agreements
                               
Structured settlements
    16     $ 5     $ 9       4 %
Coverage in place
    16       3       13       5  
 
                       
Total with settlement agreements
    32       8       22       9  
 
                               
Other policyholders with active accounts
                               
Large pollution accounts
    116       40       48       18  
Small pollution accounts
    320       11       41       16  
 
                       
Total other policyholders
    436       51       89       34  
 
                               
Assumed reinsurance and pools
          4       27       10  
Unassigned IBNR
                124       47  
 
                       
 
                               
Total
    468     $ 63     $ 262       100 %
 
                       
Pending Environmental Pollution Accounts and Associated Reserves
                                 
                    Net        
                    Environmental     Percent of  
            Net Paid Losses     Pollution     Environmental  
    Number of     in 2007     Reserves     Pollution Net  
December 31, 2007   Policyholders     (In millions)     (In millions)     Reserve  
Policyholders with settlement agreements
                               
Structured settlements
    10     $ 9     $ 6       2 %
Coverage in place
    18       8       14       6  
 
                       
Total with settlement agreements
    28       17       20       8  
 
                               
Other policyholders with active accounts
                               
Large pollution accounts
    112       17       53       22  
Small pollution accounts
    298       9       42       17  
 
                       
Total other policyholders
    410       26       95       39  
 
                               
Assumed reinsurance and pools
          1       31       13  
Unassigned IBNR
                96       40  
 
                       
 
                               
Total
    438     $ 44     $ 242       100 %
 
                       

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INVESTMENTS
We maintain a large portfolio of fixed income and equity securities, including large amounts of corporate and government issued debt securities, collateralized mortgage obligations (CMOs), asset-backed and other structured securities, equity and equity-based securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array of asset classes. Our investment portfolio supports our obligation to pay future insurance claims and provides investment returns which are an important part of our overall profitability.
For more than a year, capital and credit markets have experienced severe levels of volatility, illiquidity, uncertainty and overall disruption. Despite government intervention, market conditions have led to the merger or failure of a number of prominent financial institutions and government sponsored entities, sharply increased unemployment and reduced economic activity. In addition, significant declines in the value of assets and securities that began with the residential sub-prime mortgage crisis have spread to nearly all classes of investments, including most of those held in our investment portfolio. As a result, during 2008 we incurred significant realized and unrealized losses in our investment portfolio and experienced substantial declines in our net investment income which have materially adversely impacted our results of operations and equity.
Net Investment Income
The significant components of net investment income are presented in the following table.
Net Investment Income
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Fixed maturity securities
  $ 1,984     $ 2,047     $ 1,842  
Short term investments
    115       186       248  
Limited partnerships
    (379 )     183       288  
Equity securities
    80       25       23  
Income (loss) from trading portfolio (a)
    (149 )     10       103  
Interest on funds withheld and other deposits
    (2 )     (1 )     (68 )
Other
    21       36       18  
 
                 
 
                       
Gross investment income
    1,670       2,486       2,454  
Investment expense
    (51 )     (53 )     (42 )
 
                 
 
                       
Net investment income
  $ 1,619     $ 2,433     $ 2,412  
 
                 
 
(a)  
The change in net unrealized gains (losses) on trading securities included in Net investment income was $3 million and $(15) million for the years ended December 31, 2008 and 2007. There was no change in net unrealized gains (losses) on trading securities included in Net investment income for the year ended December 31, 2006.
Net investment income decreased by $814 million in 2008 compared with 2007. The decrease was primarily driven by significant losses from limited partnerships and the trading portfolio in 2008 and a decline in short term interest rates. Limited partnerships may present greater risk, greater volatility and higher illiquidity than fixed income investments. The decreased results from the trading portfolio were substantially offset by a corresponding decrease in the policyholders’ funds reserves supported by the trading portfolio, which is included in Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations.
Net investment income increased by $21 million in 2007 compared with 2006. The improvement was primarily driven by an increase in the overall invested asset base and a reduction of interest expense on funds withheld and other deposits as discussed further below. These increases were substantially offset by decreases in limited partnership income and results from the trading portfolio.
During 2006, we commuted several significant reinsurance contracts which contained interest crediting provisions that were reflected as a component of Net investment income in our Consolidated Statement of Operations. As of December 31, 2006, no further interest expense was due on the commuted contracts.
The bond segment of the fixed maturity investment portfolio provided an income yield of 5.7%, 5.8% and 5.6% for the years ended December 31, 2008, 2007 and 2006.

48


 

Net Realized Investment Gains (Losses)
The components of net realized investment results for available-for-sale securities are presented in the following table.
Net Realized Investment Gains (Losses)
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Fixed maturity securities:
                       
U.S. Government bonds
  $ 235     $ 86     $ 62  
Corporate and other taxable bonds
    (643 )     (183 )     (98 )
Tax-exempt bonds
    53       3       53  
Asset-backed bonds
    (476 )     (343 )     (9 )
Redeemable preferred stock
          (41 )     (3 )
 
                 
 
                       
Total fixed maturity securities
    (831 )     (478 )     5  
Equity securities
    (490 )     117       16  
Derivative securities
    (19 )     32       18  
Short term investments
    34       7       (5 )
Other
    9       11       52  
 
                 
 
                       
Realized investment gains (losses), net of participating policyholders’ and minority interests
    (1,297 )     (311 )     86  
 
                       
Income tax (expense) benefit
    456       108       (19 )
 
                 
 
                       
Net realized investment gains (losses), net of participating policyholders’ and minority interests
  $ (841 )   $ (203 )   $ 67  
 
                 
Net realized investment results decreased by $638 million for 2008 compared with 2007. Net realized investment results decreased by $270 million for 2007 compared with 2006. The decrease in Net realized investment results in both periods was primarily driven by an increase in other-than-temporary impairment (OTTI) losses. Further information on our OTTI losses and impairment decision process is set forth in Note B of the Consolidated Financial Statements included under Item 8.

49


 

The following table provides details of the largest realized investment losses from sales of securities aggregated by issuer including the fair value of the securities at date of sale, the amount of the loss recorded and the period of time that the securities had been in an unrealized loss position prior to sale. The period of time that the securities had been in an unrealized loss position prior to sale can vary due to the timing of individual security purchases. Also included is a narrative providing the industry sector along with the facts and circumstances giving rise to the loss.
Largest Realized Investment Losses from Securities Sold at a Loss
Year ended December 31, 2008
                         
    Fair             Months in  
    Value at             Unrealized  
    Date of     Loss     Loss Prior  
Issuer Description and Discussion   Sale     On Sale     To Sale (a)  
(In millions)                        
Various notes and bonds issued by the United States Treasury. Securities sold due to outlook on interest rates.
  $ 10,663     $ 106       0-6  
 
                       
Non-redeemable preferred stock of Federal National Mortgage Association. The company is now in conservatorship.
    6       51       0-12 +
 
                       
Fixed income securities of an investment banking firm that filed bankruptcy causing the fair value of the securities to decline rapidly.
    37       41       0-12  
 
                       
Non-redeemable preferred stock of Federal Home Loan Mortgage Corporation. The company is now in conservatorship.
    3       27       0-12  
 
                       
Mortgage backed pass-through securities were sold based on deteriorating performance of the underlying loans and the resulting rapid market price decline.
    36       18       0-6  
 
                       
Fixed income securities of a provider of wireless and wire line communication services. Securities were sold to reduce exposure because the company announced a significant shortfall in operating results, causing significant credit deterioration which resulted in a rating downgrade.
    41       17       0-12  
 
                   
 
  $ 10,786     $ 260          
 
                   
 
(a)  
Represents the range of consecutive months the various positions were in an unrealized loss prior to sale. 0-12+ means certain positions were less than 12 months, while others were greater than 12 months.

50


 

Gross Unrealized Losses
The following tables summarize the fair value and gross unrealized loss of fixed income investment and non-investment grade securities categorized first by the length of time, as measured by the first date, those securities have been in a continuous unrealized loss position, and then further categorized by the severity of the unrealized loss position as of December 31, 2008 and 2007.
Unrealized Loss Aging for Fixed Income Securities
                                                                         
    Fair Value as a Percentage of Amortized Cost      
    Estimated                                                             Gross
Unrealized
 
December 31, 2008   Fair Value     90-99%     80-89%     70-79%     60-69%     50-59%     40-49%     <40%     Loss  
(In millions)                                                                        
Investment grade:
                                                                       
0-6 months
  $ 6,749     $ 169     $ 264     $ 167     $ 58     $ 7     $ 11     $ 5     $ 681  
7-11 months
    6,159       126       376       315       364       262       118       30       1,591  
12-24 months
    3,549       55       143       128       355       449       230       443       1,803  
Greater than 24 months
    1,778       27       67       151       68       52       8       136       509  
 
                                                     
 
                                                                       
Total investment grade
  $ 18,235     $ 377     $ 850     $ 761     $ 845     $ 770     $ 367     $ 614     $ 4,584  
 
                                                     
 
                                                                       
Non-investment grade:
                                                                       
0-6 months
  $ 853     $ 10     $ 47     $ 93     $ 50     $ 44     $ 16     $ 30     $ 290  
7-11 months
    374       1       20       43       40       33       19       17       173  
12-24 months
    1,078       3       30       83       193       94       203       41       647  
Greater than 24 months
    12                         5             2             7  
 
                                                     
 
                                                                       
Total non-investment grade
  $ 2,317     $ 14     $ 97     $ 219     $ 288     $ 171     $ 240     $ 88     $ 1,117  
 
                                                     
 
                                                                       
Total
  $ 20,552     $ 391     $ 947     $ 980     $ 1,133     $ 941     $ 607     $ 702     $ 5,701  
 
                                                     

51


 

Unrealized Loss Aging for Fixed Income Securities
                                                                         
    Fair Value as a Percentage of Amortized Cost      
    Estimated                                                             Gross
Unrealized
 
December 31, 2007   Fair Value     90-99%     80-89%     70-79%     60-69%     50-59%     40-49%     <40%     Loss  
(In millions)                                                                        
Investment grade:
                                                                       
0-6 months
  $ 4,771     $ 100     $ 42     $ 29     $ 26     $ 25     $ 6     $     $ 228  
7-11 months
    1,584       35       81       17       25       13       7       15       193  
12-24 months
    690       21       2       10       7       8       9             57  
Greater than 24 months
    3,869       88       42       8                               138  
 
                                                     
 
                                                                       
Total investment grade
  $ 10,914     $ 244     $ 167     $ 64     $ 58     $ 46     $ 22     $ 15     $ 616  
 
                                                     
 
                                                                       
Non-investment grade:
                                                                       
0-6 months
  $ 1,527     $ 56     $ 14     $ 3     $     $     $     $     $ 73  
7-11 months
    125       6       2                                     8  
12-24 months
    26       1       1       1       1                         4  
Greater than 24 months
    9       1       1                                     2  
 
                                                     
 
                                                                       
Total non-investment grade
  $ 1,687     $ 64     $ 18     $ 4     $ 1     $     $     $     $ 87  
 
                                                     
 
                                                                       
Total
  $ 12,601     $ 308     $ 185     $ 68     $ 59     $ 46     $ 22     $ 15     $ 703  
 
                                                     

52


 

