SEC Filing | Loews Corporation

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Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

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 1-6541

LOEWS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		13-2646102
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

667 Madison Avenue, New York, N.Y. 10021-8087

(Address of principal executive offices) (Zip Code)

(212) 521-2000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).


Large accelerated filer	X		Accelerated filer			Non-accelerated filer

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

Yes

Class			Outstanding at October 20, 2006
Common stock, $0.01 par value			550,542,767 shares
Carolina Group stock, $0.01 par value			108,309,871 shares

INDEX

	Page
	No.

Part I. Financial Information


Item 1. Financial Statements	3

Consolidated Condensed Balance Sheets
September 30, 2006 and December 31, 2005	3

Consolidated Condensed Statements of Income
Three and nine months ended September 30, 2006 and 2005 Restated	4

Consolidated Condensed Statements of Shareholders’ Equity
September 30, 2006 and 2005	6

Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 2006 and 2005 Restated	7

Notes to Consolidated Condensed Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	68

Item 3. Quantitative and Qualitative Disclosures about Market Risk	118

Item 4. Controls and Procedures	122

Part II. Other Information	122

Item 1. Legal Proceedings	122

Item 1A. Risk Factors	123

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	127

Item 4. Submission of Matters to a Vote of Security Holders	127

Item 6. Exhibits	128

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2006		2005
(In millions)

Assets:

Investments:
Fixed maturities, amortized cost of $32,025.3 and $32,759.0	$	32,722.9	$	33,381.2
Equity securities, cost of $945.6 and $903.5		1,170.5		1,107.2
Limited partnership investments		2,014.3		1,769.0
Other investments		30.0		32.0
Short-term investments		15,546.8		9,106.6
Total investments		51,484.5		45,396.0
Cash		155.7		153.1
Receivables		14,278.0		15,313.7
Property, plant and equipment		5,279.9		4,951.6
Deferred income taxes		628.1		905.3
Goodwill and other intangible assets		298.9		297.4
Other assets		1,908.3		1,909.6
Deferred acquisition costs of insurance subsidiaries		1,220.4		1,197.4
Separate account business		524.7		551.5
Total assets	$	75,778.5	$	70,675.6

Liabilities and Shareholders’ Equity:

Insurance reserves:
Claim and claim adjustment expense	$	30,140.8	$	30,938.0
Future policy benefits		6,552.4		6,297.2
Unearned premiums		3,870.6		3,705.7
Policyholders’ funds		1,049.2		1,495.3
Total insurance reserves		41,613.0		42,436.2
Payable for securities purchased		1,200.8		401.7
Collateral on loaned securities		2,385.4		767.4
Short-term debt		554.5		598.2
Long-term debt		5,372.2		4,608.6
Reinsurance balances payable		885.8		1,636.2
Other liabilities		4,625.3		4,524.8
Separate account business		524.7		551.5
Total liabilities		57,161.7		55,524.6
Minority interest		2,534.3		2,058.9
Preferred stock, $0.10 par value,
Authorized - 100,000,000 shares
Common stock:
Loews common stock, $0.01 par value:
Authorized - 1,800,000,000 shares
Issued - 556,333,626 and 557,540,667 shares		5.6		5.6
Carolina Group stock, $0.01 par value:
Authorized - 600,000,000 shares
Issued - 108,649,871 and 78,531,678 shares		1.1		0.8
Additional paid-in capital		4,064.5		2,417.9
Earnings retained in the business		11,836.4		10,364.4
Accumulated other comprehensive income		381.7		311.1
		16,289.3		13,099.8
Less treasury stock, at cost (5,827,300 shares of Loews common stock as of
September 30, 2006 and 340,000 shares of Carolina Group stock as of
September 30, 2006 and December 31, 2005)		206.8		7.7
Total Shareholders’ equity		16,082.5		13,092.1
Total liabilities and shareholders’ equity	$	75,778.5	$	70,675.6

See accompanying Notes to Consolidated Condensed Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006			2005
(In millions, except per share data)			(Restated					(Restated
			See Note 18)					See Note 18)
Revenues:
Insurance premiums	$	1,943.4	$	1,873.5	$	5,704.0		$	5,684.3
Net investment income		694.5		608.0		2,039.5			1,468.5
Investment gains (losses)		28.5		60.0		(62.8	)		69.7
Gain on issuance of subsidiary stock		9.0				9.0
Manufactured products (including excise taxes of $185.8, $176.2, $526.4 and $511.4)		1,035.5		968.3		2,954.6			2,771.2
Other		796.3		628.1		2,384.7			1,916.1
Total		4,507.2		4,137.9		13,029.0			11,909.8

Expenses:
Insurance claims and policyholders’ benefits		1,521.9		1,871.4		4,446.1			4,886.4
Amortization of deferred acquisition costs		390.4		415.5		1,132.4			1,167.6
Cost of manufactured products sold		598.0		562.6		1,706.0			1,662.4
Other operating expenses		802.8		763.3		2,410.6			2,262.1
Restructuring and other related charges						(12.9	)
Interest		78.7		73.9		224.0			289.5
Total		3,391.8		3,686.7		9,906.2			10,268.0
		1,115.4		451.2		3,122.8			1,641.8
Income tax expense		363.6		104.6		1,035.0			446.6
Minority interest		122.4		46.6		341.3			121.7
Total		486.0		151.2		1,376.3			568.3
Income from continuing operations		629.4		300.0		1,746.5			1,073.5
Discontinued operations, net		5.7		2.2		(1.7	)		10.6
Net income	$	635.1	$	302.2	$	1,744.8		$	1,084.1

Net income attributable to:
Loews common stock:
Income from continuing operations	$	511.5	$	232.5	$	1,467.2		$	903.8
Discontinued operations, net		5.7		2.2		(1.7	)		10.6
Loews common stock		517.2		234.7		1,465.5			914.4
Carolina Group stock		117.9		67.5		279.3			169.7
Total	$	635.1	$	302.2	$	1,744.8		$	1,084.1

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
(In millions, except per share data)			(Restated				(Restated
			See Note 18)				See Note 18)

Basic and diluted net income per Loews common share
Income from continuing operations	$	0.93	$	0.42	$	2.64	$	1.62
Discontinued operations, net		0.01						0.02
Net income	$	0.94	$	0.42	$	2.64	$	1.64

Basic and diluted net income per Carolina Group share	$	1.17	$	0.99	$	3.16	$	2.49

Basic weighted average number of shares outstanding:
Loews common stock		550.59		557.16		554.45		556.99
Carolina Group stock		100.48		68.13		88.33		68.06

Diluted weighted average number of shares outstanding:
Loews common stock		551.44		558.10		555.26		557.79
Carolina Group stock		100.59		68.23		88.43		68.14

See accompanying Notes to Consolidated Condensed Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Comprehensive Income (Loss)			Loews Common Stock			Carolina Group Stock		Additional Paid-in Capital			Earnings Retained in the Business			Accumulated Other Comprehensive Income			Common Stock Held in Treasury
(In millions, except per share data)


Balance, December 31, 2004 as
previously reported				$	185.6		$	0.7	$	1,801.2		$	9,392.7		$	597.4		$	(7.7	)
Par value adjustment, Loews common
stock					(551.2	)				551.2
Three-for-one stock split					371.2					(371.2	)
Balance, December 31, 2004 as
adjusted					5.6			0.7		1,981.2			9,392.7			597.4			(7.7	)
Comprehensive income:
Net Income	$	1,084.1											1,084.1
Other comprehensive income		(251.0	)													(251.0	)
Comprehensive income	$	833.1
Dividends paid:
Loews common stock, $0.15
per share													(83.6	)
Carolina Group stock, $1.365
per share													(92.9	)
Issuance of Loews common stock										9.1
Issuance of Carolina Group stock										6.0
Balance, September 30, 2005				$	5.6		$	0.7	$	1,966.3		$	10,300.3		$	346.4		$	(7.7	)

	Comprehensive Income (Loss)		Loews Common Stock			Carolina Group Stock		Additional Paid-in Capital			Earnings Retained in the Business			Accumulated Other Comprehensive Income		Common Stock Held in Treasury
(In millions, except per share data)


Balance, December 31, 2005 as
previously reported			$	185.8		$	0.8	$	2,237.7		$	10,364.4		$	311.1	$	(7.7	)
Par value adjustment, Loews common
stock				(550.7	)				550.7
Three-for-one stock split				370.5					(370.5	)
Balance, December 31, 2005 as
adjusted				5.6			0.8		2,417.9			10,364.4			311.1		(7.7	)
Comprehensive income:
Net Income	$	1,744.8										1,744.8
Other comprehensive income		70.6													70.6
Comprehensive income	$	1,815.4
Dividends paid:
Loews common stock, $0.175
per share												(97.1	)
Carolina Group stock, $1.365
per share												(127.3	)
Retirement of treasury stock									(7.3	)		(48.4	)				55.7
Issuance of Loews common stock									13.8
Issuance of Carolina Group stock							0.3		1,630.6
Stock compensation expense									7.8
Other									1.7
Purchase of Loews treasury stock																	(254.8	)
Balance, September 30, 2006			$	5.6		$	1.1	$	4,064.5		$	11,836.4		$	381.7	$	(206.8	)

See accompanying Notes to Consolidated Condensed Financial Statements.

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30	2006			2005
(In millions)				(Restated
				See Note 18)

Operating Activities:

Net income	$	1,744.8		$	1,084.1
Adjustments to reconcile net income to net cash
provided (used) by operating activities-net		596.5			259.6
Changes in operating assets and liabilities-net:
Reinsurance receivables		1,533.9			1,238.4
Other receivables		(60.4	)		173.9
Federal income tax		69.1			(93.7	)
Prepaid reinsurance premiums		(27.7	)		214.0
Deferred acquisition costs		(23.0	)		34.0
Insurance reserves and claims		(314.7	)		58.3
Reinsurance balances payable		(750.4	)		(332.2	)
Other liabilities		9.8			(251.7	)
Trading securities		(1,054.4	)		(154.7	)
Other, net		(40.2	)		28.4
Net cash flow operating activities - continuing operations		1,683.3			2,258.4
Net cash flow operating activities - discontinued operations		0.3			(33.2	)
Net cash flow operating activities - total		1,683.6			2,225.2

Investing Activities:

Purchases of fixed maturities		(47,185.3	)		(60,176.6	)
Proceeds from sales of fixed maturities		42,022.3			51,507.1
Proceeds from maturities of fixed maturities		6,794.0			8,742.7
Purchases of equity securities		(277.2	)		(361.0	)
Proceeds from sales of equity securities		153.2			276.8
Purchases of property and equipment		(615.9	)		(317.1	)
Proceeds from sales of property and equipment		11.7			15.3
Change in collateral on loaned securities		1,618.0			1,088.2
Proceeds from casualty loss of Ocean Warwick					44.1
Change in short-term investments		(5,527.8	)		(1,170.2	)
Change in other investments		(190.3	)		231.3
Net cash flow investing activities - continuing operations		(3,197.3	)		(119.4	)
Net cash flow investing activities - discontinued operations		23.7			5.1
Net cash flow investing activities - total		(3,173.6	)		(114.3	)

Loews Corporation and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30	2006			2005
(In millions)				(Restated
				See Note 18)

Financing Activities:

Dividends paid	$	(224.4	)	$	(176.5	)
Dividends paid to minority interests		(124.3	)		(14.6	)
Purchases of treasury shares		(254.8	)
Issuance of common stock		1,639.1			12.7
Proceeds from subsidiary stock offering		234.5
Principal payments on debt		(89.4	)		(3,203.0	)
Issuance of debt		818.1			1,418.0
Receipts of policyholder account balances on investment contracts		1.8			3.5
Withdrawals of policyholder account balances on investment contracts		(510.3	)		(167.1	)
Excess tax benefits from share-based payment arrangements		4.9
Other		6.1			4.5
Net cash flow financing activities - continuing operations		1,501.3			(2,122.5	)

Net change in cash		11.3			(11.6	)
Net cash transactions from:
Continuing operations to discontinued operations		15.3			(33.4	)
Discontinued operations to continuing operations		(15.3	)		33.4
Cash, beginning of period		182.0			234.0
Cash, end of period		193.3			222.4

Cash, end of period:
Continuing operations		155.7			203.0
Discontinued operations		37.6			19.4
Total	$	193.3		$	222.4

See accompanying Notes to Consolidated Condensed Financial Statements.

Loews Corporation and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation

Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: commercial property and casualty insurance (CNA Financial Corporation (“CNA”), an 89% owned subsidiary); the production and sale of cigarettes (Lorillard, Inc. (“Lorillard”), a wholly owned subsidiary); the operation of interstate natural gas transmission pipeline systems (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), an 85% owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 54% owned subsidiary); the operation of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary) and the distribution and sale of watches and clocks (Bulova Corporation (“Bulova”), a wholly owned subsidiary). Unless the context otherwise requires, the terms “Company,” “Loews” and “Registrant” as used herein mean Loews Corporation excluding its subsidiaries.