The classification between investment grade and non-investment grade is based on a ratings methodology that takes into account ratings from the three major providers, S&P, Moody’s and Fitch in that order of preference. If a security is not rated by any of the three, the Company formulates an internal rating.
As part of the ongoing OTTI monitoring process, we evaluated the facts and circumstances based on available information for each of these securities and determined that the securities presented in the above tables were temporarily impaired when evaluated at December 31, 2008 or 2007. This determination was based on a number of factors that we regularly consider including, but not limited to: the issuers’ ability to meet current and future interest and principal payments, an evaluation of the issuers’ financial condition and near term prospects, our assessment of the sector outlook and estimates of the fair value of any underlying collateral. In all cases where a decline in value is judged to be temporary, we have the intent and ability to hold these securities for a period of time sufficient to recover the amortized cost of our investment through an anticipated recovery in the fair value of such securities or by holding the securities to maturity. In many cases, the securities held are matched to liabilities as part of ongoing asset/liability duration management. As such, we continually assess our ability to hold securities for a time sufficient to recover any temporary loss in value or until maturity. We believe we have sufficient levels of liquidity so as to not impact the asset/liability management process. Further information on our unrealized losses by asset class and our considerations in determining that the securities were temporarily impaired at December 31, 2008 is included in Note B to the Consolidated Financial Statements included under Item 8.
Non-investment grade bonds, as presented in the tables above, are primarily high-yield securities rated below BBB- by bond rating agencies, as well as other unrated securities that, according to our analysis, are below investment grade. Non-investment grade securities generally involve a greater degree of risk than investment grade securities.
The following table provides the composition of fixed maturity securities available-for-sale in a gross unrealized loss position at December 31, 2008 by maturity profile. Securities not due at a single date are allocated based on weighted average life.
Maturity Profile
                 
    Percent of
Fair
    Percent of
Unrealized
 
    Value     Loss  
Due in one year or less
    11 %     8 %
Due after one year through five years
    31       21  
Due after five years through ten years
    14       21  
Due after ten years
    44       50  
 
           
 
               
Total
    100 %     100 %
 
           
Our fixed income portfolio consists primarily of high quality bonds, 91% and 89% of which were rated as investment grade (rated BBB- or higher) at December 31, 2008 and 2007. The following table summarizes the ratings of our fixed income bond portfolio at carrying value.
Fixed Income Bond Ratings
                                 
December 31   2008     %     2007     %  
(In millions)                                
U.S. Government and affiliated agency securities
  $ 2,993       11 %   $ 816       3 %
Other AAA rated
    10,112       35       16,728       50  
AA and A rated
    8,166       28       6,326       19  
BBB rated
    5,000       17       5,713       17  
Non-investment grade
    2,569       9       3,616       11  
 
                       
 
                               
Total
  $ 28,840       100 %   $ 33,199       100 %
 
                       
At December 31, 2008 and 2007, approximately 97% and 95% of the portfolio was issued by U.S. Government and affiliated agencies or was rated by S&P or Moody’s. The remaining bonds were rated by other rating agencies or internally.

53


 

The carrying value of securities that are either subject to trading restrictions or trade in illiquid private placement markets at December 31, 2008 was $368 million, which represents 1.1% of our total investment portfolio. These securities were in a net unrealized gain position of $170 million at December 31, 2008.
Duration
A primary objective in the management of the fixed maturity and equity portfolios is to optimize return relative to underlying liabilities and respective liquidity needs. Our views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions, and the domestic and global economic conditions, are some of the factors that enter into an investment decision. We also continually monitor exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on our views of a specific issuer or industry sector.
A further consideration in the management of the investment portfolio is the characteristics of the underlying liabilities and the ability to align the duration of the portfolio to those liabilities to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, we segregate investments for asset/liability management purposes.
The segregated investments support liabilities primarily in the Life & Group Non-Core segment including annuities, structured benefit settlements and long term care products. The remaining investments are managed to support the Standard Lines, Specialty Lines and Corporate & Other Non-Core segments.
The effective durations of fixed income securities, short term investments, preferred stocks and interest rate derivatives are presented in the table below. Short term investments are net of securities lending collateral and account payable and receivable amounts for securities purchased and sold, but not yet settled.
Effective Durations
                                 
    December 31, 2008     December 31, 2007  
            Effective Duration             Effective Duration  
    Fair Value     (In years)     Fair Value     (In years)  
(In millions)                                
Segregated investments
  $ 8,168       9.9     $ 9,211       10.7  
 
Other interest sensitive investments
    25,194       4.5       29,406       3.3  
 
                       
 
                               
Total
  $ 33,362       5.8     $ 38,617       5.1  
 
                       
The investment portfolio is periodically analyzed for changes in duration and related price change risk. Additionally, we periodically review the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in Item 7A — Quantitative and Qualitative Disclosures About Market Risk included herein.

54


 

Asset-Backed Mortgage Exposure
Asset-Backed Distribution
                                                         
    Security Type                      
                                            Percent     Percent  
                                            of Total     of Total  
December 31, 2008   MBS(a)     CMO(b)     ABS(c)     CDO(d)     Total     Security Type     Investments  
(In millions)                                                        
U.S. Government Agencies
  $ 408     $ 1,273     $     $     $ 1,681       22 %     4 %
AAA
          3,249       1,672       3       4,924       63       14  
AA
          187       190       6       383       5       1  
A
          80       96       28       204       3       1  
BBB
          92       230       2       324       4       1  
Non-investment grade and equity tranches
          213       27       8       248       3       1  
 
                                         
Total Fair Value
  $ 408     $ 5,094     $ 2,215     $ 47     $ 7,764       100 %     22 %
 
                                         
Total Amortized Cost
  $ 405     $ 6,181     $ 2,887     $ 197     $ 9,670                  
 
                                             
 
                                                       
Percent of total fair value by security type
    5 %     65 %     29 %     1 %     100 %                
 
                                                       
Sub-prime (included above)
                                                       
Fair Value
  $     $     $ 1,163     $ 1     $ 1,164       15 %     3 %
Amortized Cost
  $     $     $ 1,477     $ 31     $ 1,508       16 %     4 %
 
                                                       
Alt-A (included above)
                                                       
Fair Value
  $     $ 898     $     $ 3     $ 901       12 %     3 %
Amortized Cost
  $     $ 1,229     $     $ 8     $ 1,237       13 %     3 %
 
(a)  
Mortgage-backed securities (MBS)
 
(b)  
Collateralized mortgage obligations (CMO)
 
(c)  
Asset-backed securities (ABS)
 
(d)  
Collateralized debt obligations (CDO)
Included in our fixed maturity securities at December 31, 2008 were $7,764 million of asset-backed securities, at fair value, which represents 22% of total invested assets. Of the total asset-backed securities, 85% were U.S. Government Agency issued or AAA rated. Of the total invested assets, $1,164 million or 3% have exposure to sub-prime residential mortgage (sub-prime) collateral, as measured by the original deal structure, while 3% have exposure to Alternative A residential mortgages that have lower than normal standards of loan documentation (Alt-A) collateral. Of the securities with sub-prime exposure, approximately 98% were rated investment grade, while 97% of the Alt-A securities were rated investment grade. We believe that each of these securities would be rated investment grade even without the benefit of any applicable third-party guarantees. In addition to sub-prime exposure in fixed maturity securities, there is exposure of approximately $36 million through limited partnerships and sold credit default swaps which provide the buyer protection against declines in sub-prime indices.
Included in the table above are commercial mortgage-backed securities (CMBS), which had an aggregate fair value of $661 million and an aggregate amortized cost of $1,068 million at December 31, 2008. Most of our CMBS holdings are in the form of senior tranches of securitization, which benefit from significant credit support from subordinated tranches.
All asset-backed securities in an unrealized loss position are reviewed as part of the ongoing OTTI process, which resulted in OTTI losses of $302 million after-tax for the year ended December 31, 2008. Included in this OTTI loss was $128 million after-tax related to securities with sub-prime and Alt-A exposure. Our review of these securities includes an analysis of cash flow modeling under various default scenarios, the seniority of the specific tranche within the deal structure, the composition of the collateral and the actual default experience. Given current market conditions and the specific facts and circumstances related to our individual sub-prime, Alt-A and CMBS exposures, we believe that all remaining unrealized losses are temporary in nature. Continued deterioration in these markets beyond our current expectations may cause us to reconsider and record additional OTTI losses. See Note B of the Consolidated Financial Statements included under Item 8 for additional information related to unrealized losses on asset-backed securities.

55


 

Short Term Investments
The carrying value of the components of the short term investment portfolio is presented in the following table.
Short Term Investments
                 
December 31   2008     2007  
(In millions)                
Short term investments available-for-sale:
               
Commercial paper
  $ 563     $ 3,040  
U.S. Treasury securities
    2,258       577  
Money market funds
    329       72  
Other, including collateral held related to securities lending
    384       808  
 
           
 
               
Total short term investments available-for-sale
    3,534       4,497  
 
           
 
               
Short term investments trading:
               
Commercial paper
          35  
Money market funds
          139  
Other
          6  
 
           
 
               
Total short term investments trading
          180  
 
           
 
               
Total short term investments
  $ 3,534     $ 4,677  
 
           
Separate Accounts
The following table summarizes the bond ratings of the investments supporting separate account products which guarantee principal and a minimum rate of interest, for which additional amounts may be recorded in Policyholders’ funds should the aggregate contract value exceed the fair value of the related assets supporting the business at any point in time.
Separate Account Bond Ratings
                                 
December 31   2008     %     2007     %  
(In millions)                                
AAA rated
  $ 120       35 %   $ 122       29 %
AA and A rated
    148       43       224       54  
BBB rated
    74       22       73       17  
Non-investment grade
    1                    
 
                       
 
                               
Total
  $ 343       100 %   $ 419       100 %
 
                       
At December 31, 2008 and 2007, approximately 97% of the separate account portfolio was rated by S&P or Moody’s. The remaining bonds were rated by other rating agencies or internally.

56


 

LIQUIDITY AND CAPITAL RESOURCES
As a result of the significant realized and unrealized losses in our investment portfolio and declines in our net investment income during 2008 as discussed in the Investments section of this MD&A, we took several actions during the fourth quarter to strengthen our capital position and to ensure our operating insurance subsidiaries had sufficient statutory surplus, including the following:
   
In October 2008, we suspended our quarterly dividend payment to common stockholders.
 
   
In November 2008, we issued, and Loews Corporation (Loews) purchased, 12,500 shares of our non-voting cumulative preferred stock (2008 Senior Preferred) for $1.25 billion.
 
   
We used the majority of the proceeds from the 2008 Senior Preferred to increase the statutory surplus of our principal insurance subsidiary, Continental Casualty Company (CCC), through the purchase of a $1.0 billion surplus note of CCC.
 
   
In November 2008, we borrowed $250 million on an existing credit facility and used $200 million of the proceeds to retire senior notes that matured in December 2008.
 
   
In December 2008, we contributed $500 million of cash and short term investments from our holding company to CCC.
 
   
We requested and received approval for a statutory permitted practice related to the recognition of deferred tax assets which increased statutory surplus of CCC by approximately $700 million as of December 31, 2008. The permitted practice will remain in effect for the first, second and third quarter 2009 reporting periods.
Further information on the 2008 Senior Preferred, CCC surplus note and the statutory permitted practice is included in Note L of the Consolidated Financial Statements included under Item 8.
Cash Flows
Our principal operating cash flow sources are premiums and investment income from our insurance subsidiaries. Our primary operating cash flow uses are payments for claims, policy benefits and operating expenses.
For 2008, net cash provided by operating activities was $1,558 million as compared to $1,239 million in 2007. Cash provided by operating activities was favorably impacted by increased net sales of trading securities to fund policyholders’ withdrawals of investment contract products issued by us, decreased tax payments and decreased loss payments. Policyholders’ fund withdrawals are reflected as financing cash flows. Cash provided by operating activities was unfavorably impacted by decreased premium collections and decreased investment income receipts.
For 2007, net cash provided by operating activities was $1,239 million as compared to $2,250 million in 2006. Cash provided by operating activities was unfavorably impacted by decreased net sales of trading securities to fund policyholder withdrawals of investment contract products issued by us. Cash provided by operating activities was also unfavorably impacted by decreased premium collections, increased tax payments and increased loss payments.
Cash flows from investing activities include the purchase and sale of available-for-sale financial instruments, as well as the purchase and sale of businesses, land, buildings, equipment and other assets not generally held for resale.
Net cash used for investing activities was $1,908 million, $1,082 million and $1,646 million for 2008, 2007 and 2006. Cash flows used by investing activities related principally to purchases of fixed maturity securities and short term investments. The cash flow from investing activities is impacted by various factors such as the anticipated payment of claims, financing activity, asset/liability management and individual security buy and sell decisions made in the normal course of portfolio management. In 2007, net cash flows provided by investing activities-discontinued operations included $65 million of cash proceeds related to the sale of the United Kingdom discontinued operations business.

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Cash flows from financing activities include proceeds from the issuance of debt and equity securities, outflows for dividends or repayment of debt, outlays to reacquire equity instruments, and deposits and withdrawals related to investment contract products issued by us.
Net cash provided by financing activities was $347 million in 2008. In 2007 and 2006, net cash used for financing activities was $185 million and $605 million. Net cash flow provided by financing activities in 2008 was primarily related to the issuance of the 2008 Senior Preferred stock to Loews, as discussed above, partially offset by policyholders’ fund withdrawals and dividend payments. Additionally, in January 2008, we repaid our $150 million 6.45% senior note at maturity. In November 2008, we drew down $250 million on a credit facility established in 2007 and used $200 million of the proceeds to retire our 6.60% Senior Notes that were due December 15, 2008.
Common Stock Dividends
Dividends of $0.45 and $0.35 per share of our common stock were declared and paid in 2008 and 2007. No dividends were paid in 2006. In October 2008, we suspended our quarterly dividend payment.
Share Repurchases
Our Board of Directors has approved an authorization to purchase, in the open market or through privately negotiated transactions, our outstanding common stock, as our management deems appropriate. In the first quarter of 2008, we repurchased a total of 2,649,621 shares at an average price of $26.53 (including commission) per share. In accordance with the terms of the 2008 Senior Preferred, common stock repurchases are prohibited. No shares of common stock were purchased during the years ended December 31, 2007 or 2006.
Liquidity
We believe that our present cash flows from operations, investing activities and financing activities are sufficient to fund our working capital and debt obligation needs and we do not expect this to change in the near term due to the following factors:
   
We do not anticipate changes in our core property and casualty commercial insurance operations which would significantly impact liquidity and we continue to maintain reinsurance contracts which limit the impact of potential catastrophic events.
 
   
We have entered into several settlement agreements and assumed reinsurance contracts that require collateralization of future payment obligations and assumed reserves if our ratings or other specific criteria fall below certain thresholds. The ratings triggers are generally more than one level below our current ratings. A downgrade below our current ratings levels would also result in additional collateral requirements for derivative contracts for which we are in a liability position at any given point in time. As of December 31, 2008, the total potential collateralization requirements amounted to approximately $85 million.
 
   
As of December 31, 2008, our holding company held short term investments of $539 million. Our holding company’s ability to meet its debt service and other obligations is significantly dependent on receipt of dividends from our subsidiaries. As discussed further in Note L of the Consolidated Financial Statements included under Item 8, the payment of dividends to us by our insurance subsidiaries without prior approval of the insurance department of each subsidiary’s domiciliary jurisdiction is limited by formula. Notwithstanding this limitation, we believe that our holding company has sufficient liquidity to fund our preferred stock dividend and debt service payments in 2009.
We have an effective shelf registration statement under which we may issue $2.0 billion of debt or equity securities.

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Commitments, Contingencies, and Guarantees
We have various commitments, contingencies and guarantees which we become involved with during the ordinary course of business. The impact of these commitments, contingencies and guarantees should be considered when evaluating our liquidity and capital resources.
A summary of our commitments as of December 31, 2008 is presented in the following table.
Contractual Commitments
                                         
December 31, 2008   Total     Less than 1 year     1-3 years     3-5 years     More than 5 years  
(In millions)                                        
Debt (a)
  $ 2,980     $ 123     $ 644     $ 503     $ 1,710  
Lease obligations
    204       41       70       54       39  
Claim and claim expense reserves (b)
    29,104       6,425       8,087       4,210       10,382  
Future policy benefits reserves (c)
    11,956       176       342       327       11,111  
Policyholder funds reserves (c)
    207       24       10       4       169  
Guaranteed payment contracts (d)
    17       16       1              
Preferred stock dividends (e)
    625       125       250       250        
 
                                       
Total (f)
  $ 45,093     $ 6,930     $ 9,404     $ 5,348     $ 23,411  
 
                             
 
(a)  
Includes estimated future interest payments, but does not include original issue discount.
 
(b)  
Claim and claim adjustment expense reserves are not discounted and represent our estimate of the amount and timing of the ultimate settlement and administration of gross claims based on our assessment of facts and circumstances known as of December 31, 2008. See the Reserves - Estimates and Uncertainties section of this MD&A for further information. Claim and claim adjustment expense reserves of $12 million related to business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included.
 
(c)  
Future policy benefits and policyholder funds reserves are not discounted and represent our estimate of the ultimate amount and timing of the settlement of benefits based on our assessment of facts and circumstances known as of December 31, 2008. Future policy benefit reserves of $810 million and policyholder fund reserves of $38 million related to business which has been 100% ceded to unaffiliated parties in connection with the sale of our individual life business in 2004 are not included. Additional information on future policy benefits and policyholder funds reserves is included in Note A of the Consolidated Financial Statements under Item 8.
 
(d)  
Primarily relating to telecommunications and software services.
 
(e)  
Our preferred stock has a dividend rate of 10% due quarterly. We have reflected the dividend payment in the table above for a period of 5 years, which may be more or less than the actual period the preferred stock remains outstanding. As long as the preferred stock is outstanding, the minimum dividend payment, if declared, is $125 million a year.
 
(f)  
Does not include expected estimated contribution of $70 million to the Company’s pension and postretirement plans in 2009.
Further information on our commitments, contingencies and guarantees is provided in Notes B, C, F, G, I, K and L of the Consolidated Financial Statements included under Item 8.
Ratings
Ratings are an important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by major rating agencies, and these ratings reflect the rating agency’s opinion of the insurance company’s financial strength, operating performance, strategic position and ability to meet our obligations to policyholders. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating. One or more of these agencies could take action in the future to change the ratings of our insurance subsidiaries.

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The table below reflects the various group ratings issued by A.M. Best Company (A.M. Best), Moody’s and S&P for the property and casualty and life companies. The table also includes the ratings for CNAF senior debt and The Continental Corporation (Continental) senior debt.
                 
    Insurance Financial Strength      
    Ratings   Debt Ratings
    Property &            
    Casualty   Life   CNAF   Continental
    CCC   CAC   Senior   Senior
    Group       Debt   Debt
A.M. Best
  A   A-   bbb   Not rated
Moody’s
  A3   Not rated   Baa3   Baa3
S&P
  A-   Not rated   BBB-   BBB-
The following rating agency actions were taken by these rating agencies with respect to CNA from January 1, 2008 through February 23, 2009:
   
On January 27, 2009, S&P withdrew CAC’s insurance financial strength rating of BBB+ at our request.
 
   
On February 9, 2009, Moody’s affirmed CNA’s ratings and revised the outlook from stable to negative.
 
   
On February 13, 2009, A.M. Best affirmed CNA’s ratings and revised the outlook from stable to negative.
In January 2009, we exercised our early termination right under our contract with Fitch Ratings. As a result, we no longer retain Fitch Ratings to issue insurance financial strength ratings for the CCC Group or debt ratings for CNAF and Continental.
If our property and casualty insurance financial strength ratings were downgraded below current levels, our business and results of operations could be materially adversely affected. The severity of the impact on our business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of our insurance products to certain markets and the required collateralization of certain future payment obligations or reserves.
As discussed in the Liquidity section above, additional collateralization may be required for certain settlement agreements and assumed reinsurance contracts, as well as derivative contracts, if our ratings or other specific criteria fall below certain thresholds.
In addition, it is possible that a lowering of the debt ratings of Loews by certain of these agencies could result in an adverse impact on our ratings, independent of any change in our circumstances. None of the major rating agencies which rates Loews currently maintains a negative outlook or has Loews on negative Credit Watch.
Accounting Pronouncements
For a discussion of accounting pronouncements that have been adopted or will be adopted in the future, see Note A of the Consolidated Financial Statements included under Item 8.

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FORWARD-LOOKING STATEMENTS
This report contains a number of forward-looking statements which relate to anticipated future events rather than actual present conditions or historical events. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as “believes,” “expects,” “intends,” “anticipates,” “estimates,” and similar expressions. Forward-looking statements in this report include any and all statements regarding expected developments in our insurance business, including losses and loss reserves for asbestos and environmental pollution and other mass tort claims which are more uncertain, and therefore more difficult to estimate than loss reserves respecting traditional property and casualty exposures; the impact of routine ongoing insurance reserve reviews we are conducting; our expectations concerning our revenues, earnings, expenses and investment activities; expected cost savings and other results from our expense reduction activities; and our proposed actions in response to trends in our business. Forward-looking statements, by their nature, are subject to a variety of inherent risks and uncertainties that could cause actual results to differ materially from the results projected in the forward-looking statement. We cannot control many of these risks and uncertainties. Some examples of these risks and uncertainties are:
 
conditions in the capital and credit markets including severe levels of volatility, illiquidity, uncertainty and overall disruption, as well as sharply reduced economic activity, that may impact the returns, types, liquidity and valuation of our investments;
 
 
general economic and business conditions, including recessionary conditions that may decrease the size and number of our insurance customers and create higher exposures to our lines of business, especially those that provide management and professional liability insurance, as well as surety bonds, to businesses engaged in real estate, financial services and professional services, and inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;
 
 
the effects of the mergers and failures of a number of prominent financial institutions and government sponsored entities, as well as the effects of accounting and financial reporting scandals and other major failures in internal controls and governance, on capital and credit markets, as well as on the markets for directors and officers and errors and omissions coverages;
 
 
changes in foreign or domestic political, social and economic conditions;
 
 
regulatory initiatives and compliance with governmental regulations, judicial decisions, including interpretation of policy provisions, decisions regarding coverage and theories of liability, trends in litigation and the outcome of any litigation involving us, and rulings and changes in tax laws and regulations;
 
 
regulatory limitations, impositions and restrictions upon us, including the effects of assessments and other surcharges for guaranty funds and second-injury funds, other mandatory pooling arrangements and future assessments levied on insurance companies and other financial industry participants under the Emergency Economic Stabilization Act of 2008 recoupment provisions;
 
 
the impact of competitive products, policies and pricing and the competitive environment in which we operate, including changes in our book of business;
 
 
product and policy availability and demand and market responses, including the level of ability to obtain rate increases and decline or non-renew under priced accounts, to achieve premium targets and profitability and to realize growth and retention estimates;
 
 
development of claims and the impact on loss reserves, including changes in claim settlement policies;
 
 
the effectiveness of current initiatives by claims management to reduce loss and expense ratios through more efficacious claims handling techniques;
 
 
the performance of reinsurance companies under reinsurance contracts with us;
 
 
conditions in the capital and credit markets that may limit our ability to raise significant amounts of capital on favorable terms, as well as restrictions on the ability or willingness of Loews Corporation to provide additional capital support to us;