In the opinion of management, the accompanying Consolidated Condensed Financial Statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2006 and December 31, 2005 and the results of operations for the three and nine months ended September 30, 2006 and 2005 and changes in cash flows for the nine months ended September 30, 2006 and 2005.

Net income for the third quarter and first nine months of each of the years is not necessarily indicative of net income for that entire year.

Reference is made to the Notes to Consolidated Financial Statements in the 2005 Annual Report on Form 10-K which should be read in conjunction with these Consolidated Condensed Financial Statements.

On May 8, 2006, the Company effected a three-for-one stock split of Loews common stock to shareholders of record on April 24, 2006. On August 3, 2006, the Company’s shareholders approved amendments to its certificate of incorporation increasing the number of shares of Loews common stock authorized for issuance from 600 million to 1.8 billion shares and reducing the par value per share of Loews common stock from $1.00 to $0.01 per share. All share and per share information has been retroactively adjusted to reflect these events.

Accounting changes - In November of 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” as applicable to debt and equity securities that are within the scope of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and equity securities that are accounted for using the cost method specified in Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” FSP 115-1 nullifies certain requirements of Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” which provided guidance on determining whether an impairment is other-than-temporary. FSP 115-1 replaces guidance set forth in EITF No. 03-1 with references to existing other-than-temporary impairment guidance and clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. FSP 115-1 carries forward the requirements in EITF No. 03-1 regarding required disclosures in the financial statements and requires additional disclosure related to factors considered in reaching the conclusion that the impairment is not other-than-temporary. In addition, in periods subsequent to the recognition of an other-than-temporary impairment loss for debt securities, the discount or reduced premium would be amortized over the remaining life of the security based on future estimated cash flows. FSP 115-1 was effective for reporting periods beginning after December 15, 2005 and was adopted by the Company as of January 1, 2006. Adoption of this standard increased net income by approximately $2.0 million for the nine months ended September 30, 2006, related to the amortization of discount or reduced premium resulting from prior impairments. The Company has included the required additional disclosures in these financial statements.

Stock option plans - In December of 2004, the FASB issued a complete replacement of SFAS No. 123, “Share-Based Payment” (“SFAS No. 123R”), which covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123R requires companies to use the fair value method in accounting for employee stock options which results in compensation expense recorded in the income statement. Compensation expense is measured at the grant date using an option-pricing model and is recognized over the service period.

Effective January 1, 2006, the Company adopted SFAS No. 123R using the modified prospective transition method. The Company applied the transition method in calculating its pool of excess tax benefits available to absorb

future tax deficiencies as provided by FSP FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” Adoption of SFAS No. 123R decreased net income attributable to Loews common stock by $1.8 million and $4.8 million for the three and nine months ended September 30, 2006, or $0.01 per Loews common share for the nine months ended September 30, 2006. There was no impact per Loews common share for the three months ended September 30, 2006. Net income attributable to Carolina Group stock decreased by $0.1 million and $0.2 million for the three and nine months ended September 30, 2006. There was no impact per Carolina Group share. Several of the Company’s subsidiaries also maintain their own stock option plans. The amounts reported above include the Company’s share of expense related to its subsidiaries’ plans as well.

Prior to the adoption of SFAS No. 123R, the Company elected to follow Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options and awards. Under APB No. 25, no compensation expense was recognized when the exercise prices of options equaled the fair value (market price) of the underlying stock on the date of grant. SFAS No. 123, “Accounting for Stock-Based Compensation,” required the Company to disclose pro forma information regarding option grants made to its employees. SFAS No. 123 specified certain valuation techniques that produced estimated compensation charges for purposes of valuing stock option grants. These amounts were not included in the Company’s Consolidated Condensed Statements of Income, in accordance with APB No. 25. The pro forma effect of applying SFAS No. 123 included the Company’s share of expense related to its subsidiaries’ plans as well. The pro forma net income attributable to Loews common stock was reduced by $3.9 million, or $0.01 per share of Loews common stock for the nine months ended September 30, 2005. Loews pro forma net income was reduced $1.3 million or by less than $0.01 per share for the three months ended September 30, 2005. The pro forma net income attributable to Carolina Group stock was reduced by $0.1 million or less than $0.01 per share of Carolina Group stock for the nine months ended September 30, 2005. The pro forma net income attributable to Carolina Group stock was not impacted for the three months ended September 30, 2005.

Comprehensive Income - Comprehensive income includes all changes to shareholders’ equity, except those resulting from investments by shareholders and distributions to shareholders. For the three and nine months ended September 30, 2006 and 2005, comprehensive income (loss) totaled $1,148.7 million, $(26.6) million, $1,815.4 million and $833.1 million, respectively. Comprehensive income includes net income, unrealized appreciation (depreciation) of investments, foreign currency translation gains or losses and pension liability adjustments.

2. Investments

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Net investment income consisted of:

Fixed maturity securities	$	478.0		$	397.0		$	1,387.8		$	1,194.4
Short-term investments		93.2			53.8			276.9			129.7
Limited partnerships		52.3			78.7			189.5			202.1
Equity securities		3.9			7.8			23.2			21.4
Income from trading portfolio		54.2			103.8			180.6			34.8
Interest expense on funds withheld and other deposits		(10.8	)		(49.2	)		(65.4	)		(138.6	)
Other		33.8			8.6			82.9			63.6
Total investment income		704.6			600.5			2,075.5			1,507.4
Investment expenses		(10.1	)		7.5			(36.0	)		(38.9	)
Net investment income	$	694.5		$	608.0		$	2,039.5		$	1,468.5

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Investment gains (losses) are as follows:

Fixed maturities	$	39.9		$	14.3		$	(63.4	)	$	14.4
Equity securities, including short positions		(2.4	)		7.8			9.0			48.0
Derivative instruments		(13.0	)		53.1			(7.5	)		34.4
Short-term investments		(1.4	)		1.1			(6.2	)		(2.0	)
Other, including guaranteed separate account business		5.4			(16.3	)		5.3			(25.1	)
Investment gains (losses)		28.5			60.0			(62.8	)		69.7
Gain on issuance of subsidiary stock		9.0						9.0
		37.5						(53.8	)
Income tax (expense) benefit		(4.4	)		(22.4	)		22.5			(28.0	)
Minority interest		(2.3	)		(3.6	)		3.3			(3.5	)
Investment gains (losses) - net	$	30.8		$	34.0		$	(28.0	)	$	38.2

For the three months ended September 30, 2006, other-than-temporary impairment (“OTTI”) losses of $46.0 million were recorded primarily in the corporate and other taxable bonds sector. This compared to OTTI losses for the three months ended September 30, 2005 of $17.0 million recorded across various sectors. The decrease in net realized investment results was primarily driven by an increase in interest related OTTI losses on securities for which the Company did not assert an intent to hold until an anticipated recovery in value.

For the nine months ended September 30, 2006, OTTI losses of $87.0 million were recorded primarily in the corporate and other taxable bonds sector. This compared to OTTI losses for the nine months ended September 30, 2005 of $71.0 million recorded across various sectors, including an OTTI loss of $47.0 million related to loans to a large national contractor. See Note 14 for additional information on loans to the large national contractor.

The Company’s investment policies emphasize high credit quality and diversification by industry, issuer and issue. Assets supporting interest rate sensitive liabilities are segmented within the general account to facilitate asset/liability duration management.

The amortized cost and market values of securities are as follows:

Gross Unrealized Losses

September 30, 2006

Amortized Cost

Unrealized Gains

Less Than 12 Months

Greater Than 12 Months

Fair Value

(In millions)

Fixed maturity securities:

U.S. government and obligations

of government agencies

2,293.9

132.6

1.2

1.4

2,423.9

Asset-backed securities

14,170.7

35.9

19.4

155.3

14,031.9

States, municipalities and political

subdivisions-tax exempt

4,230.4

212.1

0.3

5.4

4,436.8

Corporate

6,449.7

309.1

10.0

14.9

6,733.9

Other debt

3,287.7

198.2

7.6

2.7

3,475.6

Redeemable preferred stocks

827.9

24.5

1.6

850.8

Options embedded in convertible

debt securities

0.9

Fixed maturities available-for-sale

31,261.2

912.4

40.1

179.7

31,953.8

Fixed maturities, trading

764.1

7.1

0.9

1.2

769.1

Total fixed maturities

32,025.3

919.5

41.0

180.9

32,722.9

Equity securities:

Equity securities available-

for-sale

339.0

180.7

0.3

519.4

Equity securities, trading

606.6

68.3

12.1

11.7

651.1

Total equity securities

945.6

249.0

12.1

12.0

1,170.5

Short-term investments:

Short-term investments available-for-

sale

14,795.7

Short-term investments, trading

750.6

0.5

751.1

Total short-term investments

15,546.3

0.5

15,546.8

Total

48,517.2

1,169.0

53.1

192.9

49,440.2

December 31, 2005
(In millions)

Fixed maturity securities:
U.S. government and obligations of
government agencies	$	1,357.2	$	119.1	$	3.4	$	1.2	$	1,471.7
Asset-backed securities		12,985.8		43.6		136.7		33.1		12,859.6
States, municipalities and political
subdivisions-tax exempt		9,054.3		192.5		31.2		6.9		9,208.7
Corporate		5,905.7		322.2		51.9		11.0		6,165.0
Other debt		2,830.3		233.9		17.9		2.3		3,044.0
Redeemable preferred stocks		213.3		3.5		0.4		0.7		215.7
Options embedded in convertible debt
securities		0.8								0.8
Fixed maturities available-for-sale		32,347.4		914.8		241.5		55.2		32,965.5
Fixed maturities, trading		411.6		6.7		1.5		1.1		415.7
Total fixed maturities		32,759.0		921.5		243.0		56.3		33,381.2
Equity Securities:
Equity securities available-for-sale		461.7		172.6		2.0				632.3
Equity securities, trading		441.8		58.1		15.2		9.8		474.9
Total equity securities		903.5		230.7		17.2		9.8		1,107.2
Short-term investments available-for-sale		9,106.6		-		-		-		9,106.6
Total	$	42,769.1	$	1,152.2	$	260.2	$	66.1	$	43,595.0

The following table summarizes, for fixed maturity and equity securities in an unrealized loss position at September 30, 2006 and December 31, 2005, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.

September 30, 2006

December 31, 2005

Estimated

Fair Value

Gross

Unrealized

Loss

Estimated

Fair Value

Gross

Unrealized

Loss

(In millions)

Fixed maturity securities:

Investment grade:

0-6 months

1,577.9

8.0

9,976.0

141.7

7-12 months

3,476.6

25.7

2,739.0

61.0

13-24 months

5,774.0

146.9

1,400.0

45.0

Greater than 24 months

725.6

29.8

219.0

7.0

Total investment grade

11,554.1

210.4

14,334.0

254.7

Non-investment grade:

0-6 months

621.5

5.4

632.0

29.0

7-12 months

29.9

0.9

118.0

10.0

13-24 months

70.5

3.1

122.0

3.0

Greater than 24 months

2.3

2.0

Total non-investment grade

724.2

9.4

874.0

42.0

Total fixed maturity securities

12,278.3

219.8

15,208.0

296.7

Equity securities:

0-6 months

2.8

49.0

2.0

7-12 months

0.7

0.1

1.0

13-24 months

0.1

Greater than 24 months

3.2

0.2

3.0

Total equity securities

6.8

0.3

53.0

2.0

Total fixed maturity and equity securities

12,285.1

220.1

15,261.0

298.7

An investment is impaired if the fair value of the investment is less than its cost adjusted for accretion, amortization, previous OTTI and hedging, 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.

A significant judgment in the valuation of investments is the determination of when an OTTI has occurred. CNA follows a consistent and systematic process for determining and recording an OTTI. CNA 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 CNA’s Chief Financial Officer. The Impairment Committee is responsible for analyzing watch list securities on at least a quarterly basis. The watch list includes individual securities that fall below certain thresholds or that exhibit evidence of OTTI indicators including, but not limited to, a significant adverse change in the financial condition and near term prospects of the issuer or a significant adverse change in legal factors, the business climate or credit ratings.

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

The decision to record an OTTI incorporates both quantitative criteria and qualitative information. The Impairment Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than book value, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for 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 factors.

The Impairment Committee’s decision to record an OTTI loss is primarily based on whether the security’s fair value is likely to recover to its book value in light of all of the factors considered. For securities considered to be

OTTI, the security is adjusted to fair value and the resulting losses are recognized in Investment gains (losses) on the Consolidated Condensed Statements of Income.

At September 30, 2006, the carrying value of available-for-sale fixed maturities was $31,953.8 million, representing 64.6% of the total investment portfolio. The net unrealized gain position associated with the fixed maturity portfolio included $219.8 million in gross unrealized losses, consisting of asset-backed securities which represented 79.5%, corporate bonds which represented 11.3%, available-for-sale municipal securities which represented 2.6%, and all other fixed maturity securities which represented 6.6%. The gross unrealized loss for any single issuer was no greater than 0.1% of the carrying value of the total available-for-sale fixed maturity portfolio. The total available-for-sale fixed maturity portfolio gross unrealized losses of $219.8 million included 1,315 securities which were, in aggregate, 2.0% below amortized cost.