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weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow;
 
regulatory requirements imposed by coastal state regulators in the wake of hurricanes or other natural disasters, including limitations on the ability to exit markets or to non-renew, cancel or change terms and conditions in policies, as well as mandatory assessments to fund any shortfalls arising from the inability of quasi-governmental insurers to pay claims;
 
man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;
 
the unpredictability of the nature, targets, severity or frequency of potential terrorist events, as well as the uncertainty as to our ability to contain our terrorism exposure effectively, notwithstanding the extension through December 31, 2014 of the Terrorism Risk Insurance Act of 2002;
 
the occurrence of epidemics;
 
exposure to liabilities due to claims made by insureds and others relating to asbestos remediation and health-based asbestos impairments, as well as exposure to liabilities for environmental pollution, construction defect claims and exposure to liabilities due to claims made by insureds and others relating to lead-based paint and other mass torts;
 
the sufficiency of our loss reserves and the possibility of future increases in reserves;
 
regulatory limitations and restrictions, including limitations upon our ability to receive dividends from our insurance subsidiaries imposed by state regulatory agencies and minimum risk-based capital standards established by the National Association of Insurance Commissioners;
 
the risks and uncertainties associated with our loss reserves as outlined in the Critical Accounting Estimates and the Reserves – Estimates and Uncertainties sections of this MD&A;
 
the possibility of changes in our ratings by ratings agencies, including the inability to access certain markets or distribution channels and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices; and
 
the actual closing of contemplated transactions and agreements.
Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of the statement, even if our expectations or any related events or circumstances change.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments are exposed to various risks, such as interest rate, credit and currency risk. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in these risks in the near term, including increases in interest rates and further credit spread widening, could have an adverse material impact on our results of operations and/or equity.
Discussions herein regarding market risk focus on only one element of market risk, which is price risk. Price risk relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors that relate to market volatility of the rate, index or price underlying the financial instrument. Our primary market risk exposures are due to changes in interest rates, although we have certain exposures to changes in equity prices and foreign currency exchange rates. The fair value of the financial instruments is adversely affected when interest rates rise, equity markets decline and the dollar strengthens against foreign currency.
Active management of market risk is integral to our operations. We may use the following tools to manage our exposure to market risk within defined tolerance ranges: (1) change the character of future investments purchased or sold, (2) use derivatives to offset the market behavior of existing assets and liabilities or assets expected to be purchased and liabilities to be incurred, or (3) rebalance our existing asset and liability portfolios.
Sensitivity Analysis
We monitor our sensitivity to interest rate risk by evaluating the change in the value of financial assets and liabilities due to fluctuations in interest rates. The evaluation is performed by applying an instantaneous change in interest rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on our fair value at risk and the resulting effect on stockholders’ equity. The analysis presents the sensitivity of the fair value of our financial instruments to selected changes in market rates and prices. The range of change chosen reflects our view of changes that are reasonably possible over a one-year period. The selection of the range of values chosen to represent changes in interest rates should not be construed as our prediction of future market events, but rather an illustration of the impact of such events.
The sensitivity analysis estimates the decline in the fair value of our interest sensitive assets and liabilities that were held on December 31, 2008 and 2007 due to instantaneous parallel increases in the period end yield curve of 100 and 150 basis points.
The sensitivity analysis also assumes an instantaneous 10% and 20% decline in the foreign currency exchange rates versus the United States dollar from their levels at December 31, 2008 and 2007, with all other variables held constant.
Equity price risk was measured assuming an instantaneous 10% and 25% decline in the Standard & Poor’s 500 Index (S&P 500) from its level at December 31, 2008 and 2007, with all other variables held constant. Our equity holdings were assumed to be highly and positively correlated with the S&P 500.
Our sensitivity analysis has also been applied to the assets supporting our separate account business because certain of our separate account products guarantee principal and a minimum rate of interest. All or a portion of these decreases related to the separate account assets may be offset by decreases in related separate account liabilities to customers, but that is dependent on the position of the separate account in relation to the specific guarantees at the time of the interest rate or price decline. Similarly, increases in the fair value of the separate account investments would also be offset by increases in the same related separate account liabilities by the same approximate amounts.

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The following tables present the estimated effects on the fair value of our financial instruments at December 31, 2008 and December 31, 2007, due to an increase in interest rates of 100 basis points, a 10% decline in foreign currency exchange rates and a 10% decline in the S&P 500.
Market Risk Scenario 1
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 31, 2008   Value     Rate Risk     Risk     Risk  
(In millions)                                
General account:
                               
Fixed maturity securities available-for-sale
  $ 28,886     $ (1,919 )   $ (99 )   $ (2 )
Fixed maturity securities trading
    1                    
Equity securities available-for-sale
    871             (1 )     (87 )
Short term investments available-for-sale
    3,534       (17 )     (13 )      
Limited partnerships
    1,683       1             (38 )
Other invested assets
    28                    
 
                       
 
                               
Total general account
    35,003       (1,935 )     (113 )     (127 )
 
                       
 
                               
Separate accounts:
                               
Fixed maturity securities
    343       (17 )            
Equity securities
    27                   (2 )
Short term investments
    7                    
 
                       
 
                               
Total separate accounts
    377       (17 )           (2 )
 
                       
 
                               
Derivative financial instruments, included in Other liabilities
    (111 )     90              
 
                       
 
                               
Total securities
  $ 35,269     $ (1,862 )   $ (113 )   $ (129 )
 
                       
 
                               
Debt (carrying value)
  $ 2,058     $ (102 )   $     $  
 
                       
Market Risk Scenario 1
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 31, 2007   Value     Rate Risk     Risk     Risk  
(In millions)                                
General account:
                               
Fixed maturity securities available-for-sale
  $ 34,080     $ (1,900 )   $ (111 )   $ (42 )
Fixed maturity securities trading
    177       (2 )     (1 )     (1 )
Equity securities available-for-sale
    568             (1 )     (57 )
Short term investments available-for-sale
    4,497       (4 )     (42 )      
Short term investments trading
    180                    
Limited partnerships
    2,214       1             (43 )
Other invested assets
    73       (2 )     8       (69 )
 
                       
 
                               
Total general account
    41,789       (1,907 )     (147 )     (212 )
 
                       
 
                               
Separate accounts:
                               
Fixed maturity securities
    419       (20 )            
Equity securities
    45                   (5 )
Short term investments
    6                    
 
                       
 
                               
Total separate accounts
    470       (20 )           (5 )
 
                       
 
                               
Derivative financial instruments, included in Other liabilities
    (62 )     33              
 
                       
 
                               
Total securities
  $ 42,197     $ (1,894 )   $ (147 )   $ (217 )
 
                       
 
                               
Debt (carrying value)
  $ 2,157     $ (107 )   $     $  
 
                       

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The following tables present the estimated effects on the fair value of our financial instruments at December 31, 2008 and December 31, 2007, due to an increase in interest rates of 150 basis points, a 20% decline in foreign currency exchange rates and a 25% decline in the S&P 500.
Market Risk Scenario 2
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 31, 2008   Value     Rate Risk     Risk     Risk  
(In millions)                                
General account:
                               
Fixed maturity securities available-for-sale
  $ 28,886     $ (2,834 )   $ (197 )   $ (5 )
Fixed maturity securities trading
    1                    
Equity securities available-for-sale
    871             (2 )     (218 )
Short term investments available-for-sale
    3,534       (29 )     (26 )      
Limited partnerships
    1,683       1             (94 )
Other invested assets
    28                    
 
                       
 
                               
Total general account
    35,003       (2,862 )     (225 )     (317 )
 
                       
 
                               
Separate accounts:
                               
Fixed maturity securities
    343       (25 )            
Equity securities
    27                   (7 )
Short term investments
    7                    
 
                       
 
                               
Total separate accounts
    377       (25 )           (7 )
 
                       
 
                               
Derivative financial instruments, included in Other liabilities
    (111 )     131              
 
                       
 
                               
Total securities
  $ 35,269     $ (2,756 )   $ (225 )   $ (324 )
 
                       
 
                               
Debt (carrying value)
  $ 2,058     $ (149 )   $     $  
 
                       
Market Risk Scenario 2
                                 
            Increase (Decrease)  
    Market     Interest     Currency     Equity  
December 31, 2007   Value     Rate Risk     Risk     Risk  
(In millions)                                
General account:
                               
Fixed maturity securities available-for-sale
  $ 34,080     $ (2,789 )   $ (221 )   $ (106 )
Fixed maturity securities trading
    177       (3 )     (1 )     (3 )
Equity securities available-for-sale
    568             (2 )     (142 )
Short term investments available-for-sale
    4,497       (6 )     (85 )      
Short term investments trading
    180                    
Limited partnerships
    2,214       1             (109 )
Other invested assets
    73       2       (8 )     (171 )
 
                       
 
                               
Total general account
    41,789       (2,795 )     (317 )     (531 )
 
                       
 
                               
Separate accounts:
                               
Fixed maturity securities
    419       (30 )            
Equity securities
    45                   (11 )
Short term investments
    6                    
 
                       
 
                               
Total separate accounts
    470       (30 )           (11 )
 
                       
 
                               
Derivative financial instruments, included in Other liabilities
    (62 )     48              
 
                       
 
                               
Total securities
  $ 42,197     $ (2,777 )   $ (317 )   $ (542 )
 
                       
 
                               
Debt (carrying value)
  $ 2,157     $ (156 )   $     $  
 
                       

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CNA Financial Corporation
Consolidated Statements of Operations
                         
Years ended December 31   2008     2007     2006  
(In millions, except per share data)                        
Revenues
                       
Net earned premiums
  $ 7,151     $ 7,484     $ 7,603  
Net investment income
    1,619       2,433       2,412  
Realized investment gains (losses), net of participating policyholders’ and minority interests
    (1,297 )     (311 )     86  
Other revenues
    326       279       275  
 
                 
 
                       
Total revenues
    7,799       9,885       10,376  
 
                 
 
                       
Claims, Benefits and Expenses
                       
Insurance claims and policyholders’ benefits
    5,723       6,009       6,047  
Amortization of deferred acquisition costs
    1,467       1,520       1,534  
Other operating expenses
    1,037       994       1,027  
Restructuring and other related charges
                (13 )
Interest
    134       140       131  
 
                 
 
                       
Total claims, benefits and expenses
    8,361       8,663       8,726  
 
                 
 
                       
Income (loss) before income tax and minority interest
    (562 )     1,222       1,650  
Income tax (expense) benefit
    311       (317 )     (469 )
Minority interest
    (57 )     (48 )     (44 )
 
                 
 
                       
Income (loss) from continuing operations
    (308 )     857       1,137  
Income (loss) from discontinued operations, net of income tax (expense) benefit of $9, $0 and $7
    9       (6 )     (29 )
 
                 
 
                       
Net income (loss)
  $ (299 )   $ 851     $ 1,108  
 
                 
 
                       
Basic Earnings (Loss) Per Share
                       
 
                       
Income (loss) from continuing operations
  $ (1.21 )   $ 3.15     $ 4.17  
Income (loss) from discontinued operations
    0.03       (0.02 )     (0.11 )
 
                 
 
                       
Basic earnings (losses) per share available to common stockholders
  $ (1.18 )   $ 3.13     $ 4.06  
 
                 
 
                       
Diluted Earnings (Loss) Per Share
                       
 
                       
Income (loss) from continuing operations
  $ (1.21 )   $ 3.15     $ 4.16  
Income (loss) from discontinued operations
    0.03       (0.02 )     (0.11 )
 
                 
 
                       
Diluted earnings (losses) per share available to common stockholders
  $ (1.18 )   $ 3.13     $ 4.05  
 
                 
 
                       
Weighted Average Outstanding Common Stock and Common Stock Equivalents
                       
 
                       
Basic
    269.4       271.5       262.1  
 
                 
Diluted
    269.4       271.8       262.3  
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

66


 

CNA Financial Corporation
Consolidated Balance Sheets
                 
December 31   2008     2007  
(In millions, except share data)                
Assets
               
Investments:
               