The gross unrealized losses on equities are less than $1.0 million, including 79 securities which, in aggregate, are below cost by 4.0%.

Given the current facts and circumstances, the Impairment Committee has determined that the securities presented in the above unrealized gain/loss tables were temporarily impaired when evaluated at September 30, 2006 or December 31, 2005, and therefore no related realized losses were recorded. A discussion of some of the factors reviewed in making that determination is presented below by major security type. The Company does not consider the unrealized loss related to any single issuer to be significant.

Asset-Backed Securities

The unrealized losses on the Company's investments in asset-backed securities were caused primarily by a change in interest rates. This category includes mortgage-backed pass-through securities guaranteed by an agency of the U.S. government. There were 426 agency mortgage-backed securities and 2 agency collateralized mortgage obligations (“CMOs”) in an unrealized loss position as of September 30, 2006. The aggregate severity of the unrealized loss on these securities was 4.0% of amortized cost. These securities do not tend to be influenced by the credit of the issuer but rather the characteristics and projected principal payments of the underlying collateral.

The remainder of the holdings in this category are corporate mortgage-backed pass-through, CMOs and corporate asset-backed structured securities. The holdings in these sectors include 412 securities in an unrealized loss position with over 93.0% of these unrealized losses related to securities rated AAA. The aggregate severity of the unrealized loss was 2.0% of amortized cost. The contractual cash flows on the asset-backed structured securities are pass-through but may be structured into classes of preference. The structured securities held are generally secured by over collateralization or default protection provided by subordinated tranches. The Company purchased the majority of those investments at a discount relative to their face amount. Within this category, securities subject to EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” are monitored for adverse changes in cash flow projections. If there are adverse changes in cash flows the amount of accretable yield is prospectively adjusted and an OTTI loss is recognized. There was no adverse change in estimated cash flows noted for the EITF No. 99-20 securities, which have an aggregate unrealized loss of $6.0 million and an aggregate severity of the unrealized loss of 1.0% of amortized cost.

Because the decline in fair value was primarily attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold those investments until an anticipated recovery of fair value, which may be maturity, the Company considers these investments to be temporarily impaired at September 30, 2006.

Corporate Securities

The Company’s portfolio management objective for corporate bonds focuses on sector and issuer exposures and value analysis within sectors. In order to maximize the total return objectives, corporate bonds are analyzed on a risk adjusted basis compared to other opportunities that are available in the market. Trading decisions may be made based on an issuer that may be overvalued in the Company’s portfolio compared to a like issuer that may be undervalued in the market. The Company also monitors issuer exposure and broader industry sector exposures and may reduce exposures based on its current view of a specific issuer or sector.

Of the unrealized losses in this category, 67.0% relate to securities rated as investment grade (rated BBB or higher). The total holdings in this category are diversified across 10 industry sectors and 236 securities. The aggregate severity of the unrealized loss was less than 2.0% of amortized cost. Within corporate bonds, the largest industry sectors were financial, consumer cyclical, consumer non-cyclical and technology, which as a percentage of total gross unrealized losses were 52.0%, 16.0%, 8.0%, and 8.0% at September 30, 2006. The decline in market

value is primarily attributable to changes in interest rates and macro conditions in certain sectors that the market views as temporarily out of favor. Because the decline is not related to specific credit quality issues, and because the Company has the ability and intent to hold those investments until an anticipated recovery of fair value, which may be maturity, the Company considers these investments to be temporarily impaired at September 30, 2006.

Investment Commitments

As of September 30, 2006 and December 31, 2005, the Company had committed approximately $137.0 million and $191.0 million to future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company invests in multiple bank loan participations as part of its overall investment strategy and has committed to additional future purchases and sales. The purchase and sale of these investments are recorded on the date that the legal agreements are finalized and cash settlement is made. As of September 30, 2006 and December 31, 2005, the Company had commitments to purchase $102.1 million and $135.3 million, and sell $43.9 million and $26.3 million of various bank loan participations. When loan participation purchases are settled and recorded they may contain both funded and unfunded amounts. An unfunded loan represents an obligation by the Company to provide additional amounts under the terms of the loan participation. The funded portions are reflected on the Consolidated Condensed Balance Sheets, while any unfunded amounts are not recorded until a draw is made under the loan facility. As of September 30, 2006 and December 31, 2005, the Company had obligations on unfunded bank loan participations in the amount of $34.0 million and $21.0 million.

3. Earnings Per Share

Companies with complex capital structures are required to present basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income attributable to each class of common stock by the weighted average number of common shares of each class of common stock outstanding for the period. Diluted earnings 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.

Certain options and stock appreciation rights were not included in the diluted weighted shares amount due to the exercise price being greater than the average stock price for the respective periods. The number of shares not included in the diluted computations is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005

Loews common stock		2,610		851		76,098		26,952
Carolina Group stock		-		563		17,372		190

The attribution of income to each class of common stock for the three and nine months ended September 30, 2006 and 2005, was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions, except %)

Loews common stock:

Consolidated net income	$	635.1		$	302.2		$	1,744.8		$	1,084.1
Less income attributable to Carolina Group stock		117.9			67.5			279.3			169.7
Income attributable to Loews common stock	$	517.2		$	234.7		$	1,465.5		$	914.4

Carolina Group stock:
Income available to Carolina Group stock	$	202.9		$	172.0		$	540.2		$	432.6
Weighted average economic interest of the Carolina
Group		58.12	%		39.26	%		51.70	%		39.23	%

Income attributable to Carolina Group stock	$	117.9		$	67.5		$	279.3		$	169.7

For the three and nine months ended September 30, 2006 and 2005, net income per common share attributable to Loews common stock and Carolina Group stock assuming dilution is the same as basic net income per share because the impact of securities that could potentially dilute basic net income per common share was insignificant or antidilutive for the periods presented.

4. Loews and Carolina Group Consolidating Condensed Financial Information

The issuance of Carolina Group stock has resulted in a two class common stock structure for the Company. Carolina Group stock, commonly called a tracking stock, is intended to reflect the economic performance of a defined group of assets and liabilities of the Company referred to as the Carolina Group. The principal assets and liabilities attributed to the Carolina Group are the Company’s 100% stock ownership interest in Lorillard, Inc.; notional, intergroup debt owed by the Carolina Group to the Loews Group ($1.4 billion outstanding at September 30, 2006), bearing interest at the annual rate of 8.0% and, subject to optional prepayment, due December 31, 2021; and any and all liabilities, costs and expenses of the Company and Lorillard arising out of or related to tobacco or tobacco-related businesses.

As of September 30, 2006, the outstanding Carolina Group stock represents a 62.3% economic interest in the economic performance of the Carolina Group. The Loews Group consists of all of the Company’s assets and liabilities other than the 62.3% economic interest represented by the outstanding Carolina Group stock, and includes as an asset the notional, intergroup debt of the Carolina Group. Holders of the Company’s common stock and of Carolina Group stock are shareholders of Loews Corporation and are subject to the risks related to an equity investment in Loews Corporation. Each outstanding share of Carolina Group stock has 3/10 of a vote per share.

In August of 2006, May of 2006 and November of 2005, the Company sold an additional 15 million, 15 million and 10 million shares of Carolina Group stock for net proceeds of $876.8 million, $751.5 million and $415.1 million, respectively. Carolina Group stock represents a 58.12%, 39.26%, 51.70% and 39.23% weighted average economic interest in the Carolina Group for the three and nine months ended September 30, 2006 and 2005, respectively.

The Company has separated, for financial reporting purposes, the Carolina Group and Loews Group. The following schedules present the consolidating condensed financial information for these individual groups. Neither group is a separate company or legal entity. Rather, each group is intended to reflect a defined set of assets and liabilities.

Loews and Carolina Group

Consolidating Condensed Balance Sheet Information

Adjustments

Carolina Group

Loews

and

September 30, 2006

Lorillard

Other

Consolidated

Group

Eliminations

Total

(In millions)

Assets:

Investments

1,833.7

101.0

1,934.7

49,549.8

51,484.5

Cash

0.4

0.3

0.7

155.0

155.7

Receivables

20.9

0.4

21.3

14,275.1

(18.4

) (a)

14,278.0

Property, plant and

equipment

199.4

5,080.5

5,279.9

Deferred income taxes

424.4

203.7

628.1

Goodwill and other intangible

assets

298.9

Other assets

384.5

1,523.8

1,908.3

Investment in combined

attributed net assets of the

Carolina Group

1,392.0

(1,353.9

) (a)

(38.1

) (b)

Deferred acquisition costs of

insurance subsidiaries

1,220.4

Separate account business

524.7

Total assets

2,863.3

101.7

2,965.0

74,223.9

(1,410.4

)

75,778.5

Liabilities and Shareholders’ Equity:

Insurance reserves

41,613.0

Payable for securities

purchased

1,200.8

Collateral on loaned securities

2,385.4

Short-term debt

554.5

Long-term debt

1,353.9

5,372.2

(1,353.9

) (a)

5,372.2

Reinsurance balances payable

885.8

Other liabilities

1,497.4

12.5

1,509.9

3,133.8

(18.4

) (a)

4,625.3

Separate account business

524.7

Total liabilities

1,497.4

1,366.4

2,863.8

55,670.2

(1,372.3

)

57,161.7

Minority interest

2,534.3

Shareholders’ equity

1,365.9

(1,264.7

)

101.2

16,019.4

(38.1

) (b)

16,082.5

Total liabilities and

shareholders’ equity

2,863.3

101.7

2,965.0

74,223.9

(1,410.4

)

75,778.5

(a)	To eliminate the intergroup notional debt and interest payable/receivable.
(b)	To eliminate the Loews Group’s 37.7% equity interest in the combined attributed net assets of the Carolina Group.

Loews and Carolina Group

Consolidating Condensed Balance Sheet Information

											Adjustments
	Carolina Group								Loews		and
December 31, 2005	Lorillard		Other			Consolidated			Group		Eliminations			Total
(In millions)

Assets:

Investments	$	1,747.7	$	101.0		$	1,848.7		$	43,547.3				$	45,396.0
Cash		2.4		0.1			2.5			150.6					153.1
Receivables		25.5		0.2			25.7			15,310.0	$	(22.0	) (a)		15,313.7
Property, plant and
equipment		213.9					213.9			4,737.7					4,951.6
Deferred income taxes		428.5					428.5			476.8					905.3
Goodwill and other intangible assets										297.4					297.4
Other assets		377.5					377.5			1,532.1					1,909.6
Investment in combined
attributed net assets of the
Carolina Group										1,516.6		(1,626.9	) (a)
												110.3	(b)
Deferred acquisition costs of
insurance subsidiaries										1,197.4					1,197.4
Separate account business										551.5					551.5
Total assets	$	2,795.5	$	101.3		$	2,896.8		$	69,317.4	$	(1,538.6	)	$	70,675.6

Liabilities and Shareholders’ Equity:

Insurance reserves									$	42,436.2				$	42,436.2
Payable for securities
purchased										401.7					401.7
Collateral on loaned securities										767.4					767.4
Short-term debt										598.2					598.2
Long-term debt			$	1,626.9		$	1,626.9			4,608.6	$	(1,626.9	) (a)		4,608.6
Reinsurance balances payable										1,636.2					1,636.2
Other liabilities	$	1,455.7		14.7			1,470.4			3,076.4		(22.0	) (a)		4,524.8
Separate account business										551.5					551.5
Total liabilities		1,455.7		1,641.6			3,097.3			54,076.2		(1,648.9	)		55,524.6
Minority interest										2,058.9					2,058.9
Shareholders’ equity		1,339.8		(1,540.3	)		(200.5	)		13,182.3		110.3	(b)		13,092.1
Total liabilities and
shareholders’ equity	$	2,795.5	$	101.3		$	2,896.8		$	69,317.4	$	(1,538.6	)	$	70,675.6

(a)	To eliminate the intergroup notional debt and interest payable/receivable.
(b)	To eliminate the Loews Group’s 54.97% equity interest in the combined attributed net assets of the Carolina Group.

Loews and Carolina Group

Consolidating Condensed Statement of Income Information

Adjustments

Three Months Ended

Carolina Group

Loews

and

September 30, 2006

Lorillard

Other

Consolidated

Group

Eliminations

Total

(In millions)

Revenues:

Insurance premiums

1,943.4

Net investment income

27.4

2.2

29.6

693.1

(28.2

) (a)

694.5

Investment gains (losses)

0.1

28.4

28.5

Gain on issuance of subsidiary

stock

9.0

Manufactured products

986.0

49.5

1,035.5

Other

796.3

Total

1,013.5

2.2

1,015.7

3,519.7

(28.2

)

4,507.2

Expenses:

Insurance claims and

policyholders’ benefits

1,521.9

Amortization of deferred

acquisition costs

390.4

Cost of manufactured products

sold

573.7

24.3

598.0

Other operating expenses

83.5

0.1

83.6

719.2

802.8

Restructuring and other related

charges

Interest

0.1

28.2

28.3

78.6

(28.2

) (a)

78.7

Total

657.3

28.3

685.6

2,734.4

(28.2

)

3,391.8

356.2

(26.1

)

330.1

785.3

1,115.4

Income tax expense (benefit)

137.3

(10.1

)

127.2

236.4

363.6

Minority interest

122.4

Total

137.3

(10.1

)

127.2

358.8

486.0

Income (loss) from operations

218.9

(16.0

)

202.9

426.5

629.4

Equity in earnings of the

Carolina Group

85.0

(85.0

) (b)

Income (loss) from continuing

operations

218.9

(16.0

)

202.9

511.5

(85.0

)

629.4

Discontinued operations, net

5.7

Net income (loss)

218.9

(16.0

)

202.9

517.2

(85.0

)

635.1

(a)	To eliminate interest on the intergroup notional debt.
(b)	To eliminate the Loews Group’s intergroup interest in the earnings of the Carolina Group.

Loews and Carolina Group

Consolidating Condensed Statement of Income Information

										Adjustments
Three Months Ended	Carolina Group							Loews		and
September 30, 2005	Lorillard		Other			Consolidated		Group		Eliminations			Total
(In millions)

Revenues:

Insurance premiums								$	1,873.5				$	1,873.5
Net investment income	$	18.9	$	1.6		$	20.5		622.3	$	(34.8	) (a)		608.0
Investment gains (losses)									60.0					60.0
Manufactured products		928.4					928.4		39.9					968.3
Other									628.1					628.1
Total		947.3		1.6			948.9		3,223.8		(34.8	)		4,137.9

Expenses:

Insurance claims and
policyholders’ benefits									1,871.4					1,871.4
Amortization of deferred
acquisition costs									415.5					415.5
Cost of manufactured products
sold		543.9					543.9		18.7					562.6
Other operating expenses		95.3					95.3		668.0					763.3
Interest				34.8			34.8		73.9		(34.8	) (a)		73.9
Total		639.2		34.8			674.0		3,047.5		(34.8	)		3,686.7

		308.1		(33.2	)		274.9		176.3		-			451.2

Income tax expense (benefit)		115.2		(12.3	)		102.9		1.7					104.6
Minority interest									46.6					46.6
Total		115.2		(12.3	)		102.9		48.3		-			151.2

Income (loss) from operations		192.9		(20.9	)		172.0		128.0		-			300.0
Equity in earnings of the
Carolina Group									104.5		(104.5	) (b)
Income (loss) from continuing
operations		192.9		(20.9	)		172.0		232.5		(104.5	)		300.0
Discontinued operations, net									2.2					2.2
Net income (loss)	$	192.9	$	(20.9	)	$	172.0	$	234.7	$	(104.5	)	$	302.2

(a)	To eliminate interest on the intergroup notional debt.
(b)	To eliminate the Loews Group’s intergroup interest in the earnings of the Carolina Group.

Loews and Carolina Group

Consolidating Condensed Statement of Income Information

Adjustments

Nine Months Ended

Carolina Group

Loews

and

September 30, 2006

Lorillard

Other

Consolidated

Group

Eliminations

Total

(In millions)

Revenues:

Insurance premiums

5,704.0

Net investment income

71.6

5.8

77.4

2,051.6

(89.5

) (a)

2,039.5

Investment gains (losses)

(0.5

)

(0.5

)

(62.3

)

(62.8

)

Gain on issuance of subsidiary

stock

9.0

Manufactured products

2,818.1

136.5

2,954.6

Other

0.1

2,384.6

2,384.7

Total

2,889.3

5.8

2,895.1

10,223.4

(89.5

)

13,029.0

Expenses:

Insurance claims and

policyholders’ benefits

4,446.1

Amortization of deferred

acquisition costs

1,132.4

Cost of manufactured product

sold

1,638.0

68.0

1,706.0

Other operating expenses

285.2

0.2

285.4

2,125.2

2,410.6

Restructuring and other related

charges

(12.9

)

(12.9

)

Interest

0.1

89.5

89.6

223.9

(89.5

) (a)

224.0

Total

1,923.3

89.7

2,013.0

7,982.7

(89.5

)

9,906.2

966.0

(83.9

)

882.1

2,240.7

3,122.8

Income tax expense (benefit)

374.5

(32.6

)

341.9

693.1

1,035.0

Minority interest

341.3

Total

374.5

(32.6

)

341.9

1,034.4

1,376.3

Income (loss) from operations

591.5

(51.3

)

540.2

1,206.3

1,746.5

Equity in earnings of the

Carolina Group

260.9

(260.9

) (b)

Income (loss) from continuing

operations

591.5

(51.3

)

540.2

1,467.2

(260.9

)

1,746.5

Discontinued operations, net

(1.7

)

(1.7

)

Net income (loss)

591.5

(51.3

)

540.2

1,465.5

(260.9

)

1,744.8

(a)	To eliminate interest on the intergroup notional debt.
(b)	To eliminate the Loews Group’s intergroup interest in the earnings of the Carolina Group.

Loews and Carolina Group

Consolidating Condensed Statement of Income Information

												Adjustments
Nine Months Ended	Carolina Group									Loews		and
September 30, 2005	Lorillard			Other			Consolidated			Group		Eliminations			Total
(In millions)

Revenues:

Insurance premiums										$	5,684.3				$	5,684.3
Net investment income	$	43.4		$	3.5		$	46.9			1,528.6	$	(107.0	) (a)		1,468.5
Investment gains (losses)		(2.0	)					(2.0	)		71.7					69.7
Manufactured products		2,651.8						2,651.8			119.4					2,771.2
Other		6.1						6.1			1,910.0					1,916.1
Total		2,699.3			3.5			2,702.8			9,314.0		(107.0	)		11,909.8

Expenses:

Insurance claims and
policyholders’ benefits											4,886.4					4,886.4
Amortization of deferred
acquisition costs											1,167.6					1,167.6
Cost of manufactured products
sold		1,605.0						1,605.0			57.4					1,662.4
Other operating expenses		282.3			0.2			282.5			1,979.6					2,262.1
Interest					107.0			107.0			289.5		(107.0	) (a)		289.5
Total		1,887.3			107.2			1,994.5			8,380.5		(107.0	)		10,268.0

		812.0			(103.7	)		708.3			933.5		-			1,641.8

Income tax expense (benefit)		316.1			(40.4	)		275.7			170.9					446.6
Minority interest											121.7					121.7
Total		316.1			(40.4	)		275.7			292.6		-			568.3

Income (loss) from operations		495.9			(63.3	)		432.6			640.9		-			1,073.5
Equity in earnings of the
Carolina Group											262.9		(262.9	) (b)
Income (loss) from continuing
operations		495.9			(63.3	)		432.6			903.8		(262.9	)		1,073.5
Discontinued operations, net											10.6					10.6
Net income (loss)	$	495.9		$	(63.3	)	$	432.6		$	914.4	$	(262.9	)	$	1,084.1

(a)	To eliminate interest on the intergroup notional debt.
(b)	To eliminate the Loews Group’s intergroup interest in the earnings of the Carolina Group.

Loews and Carolina Group

Consolidating Condensed Statement of Cash Flows Information

Adjustments

Nine Months Ended

Carolina Group

Loews

and

September 30, 2006

Lorillard

Other

Consolidated

Group

Eliminations

Total

(In millions)

Net cash (used) provided by

operating activities

635.1

(53.7

)

581.4

1,212.0

(109.8

)

1,683.6

Investing activities:

Purchases of property and

equipment

(22.3

)

(22.3

)

(593.6

)

(615.9

)

Change in short-term

investments

137.6

(5,665.4

)

(5,527.8

)

Other investing activities

(189.4

)

(189.4

)

3,432.5

(273.0

)

2,970.1

(74.1

)

(74.1

)

(2,826.5

)

(273.0

)

(3,173.6

)

Financing activities:

Dividends paid

(564.0

)

326.9

(237.1

)

(97.1

)

109.8

(224.4

)

Reduction of intergroup

notional debt

(273.0

)

(273.0

)

273.0

Excess tax benefits from

share based compensation

1.0

3.9

4.9

Other financing activities

1,720.8

(563.0

)

53.9

(509.1

)

1,627.6

382.8

1,501.3

Net change in cash

(2.0

)

0.2

(1.8

)

13.1

11.3

Net cash transactions from:

Continuing operations to

discontinued operations

15.3

Discontinued operations to

continuing operations

(15.3

)

(15.3

)

Cash, beginning of period

2.4

0.1

2.5

179.5

182.0

Cash, end of period

0.4

0.3

0.7

192.6

193.3

Loews and Carolina Group

Consolidating Condensed Statement of Cash Flows Information

													Adjustments
Nine Months Ended	Carolina Group									Loews			and
September 30, 2005	Lorillard			Other			Consolidated			Group			Eliminations			Total
(In millions)

Net cash (used) provided by
operating activities	$	670.8		$	(64.2	)	$	606.6		$	1,762.6		$	(144.0	)	$	2,225.2

Investing activities:

Purchases of property and
equipment		(28.6	)					(28.6	)		(288.5	)					(317.1	)
Change in short-term investments		(162.6	)		(1.0	)		(163.6	)		(1,006.6	)					(1,170.2	)
Other investing activities											1,534.4			(161.4	)		1,373.0
		(191.2	)		(1.0	)		(192.2	)		239.3			(161.4	)		(114.3	)

Financing activities:

Dividends paid		(463.0	)		226.1			(236.9	)		(83.6	)		144.0			(176.5	)
Reduction of intergroup notional
debt					(161.4	)		(161.4	)					161.4
Other financing activities											(1,946.0	)					(1,946.0	)
		(463.0	)		64.7			(398.3	)		(2,029.6	)		305.4			(2,122.5	)
Net change in cash		16.6			(0.5	)		16.1			(27.7	)		-			(11.6	)
Net cash transactions from:
Continuing operations to
discontinued operations											(33.4	)					(33.4	)
Discontinued operations to
continuing operations											33.4						33.4
Cash, beginning of period		35.5			0.5			36.0			198.0						234.0
Cash, end of period	$	52.1		$	-		$	52.1		$	170.3		$	-		$	222.4

5. Reinsurance

CNA cedes insurance to reinsurers to limit its maximum loss, provide greater diversification of risk, minimize exposures on larger risks and to exit certain lines of business. The ceding of insurance does not discharge the primary liability of CNA. Therefore, a credit exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet their obligations or to the extent that the reinsurer disputes the liabilities assumed under reinsurance agreements. Property and casualty reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA’s retained amount varies by type of coverage. Reinsurance contracts are purchased to protect specific lines of business such as property, workers’ compensation and professional liability. Corporate catastrophe reinsurance is also purchased for property and workers’ compensation exposure. Most reinsurance contracts are purchased on an excess of loss basis. CNA also utilizes facultative reinsurance in certain lines. In addition, CNA assumes reinsurance as a member of various reinsurance pools and associations.

The following table summarizes the amounts receivable from reinsurers at September 30, 2006 and December 31, 2005.

	September 30,		December 31,
	2006		2005
(In millions)

Reinsurance receivables related to insurance reserves:
Ceded claim and claim adjustment expense	$	9,090.9	$	10,605.2
Ceded future policy benefits		1,070.1		1,192.9
Ceded policyholders’ funds		53.5		56.3
Billed reinsurance receivables		688.3		582.3
Reinsurance receivables		10,902.8		12,436.7
Less allowance for uncollectible reinsurance		535.2		519.3
Reinsurance receivables-net	$	10,367.6	$	11,917.4

CNA attempts to mitigate its credit risk related to reinsurance by entering into reinsurance arrangements with reinsurers that have credit ratings above certain levels and by obtaining substantial amounts of collateral. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances. On a more limited basis, CNA may enter into reinsurance agreements with reinsurers that are not rated.

In 2001, CNA entered into a one-year corporate aggregate reinsurance treaty related to the 2001 accident year covering substantially all property and casualty lines of business in the Continental Casualty Company pool (the “CCC Cover”). The CCC Cover was fully utilized in 2003 and interest charges accrued on the related funds held balance at 8.0% per annum. Effective July 25, 2006, CNA commuted the CCC Cover resulting in a reduction of Reinsurance Receivables of approximately $761.0 million and a corresponding reduction of $761.0 million in the funds withheld liability, which was included in Reinsurance Balances Payable on the Consolidated Condensed Balance Sheet. This commutation had no impact on the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2006.