Fixed maturity securities at fair value (amortized cost of $34,155 and $34,388)
  $ 28,887     $ 34,257  
Equity securities at fair value (cost of $1,016 and $366)
    871       568  
Limited partnership investments
    1,683       2,214  
Other invested assets
    28       73  
Short term investments
    3,534       4,677  
 
           
Total investments
    35,003       41,789  
Cash
    85       94  
Reinsurance receivables (less allowance for uncollectible receivables of $366 and $461)
    7,395       8,228  
Insurance receivables (less allowance for doubtful accounts of $221 and $312)
    1,818       1,972  
Accrued investment income
    356       330  
Receivables for securities sold and collateral
    402       142  
Deferred acquisition costs
    1,125       1,161  
Prepaid reinsurance premiums
    237       270  
Federal income tax recoverable (includes $299 and $0 due from Loews Corporation)
    294        
Deferred income taxes
    3,493       1,198  
Property and equipment at cost (less accumulated depreciation of $641 and $596)
    393       378  
Goodwill and other intangible assets
    141       142  
Other assets
    562       579  
Separate account business
    384       476  
 
           
Total assets
  $ 51,688     $ 56,759  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Insurance reserves:
               
Claim and claim adjustment expenses
  $ 27,593     $ 28,588  
Unearned premiums
    3,406       3,598  
Future policy benefits
    7,529       7,106  
Policyholders’ funds
    243       930  
Collateral on loaned securities and derivatives
    6       63  
Payables for securities purchased
    12       353  
Participating policyholders’ funds
    20       45  
Short term debt
          350  
Long term debt
    2,058       1,807  
Federal income taxes payable (includes $0 and $5 due to Loews Corporation)
          2  
Reinsurance balances payable
    316       401  
Other liabilities
    2,824       2,505  
Separate account business
    384       476  
 
           
Total liabilities
    44,391       46,224  
 
           
 
               
Commitments and contingencies (Notes B, C, F, G, I , K and L)
               
Minority interest
    420       385  
 
               
Stockholders’ equity:
               
Preferred stock (12,500,000 shares authorized)
2008 Senior Preferred (no par value; $100,000 stated value; 12,500 shares and no shares issued; held by Loews Corporation)
    1,250        
Common stock ($2.50 par value; 500,000,000 shares authorized; 273,040,243 shares issued; and 269,024,408 and 271,662,278 shares outstanding)
    683       683  
Additional paid-in capital
    2,174       2,169  
Retained earnings
    6,845       7,285  
Accumulated other comprehensive income (loss)
    (3,924 )     103  
Treasury stock (4,015,835 and 1,377,965 shares), at cost
    (109 )     (39 )
 
           
 
    6,919       10,201  
Notes receivable for the issuance of common stock
    (42 )     (51 )
 
           
Total stockholders’ equity
    6,877       10,150  
 
           
Total liabilities and stockholders’ equity
  $ 51,688     $ 56,759  
 
           
The accompanying Notes are an integral part of these Consolidated Financial Statements.

67


 

CNA Financial Corporation
Consolidated Statements of Cash Flows
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Cash Flows from Operating Activities:
                       
Net income (loss)
  $ (299 )   $ 851     $ 1,108  
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
                       
(Income) loss from discontinued operations
    (9 )     6       29  
Loss on disposal of property and equipment
    1       1        
Minority interest
    57       48       44  
Deferred income tax (benefit) provision
    (174 )     (99 )     173  
Trading portfolio activity
    644       (12 )     374  
Realized investment (gains) losses, net of participating policyholders’ and minority interests
    1,297       311       (86 )
Undistributed losses (earnings) of equity method investees
    446       (99 )     (170 )
Net amortization of bond discount
    (278 )     (252 )     (274 )
Depreciation
    78       64       48  
Changes in:
                       
Receivables, net
    987       1,386       2,427  
Accrued investment income
    (26 )     (17 )     (1 )
Deferred acquisition costs
    36       29       7  
Prepaid reinsurance premiums
    33       72       (2 )
Federal income taxes recoverable/payable
    (287 )     (38 )     102  
Insurance reserves
    (590 )     (830 )     (771 )
Reinsurance balances payable
    (85 )     (138 )     (1,097 )
Other assets
    13       42       142  
Other liabilities
    (287 )     (80 )     306  
Other, net
    9       7       (98 )
 
                 
 
                       
Total adjustments
    1,865       401       1,153  
 
                 
 
                       
Net cash flows provided by operating activities-continuing operations
  $ 1,566     $ 1,252     $ 2,261  
 
                 
Net cash flows used by operating activities-discontinued operations
  $ (8 )   $ (13 )   $ (11 )
 
                 
Net cash flows provided by operating activities-total
  $ 1,558     $ 1,239     $ 2,250  
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Purchases of fixed maturity securities
  $ (48,404 )   $ (73,157 )   $ (48,757 )
Proceeds from fixed maturity securities:
                       
Sales
    41,749       69,012       42,433  
Maturities, calls and redemptions
    4,092       4,744       4,310  
Purchases of equity securities
    (205 )     (236 )     (340 )
Proceeds from sales of equity securities
    220       340       221  
Change in short term investments
    1,032       1,347       (1,331 )
Change in collateral on loaned securities and derivatives
    (57 )     (2,788 )     2,084  
Change in other investments
    (295 )     (168 )     (195 )
Purchases of property and equipment
    (104 )     (160 )     (131 )
Dispositions
          14       8  
Other, net
    46       (69 )     16  
 
                 
 
                       
Net cash flows used by investing activities-continuing operations
  $ (1,926 )   $ (1,121 )   $ (1,682 )
 
                 
Net cash flows provided by investing activities-discontinued operations
  $ 18     $ 39     $ 36  
 
                 
Net cash flows used by investing activities-total
  $ (1,908 )   $ (1,082 )   $ (1,646 )
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

68


 

                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Cash Flows from Financing Activities:
                       
Dividends paid to common stockholders
  $ (122 )   $ (95 )   $  
Dividends paid to Loews for 2008 Senior Preferred
    (19 )            
Proceeds from the issuance of long term debt
    250             759  
Principal payments on debt
    (350 )           (294 )
Return of investment contract account balances
    (607 )     (122 )     (589 )
Receipts on investment contract account balances
    3       3       4  
Payment to repurchase Series H Issue preferred stock
                (993 )
Proceeds from the issuance of common stock
                499  
Proceeds from the issuance of 2008 Senior Preferred
    1,250              
Stock options exercised
    1       18       10  
Purchase of treasury stock
    (70 )            
Other, net
    11       11       (1 )
 
                 
 
                       
Net cash flows provided (used) by financing activities-continuing operations
  $ 347     $ (185 )   $ (605
 
                 
Net cash flows provided by financing activities-discontinued operations
  $     $     $  
 
                 
Net cash flows provided (used) by financing activities-total
  $ 347     $ (185 )   $ (605
 
                 
 
                       
Effect of foreign exchange rate changes on cash-continuing operations
    (13 )     5        
 
                       
Net change in cash
    (16 )     (23 )     (1 )
Net cash transactions from continuing operations to discontinued operations
    17       59       14  
Net cash transactions from discontinued operations to continuing operations
    (17 )     (59 )     (14 )
 
                       
Cash, beginning of year
    101       124       125  
 
                 
 
                       
Cash, end of year
  $ 85     $ 101     $ 124  
 
                 
 
                       
Cash-continuing operations
  $ 85     $ 94     $ 84  
Cash-discontinued operations
          7       40  
 
                 
Cash-total
  $ 85     $ 101     $ 124  
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

69


 

CNA Financial Corporation
Consolidated Statements of Stockholders’ Equity
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Preferred Stock
                       
Balance, beginning of period
  $     $     $ 750  
Repurchase of Series H Issue
                (750 )
Issuance of 2008 Senior Preferred
    1,250              
 
                 
 
                       
Balance, end of period
    1,250              
 
                 
 
                       
Common Stock
                       
Balance, beginning of period
    683       683       645  
Issuance of common stock
                38  
 
                 
 
                       
Balance, end of period
    683       683       683  
 
                 
 
                       
Additional Paid-in Capital
                       
Balance, beginning of period
    2,169       2,166       1,701  
Issuance of common stock and other
    5       3       465  
 
                 
 
                       
Balance, end of period
    2,174       2,169       2,166  
 
                 
 
                       
Retained Earnings
                       
Balance, beginning of period
    7,285       6,486       5,621  
Adjustment to initially apply FSP 85-4-1, net of tax
          38        
Adjustment to initially apply FIN 48
          5        
 
                 
Adjusted balance, beginning of period
    7,285       6,529       5,621  
Dividends paid to common stockholders
    (122 )     (95 )      
Dividends paid to Loews for 2008 Senior Preferred
    (19 )            
Liquidation preference in excess of par value on Series H Issue
                (243 )
Net income (loss)
    (299 )     851       1,108  
 
                 
 
                       
Balance, end of period
    6,845       7,285       6,486  
 
                 
 
                       
Accumulated Other Comprehensive Income (Loss)
                       
Balance, beginning of period
    103       549       359  
Other comprehensive income (loss)
    (4,027 )     (446 )     236  
Adjustment to initially apply SFAS 158, net of tax
                (46 )
 
                 
 
                       
Balance, end of period
    (3,924 )     103       549  
 
                 
 
                       
Treasury Stock
                       
Balance, beginning of period
    (39 )     (58 )     (67 )
Purchase of treasury stock
    (70 )            
Stock options exercised
          19       9  
 
                 
 
                       
Balance, end of period
    (109 )     (39 )     (58 )
 
                 
 
                       
Notes Receivable for the Issuance of Common Stock
                       
Balance, beginning of period
    (51 )     (58 )     (59 )
Decrease in notes receivable for the issuance of common stock
    9       7       1  
 
                 
 
                       
Balance, end of period
    (42 )     (51 )     (58 )
 
                 
 
                       
Total Stockholders’ Equity
  $ 6,877     $ 10,150     $ 9,768  
 
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. CNA’s property and casualty and the remaining life & group insurance operations are primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company (CIC), Continental Assurance Company (CAC) and CNA Surety Corporation (CNA Surety). The Company owned approximately 62% of the outstanding common stock of CNA Surety as of December 31, 2008. Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF as of December 31, 2008.
The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany amounts have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Business
CNA’s core property and casualty insurance operations are reported in two business segments: Standard Lines and Specialty Lines. CNA’s non-core operations are managed in two segments: Life & Group Non-Core and Corporate & Other Non-Core.
CNA serves 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.
Core insurance products include commercial property and casualty coverages. Non-core insurance products, which primarily have been sold or placed in run-off, include life and accident and health insurance; retirement products and annuities; and property and casualty reinsurance. CNA services include risk management, information services and claims administration. CNA’s products and services are marketed through independent agents, brokers, and managing general agents.
Insurance Operations
Premiums: Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured which principally are earned ratably over the duration of the policies. Premiums on accident and health insurance contracts are earned ratably over the policy year in which they are due. The reserve for unearned premiums on these contracts represents the portion of premiums written relating to the unexpired terms of coverage.
An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due currently or in the future from insureds, including amounts due from insureds related to losses under high deductible policies, management’s experience and current economic conditions.
Property and casualty contracts that are retrospectively rated contain provisions that result in an adjustment to the initial policy premium depending on the contract provisions and loss experience of the insured during the experience period. For such contracts, the Company estimates the amount of ultimate premiums that the Company may earn upon completion of the experience period and recognizes either an asset or a liability for the difference between the initial policy premium and the estimated ultimate premium. The Company adjusts such estimated ultimate premium amounts during the course of the experience period based on actual results to date. The resulting adjustment is recorded as either a reduction of or an increase to the earned premiums for the period.
Claim and claim adjustment expense reserves: Claim and claim adjustment expense reserves, except reserves for structured settlements not associated with asbestos and environmental pollution (A&E), workers’