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

	Direct		Assumed		Ceded		Net
(In millions)

Three Months Ended September 30, 2006

Property and casualty	$	2,342.0	$	19.0	$	577.0	$	1,784.0
Accident and health		186.0		15.0		42.0		159.0
Life		18.0				18.0
Total	$	2,546.0	$	34.0	$	637.0	$	1,943.0

Three Months Ended September 30, 2005

Property and casualty	$	2,548.0	$	13.0	$	856.0	$	1,705.0
Accident and health		246.0		18.0		96.0		168.0
Life		27.0				26.0		1.0
Total	$	2,821.0	$	31.0	$	978.0	$	1,874.0

Nine Months Ended September 30, 2006

Property and casualty	$	6,795.0	$	47.0	$	1,620.0	$	5,222.0
Accident and health		550.0		44.0		114.0		480.0
Life		76.0				74.0		2.0
Total	$	7,421.0	$	91.0	$	1,808.0	$	5,704.0

Nine Months Ended September 30, 2005

Property and casualty	$	7,600.0	$	72.0	$	2,526.0	$	5,146.0
Accident and health		805.0		42.0		311.0		536.0
Life		109.0				107.0		2.0
Total	$	8,514.0	$	114.0	$	2,944.0	$	5,684.0

Included in the direct and ceded earned premiums for the three months ended September 30, 2006 and 2005 are $376.0 million and $699.0 million, and for the nine months ended September 30, 2006 and 2005 are $1,087.0 million and $2,299.0 million, related to business that is 100% reinsured as a result of business dispositions and a significant captive program.

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

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

Reinsurance contracts that do not effectively transfer the underlying economic risk of loss on policies written by CNA 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. CNA primarily records these deposits as either Reinsurance Receivables or Other Assets for ceded recoverables and Reinsurance Balances Payable or Other Liabilities for assumed liabilities.

Funds Withheld Reinsurance Arrangements

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

Interest cost on reinsurance contracts accounted for on a funds withheld basis is incurred during all periods in which a funds withheld liability exists, and is included in net investment income. The amount subject to interest crediting rates on such contracts was $320.0 million and $1,050.0 million at September 30, 2006 and December 31, 2005. The decrease is due to the commutation of the CCC Cover discussed above. Certain funds withheld reinsurance contracts require interest on additional premiums arising from ceded losses as if those premiums were payable at the inception of the contract. The amount subject to interest crediting on these funds withheld contracts will vary over time based on a number of factors, including the timing of loss payments and ultimate gross losses incurred. CNA expects that it will continue to incur interest costs on these contracts for several years.

As of September 30, 2006 and December 31, 2005, there were 12 and 13 ceded reinsurance treaties inforce that CNA considers to be finite reinsurance. These treaties provide reinsurance protection for individual accident years 1999 through 2002 on specified portions of CNA’s domestic property and casualty business. All of these contracts are accounted for on a funds withheld basis. In 2003, CNA discontinued purchases of such contracts. The following table summarizes the pretax impact of these contracts, including the commuted CCC Cover discussed in further detail above. Effective October 1, 2005, the Aggregate Cover, which was a corporate aggregate reinsurance treaty related to the 1999 through 2001 accident years and covered substantially all of CNA’s property and casualty lines of business, was commuted.

Three Months Ended September 30, 2006	Aggregate Cover			CCC Cover			All Other			Total
(In millions)

Ceded earned premium
Ceded claim and claim adjustment expense
Ceding commissions
Interest charges				$	(5.0	)	$	(4.0	)	$	(9.0	)
Pretax expense	$	-		$	(5.0	)	$	(4.0	)	$	(9.0	)

Three Months Ended September 30, 2005

Ceded earned premium	$	1.0					$	(9.0	)	$	(8.0	)
Ceded claim and claim adjustment expense								15.0			15.0
Ceding commissions								3.0			3.0
Interest charges		(15.0	)	$	(17.0	)		(16.0	)		(48.0	)
Pretax expense	$	(14.0	)	$	(17.0	)	$	(7.0	)	$	(38.0	)

Nine Months Ended September 30, 2006	Aggregate Cover			CCC Cover			All Other			Total
(In millions)

Ceded earned premium							$	(12.0	)	$	(12.0	)
Ceded claim and claim adjustment expense								17.0			17.0
Ceding commissions
Interest charges				$	(40.0	)		(20.0	)		(60.0	)
Pretax expense	$	-		$	(40.0	)	$	(15.0	)	$	(55.0	)

Nine Months Ended September 30, 2005

Ceded earned premium	$	(17.0	)				$	56.0		$	39.0
Ceded claim and claim adjustment expense								(52.0	)		(52.0	)
Ceding commissions								(27.0	)		(27.0	)
Interest charges		(57.0	)	$	(49.0	)		(26.0	)		(132.0	)
Pretax expense	$	(74.0	)	$	(49.0	)	$	(49.0	)	$	(172.0	)

Included in “All Other” above for the nine months ended September 30, 2005 is approximately $24.0 million of pretax expense related to Standard Lines which resulted from an unfavorable arbitration ruling on two reinsurance treaties impacting ceded earned premiums, ceded claim and claim adjustment expenses, ceding commissions and interest charges. This unfavorable outcome was partially offset by a release of previously established reinsurance bad debt reserves resulting in a net impact from the arbitration ruling of $10.0 million pretax expense for the nine months ended September 30, 2005.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Standard Lines	$	(7.0	)	$	(24.0	)	$	(31.0	)	$	(120.0	)
Specialty Lines					(3.0	)		(4.0	)		(10.0	)
Other Insurance		(2.0	)		(11.0	)		(20.0	)		(42.0	)
Pretax expense	$	(9.0	)	$	(38.0	)	$	(55.0	)	$	(172.0	)

6. Receivables

	September 30,		December 31,
	2006		2005
(In millions)

Reinsurance	$	10,902.8	$	12,436.7
Other insurance		2,292.1		2,310.6
Security sales		1,060.6		604.9
Accrued investment income		342.0		322.2
Other		655.7		612.6
Total		15,253.2		16,287.0
Less: allowance for doubtful accounts on reinsurance receivables		535.2		519.3
allowance for other doubtful accounts and cash discounts		440.0		454.0
Receivables	$	14,278.0	$	15,313.7

7. Claim and Claim Adjustment Expense Reserves

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

Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined.

Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company’s results of operations and/or equity. The level of catastrophe losses experienced in any period cannot be predicted and can be material to the results of operations and/or equity of the Company. Catastrophe losses, net of reinsurance, were $22.0 million and $437.0 million for the three months ended September 30, 2006 and 2005, and $40.0 million and $443.0 million for the nine months ended September 30, 2006 and 2005. The catastrophe losses in 2005 related primarily to Hurricanes Katrina, Dennis, Ophelia and Rita. There can be no assurance that CNA’s ultimate cost for catastrophes will not exceed estimates.

Commercial catastrophe losses, gross of reinsurance, were $22.0 million and $797.0 million for the three months ended September 30, 2006 and 2005, and $40.0 million and $803.0 million for the nine months ended September 30, 2006 and 2005.

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

The following tables summarize the gross and net carried reserves as of September 30, 2006 and December 31, 2005.

September 30, 2006

Standard

Lines

Specialty

Lines

Life and

Group

Non-Core

Other

Insurance

Total

(In millions)

Gross Case Reserves

6,843.0

1,724.0

2,443.0

2,766.0

13,776.0

Gross IBNR Reserves

7,979.0

3,783.0

826.0

3,777.0

16,365.0

Total Gross Carried Claim and Claim

Adjustment Expense Reserves

14,822.0

5,507.0

3,269.0

6,543.0

30,141.0

Net Case Reserves

5,117.0

1,352.0

1,483.0

1,390.0

9,342.0

Net IBNR Reserves

6,484.0

2,813.0

388.0

2,023.0

11,708.0

Total Net Carried Claim and Claim

Adjustment Expense Reserves

11,601.0

4,165.0

1,871.0

3,413.0

21,050.0

December 31, 2005	Standard Lines		Specialty Lines		Life and Group Non-Core		Other Insurance		Total
(In millions)

Gross Case Reserves	$	7,033.0	$	1,907.0	$	2,542.0	$	3,297.0	$	14,779.0
Gross IBNR Reserves		8,051.0		3,298.0		735.0		4,075.0		16,159.0
Total Gross Carried Claim and Claim
Adjustment Expense Reserves	$	15,084.0	$	5,205.0	$	3,277.0	$	7,372.0	$	30,938.0

Net Case Reserves	$	5,165.0	$	1,442.0	$	1,456.0	$	1,554.0	$	9,617.0
Net IBNR Reserves		6,081.0		2,352.0		381.0		1,902.0		10,716.0
Total Net Carried Claim and Claim
Adjustment Expense Reserves	$	11,246.0	$	3,794.0	$	1,837.0	$	3,456.0	$	20,333.0

The following provides discussion of CNA’s asbestos, environmental pollution and mass tort (“APMT”) and core reserves.

APMT Reserves

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

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

In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others: the number and outcome of direct actions against CNA; 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 federal legislation to address asbestos claims; an increase in asbestos, environmental pollution and mass tort claims which cannot now be anticipated; an increase in costs to defend asbestos, pollution and mass tort claims; expanding liability against CNA’s policyholders in environmental and mass tort matters; broadened scope of clean-up resulting in increased liability to CNA’s policyholders; a further increase of claims and claims payments that may exhaust underlying umbrella and excess coverage at accelerated rates; and future developments pertaining to CNA’s ability to recover reinsurance for asbestos, pollution and mass tort claims.

CNA has annually performed ground up reviews of all open APMT claims to evaluate the adequacy of CNA’s APMT reserves. In performing its comprehensive ground up analysis, CNA considers input from its professionals with direct responsibility for the claims, inside and outside counsel with responsibility for representation of CNA and its actuarial staff. These professionals review, among many factors, the policyholder’s present and predicted future exposures, including such factors as claims volume, trial conditions, prior settlement history, settlement demands and defense costs; the impact of asbestos defendant bankruptcies on the policyholder; the policies issued by CNA, including such factors as aggregate or per occurrence limits, whether the policy is primary, umbrella or excess, and the existence of policyholder retentions and/or deductibles; the existence of other insurance; and reinsurance arrangements.

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

	September 30, 2006						December 31, 2005
	Asbestos			Environmental Pollution and Mass Tort			Asbestos			Environmental Pollution and Mass Tort
(In millions)

Gross reserves	$	2,735.0		$	585.0		$	2,992.0		$	680.0
Ceded reserves		(1,255.0	)		(220.0	)		(1,438.0	)		(257.0	)
Net reserves	$	1,480.0		$	365.0		$	1,554.0		$	423.0

Asbestos

CNA’s property and casualty insurance subsidiaries have exposure to asbestos-related claims. Estimation of asbestos-related claim and claim adjustment expense reserves involves limitations such as inconsistency of court decisions, specific policy provisions, allocation of liability among insurers and insureds, and additional factors such as missing policies and proof of coverage. Furthermore, estimation of asbestos-related claims is difficult due to, among other reasons, the proliferation of bankruptcy proceedings and attendant uncertainties, the targeting of a broader range of businesses and entities as defendants, the uncertainty as to which other insureds may be targeted in the future and the uncertainties inherent in predicting the number of future claims.

As of September 30, 2006 and December 31, 2005, CNA carried approximately $1,480.0 million and $1,554.0 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported asbestos-related claims. CNA recorded $1.0 million of unfavorable asbestos-related net claim and claim adjustment expense reserve development for each of the three months ended September 30, 2006 and 2005. CNA paid asbestos-related claims, net of reinsurance recoveries, of $26.0 million and $42.0 million for the three months ended September 30, 2006 and 2005. CNA recorded $2.0 million and $8.0 million of unfavorable asbestos-related net claim and claim adjustment expense reserve development for the nine months ended September 30, 2006 and 2005. CNA paid asbestos-related claims, net of reinsurance recoveries, of $76.0 million and $115.0 million for the nine months ended September 30, 2006 and 2005.

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

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

On February 13, 2003, CNA announced it had resolved asbestos related coverage litigation and claims involving A.P. Green Industries, A.P. Green Services and Bigelow - Liptak Corporation. Under the agreement, CNA is required to pay $74.0 million, net of reinsurance recoveries, over a ten year period commencing after the final approval of a bankruptcy plan of reorganization. The settlement resolves CNA’s liabilities for all pending and future asbestos and silica claims involving A.P. Green Industries, Bigelow - Liptak Corporation and related subsidiaries, including alleged “non-products” exposures. The settlement received initial bankruptcy court approval on August 18, 2003 and the court is scheduled to consider confirmation of a bankruptcy plan containing an injunction to protect CNA from any future claims by the end of 2006.

CNA is engaged in insurance coverage litigation in New York State Court, filed in 2003, with a defendant class of underlying plaintiffs who have asbestos bodily injury claims against the former Robert A. Keasbey Company (“Keasbey”) (Continental Casualty Co. v. Employers Ins. of Wausau et al., No. 601037/03 (N.Y. County)). Keasbey, a currently dissolved corporation, was a seller and installer of asbestos-containing insulation products in New York and New Jersey. Thousands of plaintiffs have filed bodily injury claims against Keasbey; however, Keasbey’s involvement at a number of work sites is a highly contested issue. Therefore, the defense disputes the percentage of valid claims against Keasbey. CNA issued Keasbey primary policies for 1970-1987 and excess policies for 1972-1978. CNA has paid an amount substantially equal to the policies’ aggregate limits for products and completed operations claims in the confirmed CNA policies. Claimants against Keasbey allege, among other things, that CNA owes coverage under sections of the policies not subject to the aggregate limits, an allegation CNA vigorously

contests in the lawsuit. In the litigation, CNA and the claimants seek declaratory relief as to the interpretation of various policy provisions. The court dismissed a claim alleging bad faith and seeking unspecified damages on March 21, 2004; that ruling was affirmed on March 31, 2005 by Appellate Division, First Department. The trial in the Keasbey coverage action commenced on July 13, 2005; closing arguments concluded on October 28, 2005. The Court reopened the record in January 2006 for additional evidentiary submissions and briefing, and additional closing arguments were held March 27, 2006. It is unclear when CNA will have a decision from the trial court. With respect to this litigation in particular, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether CNA has any further responsibility to compensate claimants against Keasbey under its policies and, if so, under which policies; (b) whether CNA’s responsibilities extend to a particular claimant’s entire claim or only to a limited percentage of the claim; (c) whether CNA’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions in some of the policies apply to exclude certain claims; (e) the extent to which claimants can establish exposures to asbestos materials as to which Keasbey has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Keasbey and whether such theories can, in fact, be established; (g) the diseases and damages alleged by such claimants; and (h) the extent that such liability would be shared with other responsible parties. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

CNA has insurance coverage disputes related to asbestos bodily injury claims against a bankrupt insured, Burns & Roe Enterprises, Inc. (“Burns & Roe”). These disputes are currently part of coverage litigation (stayed in view of the bankruptcy) and an adversary proceeding in In re: Burns & Roe Enterprises, Inc., pending in the U.S. Bankruptcy Court for the District of New Jersey, No. 00-41610. Burns & Roe provided engineering and related services in connection with construction projects. At the time of its bankruptcy filing, on December 4, 2000, Burns & Roe asserted that it faced approximately 11,000 claims alleging bodily injury resulting from exposure to asbestos as a result of construction projects in which Burns & Roe was involved. CNA allegedly provided primary liability coverage to Burns & Roe from 1956-1969 and 1971-1974, along with certain project-specific policies from 1964-1970. The litigation involves disputes over the confirmation of the Plan of Reorganization in bankruptcy, the scope and extent of coverage, if any, afforded to Burns & Roe for its asbestos liabilities. On December 5, 2005, Burns & Roe filed its Third Amended Plan of Reorganization (“Plan”). A confirmation hearing relating to that Plan is anticipated in 2007. Coverage issues will be determined in a later proceeding. With respect to both confirmation of the Plan and coverage issues, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors include, among others: (a) whether CNA has any further responsibility to compensate claimants against Burns & Roe under its policies and, if so, under which; (b) whether CNA’s responsibilities under its policies extend to a particular claimant’s entire claim or only to a limited percentage of the claim; (c) whether CNA’s responsibilities under its policies are limited by the occurrence limits or other provisions of the policies; (d) whether certain exclusions, including professional liability exclusions, in some of CNA’s policies apply to exclude certain claims; (e) the extent to which claimants can establish exposure to asbestos materials as to which Burns & Roe has any responsibility; (f) the legal theories which must be pursued by such claimants to establish the liability of Burns & Roe and whether such theories can, in fact, be established; (g) the diseases and damages alleged by such claimants; (h) the extent that any liability of Burns & Roe would be shared with other potentially responsible parties; and (i) the impact of bankruptcy proceedings on claims and coverage issue resolution. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

Suits have also been initiated directly against two CNA companies and numerous other insurers in four jurisdictions: Ohio, Texas, West Virginia and Montana. In the approximately 70 Ohio actions filed to date, plaintiffs initially alleged that the defendants negligently performed duties undertaken to protect workers and the public from the effects of asbestos, spoliated evidence and conspired and acted in concert to harm the plaintiffs. (E.g. Varner v. Ford Motor Co., (Ohio Ct. Common Pl., filed June 12, 2003); Peplowski v. ACE American Ins. Co., (N.D. Ohio, filed April 1, 2004) and Cross v. Garlock, Inc. (Ohio Ct. Common Pl., filed September 1, 2004)). In the most recent of these cases, plaintiffs have made only negligent undertaking claims against the insurers. (E.g., Ball v. Goodyear Tire & Rubber Co. (Ohio Ct. Common Pl., filed May 16, 2005)). The Cuyahoga County court granted insurers, including CNA, dismissals against an initial group of plaintiffs, ruling that insurers had no duty to warn plaintiffs about the dangers of asbestos and that there was no basis for spoliation, conspiracy and concert of action claims. That ruling was affirmed on appeal. Bugg v. Am. Std., Inc., No. 84829 (Ohio Ct. App. May 26, 2005). The Cuyahoga County court has continued to dismiss substantially similar types of complaints and plaintiffs have either failed to appeal the dismissals or have voluntarily dismissed their appeals. Nonetheless, plaintiffs continued to file additional similar suits, although at this point, all cases in that court have been dismissed. The only case that remains pending at this time is Peplowski, which was transferred to the federal Multi-District Litigation court in October 2004 and has been dormant since then. With respect to this litigation, numerous factual and legal issues remain to be resolved that are critical to the final result, the outcome of which cannot be predicted with any reliability. These factors

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

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

CCC was named in Adams v. Aetna, Inc., et al. (Circuit Court of Kanawha County, West Virginia, Nos, 0-2C-1708 to -1719, filed June 28, 2002), a purported class action against CCC and other insurers, alleging that the defendants violated West Virginia’s Unfair Trade Practices Act (“UTPA”) in handling and resolving asbestos claims against five specifically named asbestos defendants. The Adams litigation had been stayed pending a planned motion by plaintiffs to file an amended complaint that reflected two June 2004 decisions of the West Virginia Supreme Court of Appeals. In June 2005, the court presiding over Adams and three similar putative class actions against other insurers, on its own motion, directed plaintiffs to file any amended complaints by June 13, 2005, and directed the parties to agree upon a case management order that would result in trial being commenced by July 2006. Plaintiffs’ Amended Complaint greatly expands the scope of the action against the insurers, including CCC. Under the Amended Complaint, the defendant insurers, including CCC, have now been sued for alleged violations of the UTPA in connection with handling and resolving asbestos personal injury and wrongful death claims in West Virginia courts against all their insureds if those claims were resolved before June 30, 2001. CCC, along with other insurer defendants removed the Adams case to Federal court, Adams v. Ins. Co. of North America (“INA”) et al. (S.D. W. Va. No. 2:05-CV-0527). A motion by plaintiffs to remand the case to state courts was granted on March 30, 2006. Following remand to state court, CCC’s motion to dismiss the Amended Complaint was denied as to living plaintiffs, but granted as to claims brought by two estates, and CCC subsequently answered the Amended Complaint, as it had been narrowed by the plaintiffs in the interim. As narrowed, the Amended Complaint continues to seek compensatory damages for the alleged delay in resolving plaintiffs’ underlying asbestos claims and for aggravation allegedly caused by that delay and punitive damages, but no longer seeks damages for the difference between the amount plaintiffs received in their underlying asbestos settlement and what they claim they should have received, damages for increased attorneys’ fees and litigation expenses, and damages for loss by spouses of consortium. The trial court has stated that it intends for trial in the case to commence in July 2007. On September 18, 2006, CCC reached a settlement with plaintiffs conditioned upon court approval, and completion of satisfactory documentation, among other conditions. In the event the settlement is not consummated, numerous factual and legal issues would determine the final result in Adams, the outcome of which cannot be predicted with any reliability. These issues include: (a) the legal sufficiency and factual validity of the novel statutory claims pled by the claimants; (b) the applicability of claimants’ legal theories to insurers who issued excess policies and/or

neither defended nor controlled the defense of certain policyholders; (c) the possibility that certain of the claims are barred by various Statutes of Limitation; (d) the fact that the imposition of duties would interfere with the attorney-client privilege and the contractual rights and responsibilities of the parties to CNA’s insurance policies; (e) whether plaintiffs’ claims are barred in whole or in part by injunctions that have been issued by bankruptcy courts that are overseeing, or that have overseen, the bankruptcies of various insureds; (f) whether some or all of the named plaintiffs or members of the plaintiff class have released CCC from the claims alleged in the Amended Complaint when they resolved their underlying asbestos claims; (g) the appropriateness of the case for class action treatment; and (h) the potential and relative magnitude of liabilities of co-defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time.

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

CNA is vigorously defending these and other cases and believes that it has meritorious defenses to the claims asserted. However, there are numerous factual and legal issues to be resolved in connection with these claims, and it is extremely difficult to predict the outcome or ultimate financial exposure represented by these matters. Adverse developments with respect to any of these matters could have a material adverse effect on CNA’s business and insurer financial strength and debt ratings and the Company’s results of operations and/or equity.

Environmental Pollution and Mass Tort

As of September 30, 2006 and December 31, 2005, CNA carried approximately $365.0 million and $423.0 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and mass tort claims. There was no environmental pollution and mass tort net claim and claim adjustment expense reserve development recorded for the nine months ended September 30, 2006. There was $3.0 million of unfavorable environmental pollution and mass tort net claim and claim adjustment expense reserve development recorded for the nine months ended September 30, 2005. CNA recorded $30.0 million and $15.0 million of current accident year losses related to mass tort for the nine months ended September 30, 2006 and 2005. CNA paid environmental pollution-related claims and mass tort-related claims, net of reinsurance recoveries, of $88.0 million and $113.0 million for the nine months ended September 30, 2006 and 2005.

Net Prior Year Development

Favorable net prior year development of $1.0 million was recorded for the three months ended September 30, 2006, including $16.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $17.0 million of favorable premium development. Unfavorable net prior year development of $56.0 million, including $49.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $7.0 million of unfavorable premium development, was recorded for the three months ended September 30, 2005.

Unfavorable net prior year development of $1.0 million was recorded for the nine months ended September 30, 2006, including $96.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $95.0 million of favorable premium development. Unfavorable net prior year development of $216.0 million, including $344.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $128.0 million of favorable premium development, was recorded for the nine months ended September 30, 2005.

The development discussed below includes premium development due to its direct relationship to claim and claim adjustment expense reserve development. The development discussed below excludes the impact of the provision for uncollectible reinsurance. See Note 5 for further discussion of the provision for uncollectible reinsurance.

In 2005, CNA recorded favorable or unfavorable premium and claim and claim adjustment expense reserve development related to the corporate aggregate reinsurance treaties as movements in the claim and allocated claim adjustment expense reserves for the accident years covered by the corporate aggregate reinsurance treaties indicate such development was required. While the available limit of these treaties was fully utilized in 2003, the ceded premiums and losses for an individual segment may have changed in subsequent years because of the re-estimation of the subject losses or commutations of the underlying contracts. In 2005, CNA commuted a significant corporate aggregate reinsurance treaty and in the third quarter of 2006, CNA commuted its remaining corporate aggregate reinsurance treaty. See Note 5 for further discussion of the corporate aggregate reinsurance treaties.

The following discussion includes the net prior year development recorded for Standard Lines, Specialty Lines and Other Insurance. Unfavorable net prior year development of $10.0 million and $31.0 million was recorded in the Life and Group Non-Core segment for the three months ended September 30, 2006 and 2005. Unfavorable net prior year development of $8.0 million and favorable net prior year development of $11.0 million was recorded in the Life and Group Non-Core segment for the nine months ended September 30, 2006 and 2005.

	Standard			Specialty			Other
Three Months Ended September 30, 2006	Lines			Lines			Insurance			Total
(In millions)

Pretax unfavorable (favorable) net prior year claim
and allocated claim adjustment expense
development:
Core (Non-APMT)	$	6.0		$	(4.0	)	$	2.0		$	4.0
APMT								1.0			1.0
Pretax unfavorable (favorable) net prior year
development before impact of premium
development		6.0			(4.0	)		3.0			5.0
Unfavorable (favorable) premium development		(19.0	)		6.0			(3.0	)		(16.0	)
Total unfavorable (favorable) net prior year
development (pretax)	$	(13.0	)	$	2.0		$	-		$	(11.0	)

Three Months Ended September 30, 2005

Pretax unfavorable (favorable) net prior year claim and
allocated claim adjustment expense development:
Core (Non-APMT)	$	18.0		$	(7.0	)	$	(1.0	)	$	10.0
APMT								1.0			1.0
Pretax unfavorable (favorable) net prior year
development before impact of premium development		18.0			(7.0	)		-			11.0
Unfavorable premium development, excluding
impact of corporate aggregate reinsurance
treaties		8.0			6.0			1.0			15.0
Ceded premiums related to corporate aggregate
reinsurance treaties		(1.0	)								(1.0	)
Total premium development		7.0			6.0			1.0			14.0
Total unfavorable (favorable) net prior year
development (pretax)	$	25.0		$	(1.0	)	$	1.0		$	25.0

	Standard			Specialty			Other
Nine Months Ended September 30, 2006	Lines			Lines			Insurance		Total
(In millions)

Pretax unfavorable (favorable) net prior year claim
and allocated claim adjustment expense:
Core (Non-APMT)	$	70.0		$	(1.0	)	$	13.0	$	82.0
APMT								2.0		2.0
Pretax unfavorable (favorable) net prior year
development before impact of premium
development		70.0			(1.0	)		15.0		84.0
Unfavorable (favorable) premium
development		(92.0	)					1.0		(91.0	)
Total unfavorable (favorable) net prior year
development (pretax)	$	(22.0	)	$	(1.0	)	$	16.0	$	(7.0	)

Nine Months Ended September 30, 2005

Pretax unfavorable net prior year claim and
allocated claim adjustment expense development,
excluding the impact of corporate aggregate
reinsurance treaties:
Core (Non-APMT)	$	183.0		$	56.0		$	57.0	$	296.0
APMT								11.0		11.0
Total		183.0			56.0			68.0		307.0
Ceded losses related to corporate aggregate
reinsurance treaties		19.0			(25.0	)		6.0
Pretax unfavorable net prior year development
before impact of premium development		202.0			31.0			74.0		307.0
Unfavorable (favorable) premium
development, excluding impact of corporate
aggregate reinsurance treaties		(99.0	)		(9.0	)		11.0		(97.0	)
Ceded premiums related to corporate aggregate
reinsurance treaties		(6.0	)		19.0			4.0		17.0
Total premium development		(105.0	)		10.0			15.0		(80.0	)
Total unfavorable net prior year development
(pretax)	$	97.0		$	41.0		$	89.0	$	227.0

Three Month Comparison

2006 Net Prior Year Development

Standard Lines

Approximately $21.0 million of unfavorable claim and allocated claim adjustment expense reserve development was due to higher frequency and severity on claims related to excess workers’ compensation, in accident years 2005 and prior. The primary drivers of the higher frequency and severity were increasing medical inflation and advances in medical care. Medical inflation and advances in medical care result in additional claims reaching the excess layers covered by CNA and increases the size of claims already in the excess layers.