71


 

compensation lifetime claims, accident and health claims and certain claims associated with discontinued operations, are not discounted and are based on 1) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations; 2) estimates of incurred but not reported losses; 3) estimates of losses on assumed reinsurance; 4) estimates of future expenses to be incurred in the settlement of claims; 5) estimates of salvage and subrogation recoveries and 6) estimates of amounts due from insureds related to losses under high deductible policies. Management considers current conditions and trends as well as past Company and industry experience in establishing these estimates. The effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance. Ceded claim and claim adjustment expense reserves are reported as a component of Reinsurance receivables on the Consolidated Balance Sheets. See Note P for further information on claim and claim adjustment expense reserves for discontinued operations.
Claim and claim adjustment expense reserves are presented net of anticipated amounts due from insureds related to losses under deductible policies of $2.0 billion and $2.2 billion as of December 31, 2008 and 2007. A significant portion of these amounts is supported by collateral. The Company also has an allowance for uncollectible deductible amounts, which is presented as a component of the allowance for doubtful accounts included in Insurance receivables on the Consolidated Balance Sheets. In 2008, the amount due from policyholders related to losses under deductible policies within Standard Lines was reduced by $90 million for insolvent insureds. The reduction of this amount, which is reflected as unfavorable net prior year reserve development, had no effect on 2008 results of operations as the Company had previously recognized provisions in prior years. These impacts were reported in Insurance claims and policyholders’ benefits in the 2008 Consolidated Statement of Operations.
Structured settlements have been negotiated for certain property and casualty insurance claims. Structured settlements are agreements to provide fixed periodic payments to claimants. Certain structured settlements are funded by annuities purchased from CAC for which the related annuity obligations are reported in future policy benefits reserves. Obligations for structured settlements not funded by annuities are included in claim and claim adjustment expense reserves and carried at present values determined using interest rates ranging from 4.6% to 7.5% at December 31, 2008 and 2007. At December 31, 2008 and 2007, the discounted reserves for unfunded structured settlements were $756 million and $786 million, net of discount of $1.1 billion and $1.2 billion.
Workers’ compensation lifetime claim reserves are calculated using mortality assumptions determined through statutory regulation and economic factors. Accident and health claim reserves are calculated using mortality and morbidity assumptions based on Company and industry experience. Workers’ compensation lifetime claim reserves and accident and health claim reserves are discounted at interest rates that range from 3.0% to 6.5% for the years ended December 31, 2008 and 2007. At December 31, 2008 and 2007, such discounted reserves totaled $1.6 billion and $1.4 billion, net of discount of $482 million and $438 million.
Future policy benefits reserves: Reserves for long term care products are computed using the net level premium method, which incorporates actuarial assumptions as to interest rates, mortality, morbidity, persistency, withdrawals and expenses. Actuarial assumptions generally vary by plan, age at issue and policy duration, and include a margin for adverse deviation. Interest rates range from 6.0% to 8.6% at December 31, 2008 and 2007, and mortality, morbidity and withdrawal assumptions are based on Company and industry experience prevailing at the time of issue. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium paying period.
Policyholders’ funds reserves: Policyholders’ funds reserves primarily include reserves for investment contracts without life contingencies, including reserves related to the indexed group annuity portion of the Company’s pension deposit business. For these contracts, policyholder liabilities are equal to the accumulated policy account values, which consist of an accumulation of deposit payments plus credited interest, less withdrawals and amounts assessed through the end of the period. During 2008, the Company exited the indexed group annuity portion of its pension deposit business and settled the related liabilities with policyholders with no material impact to results of operations. Cash flows related to the settlement of the liabilities with policyholders are presented on the Consolidated Statements of Cash Flows in Cash flows from financing activities, as Return of investment contract account balances. Cash flows related to proceeds from the liquidation of the related assets supporting the policyholder liabilities are presented on the Consolidated Statements of Cash Flows in Cash flows from operating activities, as Trading portfolio activity.

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Guaranty fund and other insurance-related assessments: Liabilities for guaranty fund and other insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated, and when the event obligating the entity to pay an imposed or probable assessment has occurred. Liabilities for guaranty funds and other insurance-related assessments are not discounted and are included as part of Other liabilities on the Consolidated Balance Sheets. As of December 31, 2008 and 2007, the liability balances were $170 million and $178 million. As of December 31, 2008 and 2007, included in Other assets on the Consolidated Balance Sheets were $6 million and $6 million of related assets for premium tax offsets. This asset is limited to the amount that is able to be offset against premium tax on future premium collections from business written or committed to be written.
Reinsurance: Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported as receivables on the Consolidated Balance Sheets. The cost of reinsurance is primarily accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies or over the reinsurance contract period. The ceding of insurance does not discharge the primary liability of the Company. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, management’s experience and current economic conditions. The expenses incurred related to uncollectible reinsurance receivables are presented as a component of Insurance claims and policyholders’ benefits on the Consolidated Statements of Operations.
Reinsurance contracts that do not effectively transfer the underlying economic risk of loss on policies written by the Company are recorded using the deposit method of accounting, which requires that premium paid or received by the ceding company or assuming company be accounted for as a deposit asset or liability. At December 31, 2008 and 2007, the Company had $25 million and $40 million recorded as deposit assets and $110 million and $117 million recorded as deposit liabilities.
Income on reinsurance contracts accounted for under the deposit method is recognized using an effective yield based on the anticipated timing of payments and the remaining life of the contract. When the estimate of timing of payments changes, the effective yield is recalculated to reflect actual payments to date and the estimated timing of future payments. The deposit asset or liability is adjusted to the amount that would have existed had the new effective yield been applied since the inception of the contract. This adjustment is reflected in Other revenues or Other operating expenses on the Consolidated Statements of Operations as appropriate.
Participating insurance: Policyholder dividends are accrued using an estimate of the amount to be paid based on underlying contractual obligations under policies and applicable state laws. When limitations exist on the amount of net income from participating life insurance contracts that may be distributed to shareholders, the share of net income on those policies that cannot be distributed to shareholders is excluded from stockholders’ equity by a charge to operations and the establishment of a corresponding liability.
Deferred acquisition costs: Acquisition costs include commissions, premium taxes and certain underwriting and policy issuance costs which vary with and are related primarily to the acquisition of business. Such costs related to property and casualty business are deferred and amortized ratably over the period the related premiums are earned.
Deferred acquisition costs related to accident and health insurance are amortized over the premium-paying period of the related policies using assumptions consistent with those used for computing future policy benefit reserves for such contracts. Assumptions as to anticipated premiums are made at the date of policy issuance or acquisition and are consistently applied during the lives of the contracts. Deviations from estimated experience are included in results of operations when they occur. For these contracts, the amortization period is typically the estimated life of the policy.
The Company evaluates deferred acquisition costs for recoverability. Adjustments, if necessary, are recorded in current results of operations. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. Deferred acquisition costs are recorded net of ceding commissions and other ceded acquisition costs. Unamortized deferred acquisition costs relating to contracts that have been substantially changed by a modification in benefits, features, rights or coverages are no longer deferred and are included as a charge to operations in the period during which the contract modification occurred.
Investments in life settlement contracts and related revenue recognition:

Prior to 2002, the Company purchased investments in life settlement contracts. Under a life settlement contract, the Company obtained the

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ownership and beneficiary rights of an underlying life insurance policy. In March 2006, the Financial Accounting Standards Board (FASB) issued FASB Staff Position Technical Bulletin No. 85-4-1, Accounting for Life Settlement Contracts by Third-Party Investors (FSP 85-4-1). A life settlement contract for purposes of FSP 85-4-1 is a contract between the owner of a life insurance policy (the policy owner) and a third-party investor (investor). The previous accounting guidance, FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance (FTB 85-4), required the purchaser of life insurance contracts to account for the life insurance contract at its cash surrender value. Because life insurance contracts are purchased in the secondary market at amounts in excess of the policies’ cash surrender values, the application of guidance in FTB 85-4 created a loss upon acquisition of policies. FSP 85-4-1 provides initial and subsequent measurement guidance and financial statement presentation and disclosure guidance for investments by third-party investors in life settlement contracts. FSP 85-4-1 allows an investor to elect to account for its investments in life settlement contracts using either the investment method or the fair value method. The election must be made on an instrument-by-instrument basis and is irrevocable. The Company adopted FSP 85-4-1 on January 1, 2007.
The Company elected to account for its investments in life settlement contracts using the fair value method and the initial impact upon adoption of FSP 85-4-1 under the fair value method was an increase to retained earnings of $38 million, net of tax.
Under the fair value method, each life settlement contract is carried at its fair value at the end of each reporting period. The change in fair value, life insurance proceeds received and periodic maintenance costs, such as premiums, necessary to keep the underlying policy in force, are recorded in Other revenues on the Consolidated Statement of Operations for the years ended December 31, 2008 and 2007. Amounts presented related to 2006 were accounted for under the previous accounting guidance, FTB 85-4, where the carrying value of life settlement contracts was the cash surrender value, and revenue was recognized and included in Other revenues on the Consolidated Statement of Operations when the life insurance policy underlying the life settlement contract matured. Under the previous accounting guidance, maintenance expenses were expensed as incurred and included in Other operating expenses on the Consolidated Statement of Operations. The Company’s investments in life settlement contracts were $129 million and $115 million at December 31, 2008 and 2007, and are included in Other assets on the Consolidated Balance Sheets. The cash receipts and payments related to life settlement contracts are included in Cash flows from operating activities on the Consolidated Statements of Cash Flows for all periods presented.
The fair value of each life insurance policy is determined as the present value of the anticipated death benefits less anticipated premium payments for that policy. These anticipated values are determined using mortality rates and policy terms that are distinct for each insured. The discount rate used reflects current risk-free rates at applicable durations and the risks associated with assessing the current medical condition of the insured, the potential volatility of mortality experience for the portfolio and longevity risk. The Company used its own experience to determine the fair value of its portfolio of life settlement contracts. The mortality experience of this portfolio of life insurance policies may vary by quarter due to its relatively small size. 
The following table details the values for life settlement contracts.
                         
            Fair Value of Life Settlement     Face Amount of Life Insurance  
    Number of Life Settlement     Contracts     Policies  
December 31, 2008   Contracts     (In millions)     (In millions)  
Estimated maturity during:
                       
2009
    100     $ 19     $ 55  
2010
    100       17       55  
2011
    100       15       53  
2012
    100       13       53  
2013
    100       11       51  
Thereafter
    814       54       436  
 
                 
Total
    1,314     $ 129     $ 703  
 
                 
The Company uses an actuarial model to estimate the aggregate face amount of life insurance that is expected to mature in each future year and the corresponding fair value. This model projects the likelihood of the insured’s death for each in force policy based upon the Company’s estimated mortality rates. The number of life settlement contracts presented in the table above is based upon the average face amount of in force policies estimated to mature in each future year.