Approximately $8.0 million of unfavorable claim and allocated claim adjustment expense reserve development related to continued increases in individual claim reserve estimates on commercial auto business, in accident years 2005 and 2004. The increase is primarily due to larger claims. These changes in individual claim estimates result in higher projections of ultimate loss from the incurred development and average loss methods used by CNA’s actuaries.

Approximately $30.0 million of favorable claim and allocated claim adjustment expense reserve development was due to decreased frequency and severity on claims related to monoline and package liability, primarily in accident years 2002 and prior. The change was driven by decreased incurred losses as a result of changes in individual claim reserve estimates. The lower incurred losses were less than expected based on the loss development factors selected by CNA’s actuaries.

Approximately $14.0 million of the favorable premium development was due to additional premium primarily resulting from audits and changes to premium on several ceded reinsurance agreements. Businesses impacted included various middle market liability coverages, workers’ compensation, property, and large accounts. Unfavorable claim and allocated claim adjustment expense reserve development of approximately $9.0 million was recorded as a result of this favorable premium development.

Specialty Lines

Unfavorable net prior year development of $2.0 million was recorded for the three months ended September 30, 2006, including $4.0 million of favorable claim and allocated claim adjustment expense reserve development and $6.0 million of unfavorable premium development.

Other Insurance

2005 Net Prior Year Development

Standard Lines

Unfavorable net prior year development of $25.0 million was recorded for the three months ended September 30, 2005, including $18.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $7.0 million of unfavorable premium development.

Approximately $33.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development resulted from increased claim cost inflation for workers’ compensation, primarily in accident year 2001 and prior. The primary drivers of the increased claim cost inflation were increasing medical inflation and advances in medical care. Approximately $23.0 million of favorable net prior year claim and allocated claim adjustment expense reserve development was recorded due to continued improvement in the severity and number of claims for property coverages, primarily in accident year 2004. The improvements in severity and frequency are substantially due to underwriting actions taken by CNA that have significantly improved the results on this business. Underwriting actions taken included efforts to write more business in non-catastrophe prone areas.

Approximately $35.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was attributed to increased severity in liability coverages for large account policies. These increases are driven by increasing medical inflation and larger verdicts than anticipated, both of which increased the severity of these claims beyond the amount indicated by previous incurred development methods. The remainder of the favorable net prior year claim and allocated claim adjustment expense reserve development was primarily a result of improved experience on several coverages on middle market business mainly in accident year 2004.

Specialty Lines

Favorable net prior year development of $1.0 million was recorded for the three months ended September 30, 2005, including $7.0 million of favorable claim and allocated claim adjustment expense reserve development and $6.0 million of unfavorable premium development.

Other Insurance

Unfavorable premium development of $1.0 million was recorded for the three months ended September 30, 2005. There was no claim and allocated claim adjustment expense reserve development recorded for the three months ended September 30, 2005.

Nine Month Comparison

2006 Net Prior Year Development

Standard Lines

Approximately $41.0 million of unfavorable claim and allocated claim adjustment expense reserve development was primarily due to continued claim cost inflation for workers compensation in older accident years, primarily 2002 and prior. The primary drivers of the continuing claim cost inflation are medical inflation and advances in medical care.

Approximately $16.0 million of unfavorable claim and allocated claim adjustment expense reserve development related to continued increases in individual claim reserve estimates on commercial auto business, in accident years 2005 and 2004. The increase is primarily due to a higher than expected number of large claims. These changes in individual claim estimates result in higher projections of ultimate loss from the incurred development and average loss methods used by CNA’s actuaries.

Approximately $15.0 million of unfavorable claim and allocated claim adjustment expense reserve development was due to increased severity in liability coverages for large account policies. These increases were driven by increasing medical inflation and larger verdicts than anticipated, both of which increase the severity of these claims resulting in higher case incurred losses and higher ultimate estimates.

Approximately $11.0 million of unfavorable claim and allocated claim adjustment expense reserve development was due to CNA’s share of an assessment from various Windstorm Underwriting Authority Pools.

Approximately $45.0 million of favorable claim and allocated claim adjustment expense reserve development was related to continued improvement in the severity and frequency of claims for property coverages, primarily in accident year 2005. The improvements in severity and frequency are substantially due to underwriting actions taken by CNA that have significantly improved the results on this business. Underwriting actions taken include efforts to write more business in non-catastrophe prone areas.

Approximately $21.0 million of favorable claim and allocated claim adjustment expense reserve development was due to decreased frequency and severity on claims related to monoline and package liability, primarily in accident years 2002 and prior. The change was driven by decreased incurred losses resulting from favorable outcomes on individual claims. The lower incurred losses were less than expected based on the loss development factors selected by CNA’s actuaries.

Approximately $16.0 million of favorable claim and allocated claim adjustment expense reserve development was related to lower severities on the excess and surplus lines business in accident years 2000 and subsequent. These severity changes were driven primarily by judicial decisions and settlement activities on individual cases. The severity changes led to lower case incurred loss and lower ultimate estimates.

Approximately $16.0 million of favorable claim and allocated claim adjustment expense reserve development was due to umbrella products. The change covers several accident years. Initial reserves are normally estimated using the loss ratio expected for this business due to the long-tail nature of this business. The long-tail nature of the business is

due to the long period of time that passes between the time the business is written and the time when all claims are known and settled. The favorable change on the recent accident years is the result of giving greater weight to projections that rely on case incurred loss thereby recognizing the low level of case incurred loss. The favorable change in older years is driven by favorable outcomes on individual claims.

Approximately $12.0 million of favorable claim and allocated claim adjustment expense reserve development was due to improved experience for marine business, primarily in accident years 2005 and 2004. The case incurred loss (paid loss plus case reserve estimates for known claims) for these accident years has been less than expected. The expected case incurred loss was primarily based on the loss ratio expected for this business. The lower level of actual case incurred loss is driven by lower claim frequency and indicates a lower ultimate loss. The remainder of the favorable change in marine business is due to lowered individual case estimates from older accident years.

Approximately $66.0 million of the favorable premium development was due to additional premium primarily resulting from audits and changes to premium on several ceded reinsurance agreements. Businesses impacted included various middle market liability coverages, workers’ compensation, property, and large accounts. This favorable premium development was partially offset by approximately $48.0 million of unfavorable claim and allocated claim adjustment expense reserve development recorded as a result of this favorable premium development.

Specialty Lines

Approximately $40.0 million of unfavorable claim and allocated claim adjustment expense reserve development was recorded due to increased claim adjustment expenses and increased severities in the architects and engineers book of business in accident years 2003 and prior. Previous reviews assumed that incurred severities had increased, at least in part, due to increases in the adequacy of case reserve estimates with relatively minor changes in underlying severity. Subsequent changes in paid and case incurred losses have shown that more of the change was due to underlying increases in verdict and settlement size for these accident years rather than increases in case reserve adequacy, resulting in higher ultimate losses. One of the primary drivers of these larger verdicts and settlements is the continuing general increase in commercial and private real estate values.

Approximately $40.0 million of favorable claim and allocated claim adjustment expense reserve development was due to improved claim severity and claim frequency in the healthcare professional liability business, primarily in dental, nursing home liability, physicians and other healthcare facilities. The improved severity and frequency are due to underwriting changes. CNA no longer writes large national nursing home chains and focuses on smaller insureds in selected areas of the country. These changes have resulted in business that experiences fewer large claims.

Approximately $15.0 million of unfavorable claim and allocated claim adjustment expense reserve development was primarily related to increased severity on large claims from large law firm errors and omissions, and directors and officers (“D&O”) coverages. These increases result in higher ultimate loss projections from the average loss methods used by CNA’s actuaries.

Approximately $17.0 million of favorable claim and allocated claim adjustment expense reserve development was recorded in the warranty line of business for the most recent accident year. The reserves for this business are initially estimated based on the loss ratio expected for the business. Subsequent estimates rely more heavily on the actual case incurred losses due to the short-tail nature of this business. The short-tail nature of the business is due to the short period of time that passes between the time the loss occurs and the time when all claims are known and settled. Case incurred loss for the most recent accident year has been lower than indicated by the initial loss ratio.

Other Insurance

Unfavorable net prior year development of $16.0 million was recorded for the nine months ended September 30, 2006. This amount consisted of $15.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $1.0 million of unfavorable premium development.

The unfavorable claim and allocated claim adjustment expense reserve development was primarily related to the financial guarantee line of business, and an adverse arbitration ruling that was offset by a release of a previously

established allowance for uncollectible reinsurance. Reserves for the financial guarantee line of business are driven by individual claim estimates. This unfavorable claim and allocated claim adjustment expense reserve development was partially offset by the favorable loss development impact of an assumed reinsurance commutation. The unfavorable premium development was also related to this reinsurance commutation.

2005 Net Prior Year Development

Standard Lines

Unfavorable net prior year development of $97.0 million was recorded for the nine months ended September 30, 2005. This amount consisted of $202.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $105.0 million of favorable premium development.

Approximately $141.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development resulted from increased severity trends for workers’ compensation, primarily in accident years 2002 and prior. The primary drivers of the increased claim cost inflation were increasing medical inflation and advances in medical care.

Approximately $135.0 million of favorable net prior year claim and allocated claim adjustment expense reserve development was recorded due to improvement in the severity and number of claims for property coverages and marine business, primarily in accident year 2004. The improvements in severity and frequency are substantially due to underwriting actions taken by CNA that have significantly improved the results on this business. Underwriting actions taken include efforts to write more business in non-catastrophe prone areas.

Approximately $90.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $83.0 million of favorable net prior year premium development resulted from an unfavorable arbitration ruling on two reinsurance treaties.

Approximately $76.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was attributed to increased severity in liability coverages for large account policies. These increases are driven by increasing medical inflation and larger verdicts than anticipated, both of which increased the severity of these claims beyond the amount indicated by previous incurred development methods.

Approximately $51.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was related to reviews of liquor liability, trucking and habitational business that indicated that the number of large claims was higher than previously expected in recent accident years. The remainder of the favorable net prior year claim and allocated claim adjustment expense reserve development was primarily a result of improved experience on several coverages on middle market business mainly in accident year 2004.

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

Additionally, there was $19.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $6.0 million of favorable premium development related to the corporate aggregate reinsurance treaties.

Specialty Lines

Unfavorable net prior year development of $41.0 million was recorded for the nine months ended September 30, 2005, including $31.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $10.0 million of unfavorable premium development.

Approximately $60.0 million of unfavorable claim and allocated claim adjustment expense reserve development was recorded due to increased claim adjustment expenses and increased severities in the architects and engineers book of business, in accident years 2000 through 2003. Previous reviews assumed that severities had increased, at least in part, due to increases in the adequacy of case reserve estimates. Subsequent changes in paid and incurred loss have shown that more of the change was due to larger verdicts and settlements during these accident years. One of the primary drivers of these larger verdicts and settlements is the continuing general increase in real estate values. Favorable net prior year premium development of approximately $10.0 million was recorded in relation to this unfavorable claim and allocated claim adjustment expense reserve development.

Approximately $27.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was related to large D&O claims assumed from a London syndicate, primarily in accident years 2001 and prior. Approximately $40.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development was recorded due to large claims resulting from excess coverages provided to health care facilities. The claim severity estimates for this business are driven by individual case by case reviews. Reviews of the individual cases underlying the excess coverages provided by CNA resulted in significant increases to the individual case estimates.