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The increase in fair value recognized for the years ended December 31, 2008 and 2007 on contracts still being held was $17 million and $12 million. The gain recognized during the years ended December 31, 2008 and 2007 on contracts that matured was $30 million and $38 million.
Separate Account Business:

Separate account assets and liabilities represent contract holder funds related to investment and annuity products for which the policyholder assumes substantially all the risk and reward. The assets are segregated into accounts with specific underlying investment objectives and are legally segregated from the Company. All assets of the separate account business are carried at fair value with an equal amount recorded for separate account liabilities. Certain of the separate account investment contracts related to the Company’s pension deposit business guarantee principal and a minimum rate of interest, for which additional amounts may be recorded in Policyholders’ funds should the aggregate contract value exceed fair value of the related assets supporting the business at any point in time. Most of these contracts are subject to a fair value adjustment if terminated by the policyholder. During 2008, the Company recorded $68 million of additional amounts in Policyholders’ funds due to declines in the value of the related assets. To the extent the related assets supporting the business recover in value in the future, the amount of any such recovery will accrue to the Company’s benefit and will reduce the related liability in Policyholders’ funds. Fee income accruing to the Company related to separate accounts is primarily included within Other revenue on the Consolidated Statements of Operations.
Investments
Valuation of investments: CNA classifies its fixed maturity securities and its equity securities as either available-for-sale or trading, and as such, they are carried at fair value. Changes in fair value of trading securities are reported within Net investment income on the Consolidated Statements of Operations. The amortized cost of fixed maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, which are included in Net investment income on the Consolidated Statements of Operations. Changes in fair value related to available-for-sale securities are reported as a component of Other comprehensive income. Investments are written down to fair value and losses are recognized in Realized investment gains (losses) on the Consolidated Statements of Operations when a decline in value is determined to be other-than-temporary.
For asset-backed securities included in fixed maturity securities, the Company recognizes income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. Such adjustments are reflected in Net investment income on the Consolidated Statements of Operations. Interest income on lower rated beneficial interests in securitized financial assets is determined using the prospective yield method.
The Company’s carrying value of investments in limited partnerships is its share of the net asset value of each partnership, as determined by the General Partner. Certain partnerships for which results are not available on a timely basis are reported on a lag, primarily one month. Changes in net asset values are accounted for under the equity method and recorded within Net investment income on the Consolidated Statements of Operations.
Other invested assets include certain derivative securities and real estate investments. The Company’s accounting for derivative securities is discussed in further detail below. Real estate investments are carried at the lower of cost or fair value.
Short term investments are generally carried at amortized cost, which approximates fair value.
Realized investment gains (losses): All securities sold resulting in investment gains (losses) are recorded on the trade date, except for bank loan participations which are recorded on the date that the legal agreements are finalized. Realized investment gains (losses) are determined on the basis of the cost or amortized cost of the specific securities sold.
Securities lending activities: CNA lends securities to unrelated parties, primarily major brokerage firms, through two programs: an internally managed program and an external program managed by the Company’s lead custodial bank as agent. The securities lending program is for the purpose of enhancing income. The Company does not lend securities for operating or financing purposes. Borrowers of these securities must initially deposit collateral with the Company of at least 102% and maintain collateral of no less than 100% of

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the fair value of the securities loaned, regardless of whether the collateral is cash or securities. Only cash collateral is accepted for the Company’s internally managed program and is typically invested in the highest quality commercial paper with maturities of less than 7 days. U.S. Government, agencies or Government National Mortgage Association securities are accepted as non-cash collateral for the external program. The Company maintains effective control over all loaned securities and, therefore, continues to report such securities as Fixed maturity securities on the Consolidated Balance Sheets.
The lending programs are matched-book programs where the collateral is invested to substantially match the term of the loan which limits risk. In accordance with the Company’s lending agreements, securities on loan are returned immediately to the Company upon notice. Cash collateral received on these transactions is invested in short term investments with an offsetting liability recognized for the obligation to return the collateral. Non-cash collateral, such as securities received by the Company, is not reflected as an asset of the Company as there exists no right to sell or repledge the collateral. The fair value of collateral held related to securities lending, included in Short term investments on the Consolidated Balance Sheets, was $53 million at December 31, 2007. There was no cash collateral held at December 31, 2008. The fair value of non-cash collateral was $348 million and $273 million at December 31, 2008 and 2007.
Derivative Financial Instruments
All investments in derivatives are recorded at fair value. A derivative is typically defined as an instrument whose value is “derived” from an underlying instrument, index or rate, has a notional amount, requires little or no initial investment and can be net settled. Derivatives include, but are not limited to, the following types of financial instruments: interest rate swaps, interest rate caps and floors, put and call options, warrants, futures, forwards, commitments to purchase securities, credit default swaps and combinations of the foregoing. Derivatives embedded within non-derivative instruments (such as call options embedded in convertible bonds) must be separated from the host instrument when the embedded derivative is not clearly and closely related to the host instrument.
The Company’s derivatives are reported as Other invested assets or Other liabilities on the Consolidated Balance Sheets. Embedded derivative instruments subject to bifurcation are reported together with the host contract, at fair value. If certain criteria are met, a derivative may be specifically designated as a hedge of exposures to changes in fair value, cash flows or foreign currency exchange rates. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative, the nature of any hedge designation thereon and whether the derivative was transacted in a designated trading portfolio.
The Company’s accounting for changes in the fair value of derivatives not held in a trading portfolio is as follows:
     
Nature of Hedge Designation   Derivative’s Change in Fair Value Reflected In:
No hedge designation
  Realized investment gains (losses)
 
   
Fair value designation
 
Realized investment gains (losses), along with the change in fair value of the hedged asset or liability that is attributable to the hedged risk
 
   
Cash flow designation
 
Other comprehensive income, with subsequent reclassification to earnings when the hedged transaction, asset or liability impacts earnings
 
   
Foreign currency designation
 
Consistent with fair value or cash flow above, depending on the nature of the hedging relationship
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is

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determined that a derivative for which hedge accounting has been designated is not (or ceases to be) highly effective, the Company discontinues hedge accounting prospectively.
Derivatives held in designated trading portfolios are carried at fair value with changes therein reflected in Net investment income on the Consolidated Statements of Operations. These derivatives are generally not designated as hedges.
Income Taxes
The Company and its eligible subsidiaries (CNA Tax Group) are included in the consolidated federal income tax return of Loews and its eligible subsidiaries. The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized.

Pension and Postretirement Benefits
The Company recognizes the overfunded or underfunded status of its defined benefit plans in Other assets or Other liabilities on the Consolidated Balance Sheets and recognizes changes in that funded status in the year in which the changes occur through Other comprehensive income. The Company measures its funded status at December 31.
Stock-Based Compensation
The Company records compensation expense using the fair value method for all awards it grants, modifies, repurchases or cancels primarily on a straight-line basis over the requisite service period, generally four years.
Foreign Currency
Foreign currency translation gains and losses are reflected in Stockholders’ equity as a component of Accumulated other comprehensive income. The Company’s foreign subsidiaries’ balance sheet accounts are translated at the exchange rates in effect at each year end and income statement accounts are translated at the average exchange rates. Foreign currency transaction losses of $35 million, $10 million and $7 million were included in determining net income (loss) for the years ended December 31, 2008, 2007 and 2006.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is based on the estimated useful lives of the various classes of property and equipment and is determined principally on the straight-line method. Furniture and fixtures are depreciated over seven years. Office equipment is depreciated over five years. The estimated lives for data processing equipment and software range from three to five years. Leasehold improvements are depreciated over the corresponding lease terms. The Company’s owned buildings are depreciated over a period not to exceed fifty years. Capitalized improvements are depreciated over the remaining useful lives of the buildings.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived intangible assets of $141 million and $142 million as of December 31, 2008 and 2007 primarily represent the excess of purchase price over the fair value of the net assets of acquired entities and businesses. The balance at December 31, 2008 and 2007 related to the Specialty Lines segment, $139 million of which related to CNA Surety. During 2008, the Company determined that other intangible assets of $1 million related to the Specialty Lines segment were impaired.  Goodwill and indefinite-lived intangible assets are tested for impairment annually or when certain triggering events require such tests.

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Earnings (Loss) Per Share Data
Earnings (loss) per share available to common stockholders is based on weighted average outstanding shares. Basic earnings (loss) per share is computed by dividing net income (loss) from continuing operations attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Approximately 1.6 million, 300 thousand and 600 thousand shares, for the years ended December 31, 2008, 2007 and 2006, attributable to exercises under stock-based employee compensation plans, were excluded from the calculation of diluted earnings per share because they were antidilutive.
In November 2008, the Company sold $1.25 billion of a new series of preferred stock, designated the 2008 Senior Preferred Stock (2008 Senior Preferred), to Loews. The 2008 Senior Preferred accrues cumulative dividends at an initial rate of 10% per year. If declared, dividends are payable quarterly and any dividends not declared or paid when due will be compounded quarterly. See Note L for further details.
The Series H Cumulative Preferred Stock Issue (Series H Issue) was held by Loews and accrued cumulative dividends at an initial rate of 8% per year, compounded annually. In August 2006, the Company repurchased the Series H Issue from Loews for approximately $993 million, a price equal to the liquidation preference.
The computation of earnings (loss) per share is as follows.
Earnings (Loss) Per Share
                         
                   
Years ended December 31   2008     2007     2006  
(In millions, except per share amounts)                        
Income (loss) from continuing operations
  $ (308 )   $ 857     $ 1,137  
Less: undeclared Series H Issue dividend through repurchase date
                (46 )
Less: declared 2008 Senior Preferred dividend
    (19 )            
 
                 
 
                       
Income (loss) from continuing operations available to common stockholders
  $ (327 )   $ 857     $ 1,091  
 
                 
 
                       
Weighted average outstanding common stock and common stock equivalents
    269.4       271.5       262.1  
Effect of dilutive securities, employee stock options and appreciation rights
          0.3       0.2  
 
                 
Adjusted weighted average outstanding common stock and common stock equivalents assuming conversions
    269.4       271.8       262.3  
 
                 
 
                       
Basic earnings (loss) per share from continuing operations available to common stockholders
  $ (1.21 )   $ 3.15     $ 4.17  
 
                 
Diluted earnings (loss) per share from continuing operations available to common stockholders
  $ (1.21 )   $ 3.15     $ 4.16  
 
                 
 
                       
Dividends declared per common share
  $ 0.45     $ 0.35     $  
 
                 
Supplementary Cash Flow Information
Cash payments made for interest were $139 million, $142 million and $109 million for the years ended December 31, 2008, 2007 and 2006. Cash payments made for federal income taxes were $120 million, $420 million and $173 million for the years ended December 31, 2008, 2007 and 2006.

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Accounting Pronouncements
Adopted as of December 31, 2008
Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurement (SFAS 157)
In September 2006, the FASB issued SFAS 157, which defines fair value, establishes a framework for measuring fair value, specifies acceptable valuation techniques, prioritizes the inputs used in the valuation techniques into a fair value hierarchy and expands the disclosure requirements for assets and liabilities measured at fair value on a recurring and a non-recurring basis. The SFAS 157 hierarchy is based on observable inputs reflecting market data obtained from independent sources or unobservable inputs reflecting the Company’s market assumptions. This hierarchy requires the Company to use observable market data, when available.
In February 2008, the FASB issued Staff Position SFAS 157-2, Effective Date of FASB Statement No. 157 (FSP SFAS 157-2), which delays the effective date of SFAS 157 for all non-recurring fair value measurements of nonfinancial assets and nonfinancial liabilities until the fiscal year beginning after November 15, 2008. As a result, the Company partially applied the provisions of SFAS 157 upon adoption at January 1, 2008. The Company will apply the provisions of SFAS 157 to reporting units measured at fair value for the purposes of goodwill impairment testing or to indefinite-lived intangible assets measured at fair value for impairment assessment as of January 1, 2009. Adoption of these provisions is not anticipated to impact the Company’s financial condition or results of operations.
The Company’s adoption of SFAS 157 on January 1, 2008 had no impact on financial condition or results of operations as of or for the year ended December 31, 2008. The Company has complied with the disclosure requirements of SFAS 157 in Note D.
FASB Staff Position (FSP) FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not Active (FSP FAS 157-3)
In October 2008, the FASB issued FSP FAS 157-3, which clarifies the application of SFAS 157 in an inactive market. The FSP addresses application issues such as how management’s internal assumptions should be considered when measuring fair value when relevant observable data does not exist, how observable market information in a market that is not active should be considered when measuring fair value and how the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value.
FSP FAS 157-3 was effective upon issuance. The Company’s adoption of FSP FAS 157-3 had no impact on financial condition or results of operations as of or for the year ended December 31, 2008.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)
In February 2007, the FASB issued SFAS 159, which provides companies with an option to report selected financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS 159 helps to mitigate accounting-induced earnings volatility by enabling companies to report related assets and liabilities at fair value, which may reduce the need for companies to comply with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.
SFAS 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Company did not select the fair

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value option for any assets and liabilities currently held, therefore the Company’s adoption of SFAS 159 on January 1, 2008 had no impact on the Company’s financial condition or results of operations as of or for the year ended December 31, 2008.
FSP FIN 39-1, Amendment of FASB Interpretation (FIN) No. 39 (FSP FIN 39-1)
In April 2007, the FASB issued FSP FIN 39-1, which amends FIN 39, Offsetting of Amounts Related to Certain Contracts (FIN 39), by permitting a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in the statement of financial position in accordance with FIN 39. Additionally, FSP FIN 39-1 requires that a reporting entity shall not offset fair value amounts recognized for derivative instruments without offsetting fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral.
The Company adopted FSP FIN 39-1 in 2008, by electing to not offset cash collateral amounts recognized for derivative instruments under the same master netting arrangements and as a result will no longer offset fair value amounts recognized for derivative instruments. The Company presented the effect of adopting FSP FIN 39-1 as a change in accounting principle through retrospective application. The effect on the Consolidated Balance Sheets as of December 31, 2008 and 2007 was an increase of $18 million and $27 million in Other invested assets and Other liabilities. The Company’s adoption of FSP FIN 39-1 had no impact on the Company’s financial condition or results of operations as of or for the year ended December 31, 2008.
FSP FAS 133-1 and FIN 45-4, Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN 45-4)
In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, which amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives regarding the nature, circumstances requiring performance and current status of performance risk under the derivative. This FSP also requires disclosure of the maximum amount of future payments under the derivatives, the fair value of the derivatives and the nature of any recourse and collateral under the derivatives. This FSP also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. The Company has complied with the disclosure requirements related to credit derivatives in Note C and guarantees in Note K.
FSP Emerging Issues Task Force (EITF) Issue No. 99-20-1, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue 99-20 (FSP 99-20-1)
In January 2009, the FASB issued FSP 99-20-1, which amends EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to achieve more consistent determination of whether other-than-temporary impairments of available-for-sale or held-to-maturity debt securities have occurred. Specifically, FSP 99-20-1 amends EITF 99-20 to align the impairment guidance in EITF 99-20 with the impairment guidance in SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. CNA adopted this FSP as of December 31, 2008. The adoption of FSP 99-20-1 did not have an impact on our financial condition or results of operations.

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To be adopted after December 31, 2008
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161)
In March 2008, the FASB issued SFAS 161, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and requires enhanced disclosures regarding the use of derivative instruments, how they are accounted for and how they affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 will have no impact on our financial condition or results of operations.
SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements an amendment of Accounting Research Bulletin No. 51 (SFAS 160)
In December 2007, the FASB issued SFAS 160, which provides accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that an ownership interest in a subsidiary should be reported as equity in the consolidated financial statements, requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and provides for expanded disclosures in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this standard will have no impact on our financial condition or results of operations, but will impact the presentation of minority interest on the consolidated financial statements.
FSP No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP 132(R)-1)
In December 2008, the FASB issued FSP 132(R)-1, which requires additional disclosures regarding plan assets and how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and procedures, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3 of the SFAS 157 hierarchy) on changes in plan assets for the period, and significant concentrations of risk within plan assets. The additional disclosures required by FSP 132(R)-1 are effective for fiscal years ending after December 15, 2009. The adoption of this standard will have no impact on the Company’s financial condition or results of operations.

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Note B. Investments
The significant components of net investment income are presented in the following table.
Net Investment Income
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Fixed maturity securities
  $ 1,984     $ 2,047     $ 1,842  
Short term investments
    115       186       248  
Limited partnerships
    (379 )     183       288  
Equity securities
    80       25       23  
Income (loss) from trading portfolio (a)
    (149 )     10       103  
Interest on funds withheld and other deposits
    (2 )     (1 )     (68 )
Other
    21       36       18  
 
                 
 
                       
Gross investment income
    1,670       2,486       2,454  
Investment expenses
    (51 )     (53 )     (42 )
 
                 
 
                       
Net investment income
  $ 1,619     $ 2,433     $ 2,412  
 
                 
 
(a)  
The change in net unrealized gains (losses) on trading securities included in Net investment income was $3 million and $(15) million for the years ended December 31, 2008 and 2007. There was no change in net unrealized gains (losses) on trading securities included in Net investment income for the year ended December 31, 2006.
In 2008, the Company re-evaluated its classification of preferred stocks between redeemable and non-redeemable and determined that certain securities that were previously classified as redeemable preferred stock have characteristics similar to equities. These securities are presented as preferred stock securities included in Equity securities on the December 31, 2008 Consolidated Balance Sheet.

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Net realized investment gains (losses) are presented in the following table.
Net Realized Investment Gains (Losses)
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Net realized investment gains (losses):
                       
Fixed maturity securities:
                       
Gross realized gains:
  $ 532     $ 486     $ 382  
Gross realized losses:
                       
Other-than-temporary impairments
    (1,081 )     (716 )     (168 )
Trading
    (282 )     (248 )     (209 )
 
                 
 
                       
Net realized investment gains (losses) on fixed maturity securities
    (831 )     (478 )     5  
 
                 
 
                       
Equity securities:
                       
Gross realized gains:
    22       146       24  
Gross realized losses:
                       
Other-than-temporary impairments
    (403 )     (25 )     (5 )
Trading
    (109 )     (4 )     (3 )
 
                 
 
                       
Net realized investment gains (losses) on equity securities
    (490 )     117       16  
 
                 
 
                       
Other net realized investment gains
    24       50       65  
 
                 
 
                       
Net realized investment gains (losses), net of participating policyholders’ and minority interest
  $ (1,297 )   $ (311 )   $ 86  
 
                 
Net change in unrealized gains (losses) in investments is presented in the following table.
Net Change in Unrealized Gains (Losses)
                         
Years ended December 31   2008     2007     2006  
(In millions)                        
Net change in unrealized gains (losses) on investments:
                       
Fixed maturity securities
  $ (5,137 )   $ (847 )   $ 98  
Equity securities
    (347 )     (47 )     78  
Other
    5       2       2  
 
                 
 
                       
Total net change in unrealized gains (losses) on investments
    (5,479 )     (892 )     178  
Net change in unrealized gains (losses) on discontinued operations and other
    (12 )     1       (10 )
Allocated to participating policyholders’ and minority interests
    48       3       4  
Deferred income tax (expense) benefit
    1,932       315       (58 )
 
                 
 
                       
Net change in unrealized gains (losses) on investments
  $ (3,511 )   $ (573 )   $ 114  
 
                 
Net realized investment losses included $1,484 million, $741 million and $173 million of other-than-temporary impairment (OTTI) losses for the years ended December 31, 2008, 2007 and 2006. The 2008 OTTI losses were recorded primarily in the corporate and other taxable bonds, asset-backed bonds and non-redeemable preferred equity securities sectors. The 2007 OTTI losses were recorded primarily in the asset-backed bonds and corporate and other taxable bonds sectors. The 2006 OTTI losses were recorded primarily in the corporate and other taxable bonds sector.
The 2008 OTTI losses were driven primarily by deteriorating world-wide economic conditions and the resulting disruption of the financial and credit markets. Additional factors that contributed to recognizing impairments in 2008 were the conservatorship of the government sponsored entities Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) and the failure of several financial institutions. The 2007 OTTI losses were driven mainly by credit market conditions and disruption caused by issues surrounding the sub-prime residential mortgage (sub-prime) crisis. The OTTI losses for 2006 were primarily driven by an increase in interest rate related OTTI losses on securities for which the Company did not assert an intent to hold until an anticipated recovery in value.

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An investment is impaired if the fair value of the investment is less than its cost adjusted for accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an investment is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.
Significant judgment is required in the determination of whether an OTTI has occurred for an investment. The Company follows a consistent and systematic process for determining and recording an OTTI loss. The Company has established a committee responsible for the OTTI process. This committee, referred to as the Impairment Committee, is made up of three officers appointed by the Company’s Chief Financial Officer. The Impairment Committee is responsible for analyzing all securities in an unrealized loss position on at least a quarterly basis.
The Impairment Committee’s assessment of whether an OTTI loss should be recognized incorporates both quantitative and qualitative information. The Impairment Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and principal payments and (e) general market conditions and industry or sector specific outlook.
As part of the Impairment Committee’s review of impaired asset-backed securities it also considers results and analysis of cash flow modeling. The focus of this analysis is on assessing the sufficiency and quality of the underlying collateral and timing of cash flows based on various scenario tests. This additional data provides the Impairment Committee with additional context to evaluate current market conditions to determine if the impairment is temporary in nature.
For securities considered to be OTTI, the security is adjusted to fair value and the resulting losses are recognized in Realized investment gains (losses) on the Consolidated Statements of Operations.
The significant credit spread widening in 2008 negatively impacted the fair value of several asset classes resulting in material unrealized losses and impacted the unrealized loss aging as presented in the tables below. The Company’s assertion to hold until a recovery in value takes into account a view on the estimated recovery horizon which in some cases may include maturity. Given the prolonged nature of the current market downturn, the duration and severity of the unrealized losses has progressed well beyond historical norms. The Company will continue to monitor these losses and will assess all facts and circumstances as they become known which may result in changes to the conclusions reached based on current facts and circumstances and additional OTTI losses.

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The following tables provide a summary of fixed maturity and equity securities investments.
Summary of Fixed Maturity and Equity Securities
                                         
    Cost or     Gross     Gross Unrealized Losses     Estimated  
    Amortized     Unrealized     Less than     12 Months     Fair  
December 31, 2008   Cost     Gains     12 Months     or Greater     Value  
(In millions)                                        
Fixed maturity securities available-for-sale:
                                       
U.S. Treasury securities and obligations of government agencies
  $ 2,862     $ 69     $ 1     $     $ 2,930  
Asset-backed securities
    9,670       24       961       969       7,764  
States, municipalities and political subdivisions — tax-exempt securities
    8,557       90       609       623       7,415  
Corporate and other taxable bonds
    12,993       275       1,164       1,374       10,730  
Redeemable preferred stock
    72       1       23       3       47  
 
                             
 
Total fixed maturity securities available-for-sale
    34,154       459       2,758       2,969       28,886  
 
                             
 
                                       
Total fixed maturity securities trading
    1                         1  
 
                             
 
                                       
Equity securities available-for-sale:
                                       
Common stock
    134       190       1       3       320  
Preferred stock
    882       5       15       321       551  
 
                             
 
                                       
Total equity securities available-for-sale
    1,016       195       16       324       871  
 
                             
 
                                       
Total
  $ 35,171     $ 654     $ 2,774     $ 3,293     $ 29,758  
 
                             
Summary of Fixed Maturity and Equity Securities
                                         
    Cost or     Gross     Gross Unrealized Losses     Estimated  
    Amortized     Unrealized     Less than     12 Months     Fair  
December 31, 2007   Cost     Gains     12 Months     or Greater     Value  
(In millions)                                        
Fixed maturity securities available-for-sale:
                                       
U.S. Treasury securities and obligations of government agencies
  $ 594     $ 93     $     $     $ 687  
Asset-backed securities
    11,776       39       223       183       11,409  
States, municipalities and political subdivisions — tax-exempt securities
    7,615       144       82       2       7,675  
Corporate and other taxable bonds
    13,010       454       197       16       13,251  
Redeemable preferred stock
    1,216       2       160             1,058  
 
                             
 
Total fixed maturity securities available-for-sale
    34,211       732       662       201       34,080