Approximately $17.0 million of favorable net prior year claim and allocated claim adjustment expense reserve development was recorded due to lower severity in the dental program. The lower severity is driven by efforts to resolve a higher percentage of claims without a resulting indemnity payment.

Approximately $24.0 million of favorable net prior year claim and allocated claim adjustment expense reserve development was recorded as a result of improvements in the claim severity and claim frequency, mainly in recent accident years, from nursing home businesses. The improved severity and frequency are due to underwriting changes in this business. CNA no longer writes large national chains and focuses on smaller insureds in selected areas of the country. These changes have resulted in business that experiences fewer large claims. The remainder of the favorable net prior year claim and allocated claim adjustment expense reserve development was primarily attributed to favorable experience in the warranty line of business, partially offset by unfavorable net prior year claim and allocated claim adjustment expense reserve development attributed to other large D&O claims.

Additionally, there was approximately $25.0 million of favorable net prior year claim and allocated claim adjustment expense reserve development and $19.0 million of unfavorable premium development related to the corporate aggregate reinsurance treaties in the first nine months of 2005.

Other Insurance

Unfavorable net prior year development of $89.0 million was recorded for the nine months ended September 30, 2005, including $74.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $15.0 million of unfavorable premium development.

Approximately $56.0 million of unfavorable claim and allocated claim adjustment expense reserve development was a result of a commutation recorded in the second quarter of 2005. Approximately $6.0 million of unfavorable claim and allocated claim adjustment expense reserve development was related to the corporate aggregate reinsurance treaties. The unfavorable premium development was primarily driven by $10.0 million of additional ceded reinsurance premium on agreements where the ceded premium depends on the ceded loss and $4.0 million of additional premium ceded to the corporate aggregate reinsurance treaties.

8. Debt

In August of 2006, CNA issued $400.0 million of 6.0% five-year senior notes due August 15, 2011 and $350.0 million of 6.5% ten-year senior notes due August 15, 2016 in a public offering. CNA will use part of the proceeds to fund repayment of the $250.0 million outstanding 6.75% senior notes at maturity in November 2006.

9. Restructuring and Other Related Charges

In 2001, CNA finalized and approved a plan related to restructuring the property and casualty segments and Life and Group Non-Core segment, discontinuation of the variable life and annuity business and consolidation of real estate locations. During the second quarter of 2006, CNA management reevaluated the sufficiency of the remaining accrual, which related to lease termination costs, and determined that the liability is no longer required as CNA has completed its lease obligations. As a result, the excess remaining accrual was released in the second quarter of 2006, resulting in pretax income of $12.9 million for the nine months ended September 30, 2006.

10. Statutory Accounting Practices

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

CNA’s insurance subsidiaries are domiciled in various jurisdictions. These subsidiaries prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the respective jurisdictions’ insurance regulators. Prescribed statutory accounting practices are set forth in a variety of publications of the NAIC as well as state laws, regulations and general administrative rules.

CCC follows a permitted practice related to the statutory provision for reinsurance, or the uncollectible reinsurance reserve. This permitted practice allows CCC to record an additional uncollectible reinsurance reserve amount through a different financial statement line item than the prescribed statutory convention. This permitted practice had no effect on CCC’s statutory surplus as of September 30, 2006 or December 31, 2005.

CNA’s ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from its subsidiaries. The payment of dividends to CNA by its insurance subsidiaries without prior approval of the insurance department of each subsidiary’s domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval by the respective state insurance departments.

Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval of the Illinois Department of Financial and Professional Regulation - Division of Insurance (the “Department”), may be paid only from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of September 30, 2006, CCC is in a positive earned surplus position, enabling CCC to pay approximately $568.0 million of dividend payments for the remainder of 2006 that would not be subject to the Department’s prior approval. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.

Combined statutory capital and surplus and net income, determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities, for the property and casualty and the life and group insurance subsidiaries, were as follows:

	Statutory Capital and Surplus
	September 30, 2006		December 31, 2005
(In millions)

Property and casualty companies (a)	$	7,827.0	$	6,940.0
Life and group insurance companies		701.0		627.0

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

	Statutory Net Income
	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006		2005
(In millions)

Property and casualty companies	$	351.0	$	(19.0	)	$	614.0	$	849.0
Life and group insurance companies		29.0		(5.0	)		71.0		49.0

11. Benefit Plans

Pension Plans - The Company has several non-contributory defined benefit plans for eligible employees. The benefits for certain plans which cover salaried employees and certain union employees are based on formulas which include, among others, years of service and average pay. The benefits for one plan which covers union workers under various union contracts and certain salaried employees are based on years of service multiplied by a stated amount. Benefits for another plan are determined annually based on a specified percentage of annual earnings (based on the participant’s age) and a specified interest rate (which is established annually for all participants) applied to accrued balances.

The Company’s funding policy is to make contributions in accordance with applicable governmental regulatory requirements. The assets of the plans are invested primarily in interest-bearing obligations and for one plan with an insurance subsidiary of CNA, in its separate account business.

Other Postretirement Benefit Plans - The Company has several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.

Benefits for retirees reaching age 65 are generally integrated with Medicare. Other retirees, based on plan provisions, must use Medicare as their primary coverage, with the Company reimbursing a portion of the unpaid amount; or are reimbursed for the Medicare Part B premium or have no Company coverage. The benefits provided by the Company are basically health and, for certain retirees, life insurance type benefits.

The Company funds certain of these benefit plans and accrues postretirement benefits during the active service of those employees who would become eligible for such benefits when they retire.

Net periodic benefit cost components:

	Pension Benefits
	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Service cost	$	14.1		$	12.6		$	41.8		$	40.7
Interest cost		53.4			50.4			159.3			155.7
Expected return on plan assets		(61.4	)		(57.1	)		(182.3	)		(172.2	)
Amortization of unrecognized net loss		2.1			1.2			5.9			4.0
Amortization of unrecognized prior service cost		1.5			2.0			4.9			5.7
Actuarial loss		4.2			4.9			20.7			15.5
Special termination benefits		5.6						5.6
Regulatory accrual/amortization		(3.0	)					(3.0	)		(2.2	)
Net periodic benefit cost	$	16.5		$	14.0		$	52.9		$	47.2

	Other Postretirement Benefits
	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Service cost	$	2.6		$	2.7		$	7.3		$	8.0
Interest cost		7.4			7.7			20.9			23.1
Expected return on plan assets		(1.2	)		(1.2	)		(3.5	)		(3.5	)
Amortization of unrecognized net loss (gain)		0.5			0.2			1.1			0.6
Amortization of unrecognized prior service benefit		(8.2	)		(7.4	)		(24.4	)		(22.4	)
Actuarial loss		1.0			1.1			2.7			3.2
Special termination benefits		0.9						2.2
Regulatory accrual/amortization		4.9						4.9
Net periodic benefit cost	$	7.9		$	3.1		$	11.2		$	9.0

Stock Option Plans - In 2005, shareholders approved the amended and restated Loews Corporation 2000 Stock Option Plan (the “Loews Plan”). The aggregate number of shares of Loews common stock for which options or stock appreciation rights (“SARs”) may be granted under the Loews Plan is 12,000,000 shares, and the maximum number of shares of Loews common stock with respect to which options or SARs may be granted to any individual in any calendar year is 1,200,000 shares. The exercise price per share may not be less than the fair value of the common stock on the date of grant. Generally, options and SARs vest ratably over a four-year period and expire in ten years.

A summary of the stock option and SAR transactions for the Loews Plan follows:

	2006
	Number of Awards			Weighted Average Exercise Price

Awards outstanding, January 1		3,856,974		$	19.340
Granted		937,800			35.135
Exercised		(468,159	)		17.924
Canceled		(72,030	)		23.747
Awards outstanding, September 30		4,254,585			22.903

Awards exercisable, September 30		2,144,328		$	18.203

Shares available for grant, September 30		5,983,989

In the first nine months of 2006, the Company awarded SARs totaling 901,800 shares. In accordance with the Loews Plan, the Company has the ability to settle SARs in shares or cash and has the intention to settle in shares. The SARs balance at September 30, 2006 was 891,300 shares with 10,500 shares forfeited during the first nine months of 2006.

The weighted average grant date fair value of awards granted during the nine months ended September 30, 2006 was $10.00. The weighted average remaining contractual terms of awards outstanding and exercisable as of September 30, 2006, were 7.2 years and 5.9 years. The aggregate intrinsic values of awards outstanding and exercisable at September 30, 2006 were $63.8 million and $42.2 million. The total intrinsic value of awards exercised during the nine months ended September 30, 2006 was $7.6 million.

The fair value of granted options and SARs was estimated at the grant date using the Black-Scholes option pricing model. The Black-Scholes model incorporates a risk free interest rate of return and various assumptions, regarding the underlying common stock and the expected life of the securities granted. Different interest rates and assumptions were used for each grant, as appropriate at that date. The risk free interest rates used ranged from 4.4% to 5.1%. The estimates of the underlying common stock’s volatility ranged from 19.7% to 27.3%, and the expected dividend yield ranged from 0.6% to 0.7%. The expected life of the securities granted was 5.0 years.

The Company recorded stock-based compensation expense of $1.3 million and $3.5 million related to the Loews Plan during the three and nine months ended September 30, 2006. The related income tax benefits recognized were $0.4 and $1.2 million, respectively. At September 30, 2006, the compensation cost related to nonvested awards not yet recognized was $12.9 million, and the weighted average period over which it is expected to be recognized is 1.7 years.

In February of 2002, shareholders approved the Carolina Group 2002 Stock Option Plan (the “Carolina Group Plan”) in connection with the issuance of Carolina Group stock. The aggregate number of shares of Carolina Group stock for which options or SARs may be granted under the Carolina Group Plan is 1,500,000 shares; and the maximum number of shares of Carolina Group stock with respect to which options or SARs may be granted to any individual in any calendar year is 200,000 shares. The exercise price per share may not be less than the fair value of the stock on the date of the grant. Generally, options and SARs vest ratably over a four-year period and expire in ten years.

A summary of the stock option and SAR transactions for the Carolina Group Plan follows:

	2006
	Number of Awards			Weighted Average Exercise Price

Awards outstanding, January 1		536,572		$	28.526
Granted		202,000			50.234
Exercised		(118,193	)		27.023
Canceled		(11,250	)		29.506
Awards outstanding, September 30		609,129			35.998

Awards exercisable, September 30		113,619		$	27.583

Shares available for grant, September 30		546,000

During the first nine months of 2006, the Company awarded SARs totaling 202,000 shares. In accordance with the Carolina Group Plan, the Company has the ability to settle SARs in shares or cash and has the intention to settle in shares. The SARs balance at September 30, 2006 was 202,000 shares.

The weighted average grant date fair value of awards granted during the nine months ended September 30, 2006 was $12.28. The weighted average remaining contractual term of awards outstanding and exercisable as of September 30, 2006, was 8.1 years and 6.7 years. The aggregate intrinsic value of awards outstanding and exercisable at September 30, 2006 was $11.9 million and $3.2 million. The total intrinsic value of awards exercised during the nine months ended September 30, 2006 was $2.7 million.

The fair value of granted options and SARs was estimated at the grant date using the Black-Scholes option pricing model. The Black-Scholes model incorporates a risk free interest rate of return and various assumptions, regarding the underlying common stock and the expected life of the securities granted. Different interest rates and assumptions were used for each grant, as appropriate at that date. The risk free interest rates used ranged from 4.4% to 5.1%. The estimates of the underlying common stock’s volatility ranged from 28.6% to 32.7%, and the expected dividend yield ranged from 3.3% to 3.9%. The expected life of the securities granted was 5.0 years.

The Company recorded stock-based compensation expense of $0.3 million and $0.7 million related to the Carolina Group Plan during the three and nine months ended September 30, 2006. The related income tax benefits recognized were $0.1 million and $0.2 million for the respective periods. At September 30, 2006, the compensation cost related to nonvested awards not yet recognized was $3.2 million, and the weighted average period over which it is expected to be recognized is 1.7 years.

12. Business Segments

The Company’s reportable segments are primarily based on its individual operating subsidiaries. Each of the principal operating subsidiaries are headed by a chief executive officer who is responsible for the operation of its business and has the duties and authority commensurate with that position. Investment gains (losses) and the related income taxes, excluding those of CNA Financial, are included in the Corporate and other segment.

CNA manages its property and casualty operations in two operating segments, which represent CNA’s core operations: Standard Lines and Specialty Lines. The non-core operations are managed in the Life and Group Non-Core segment and Other Insurance segment. Standard Lines includes standard property and casualty coverages sold to small and middle market commercial businesses primarily through an independent agency distribution system, and excess and surplus lines, as well as insurance and risk management products sold to large corporations in the U.S. and globally. Specialty Lines provides professional, financial and specialty property and casualty products and services. Life and Group Non-Core primarily includes the results of the life and group lines of business sold or placed in run-off. Other Insurance primarily includes the results of certain property and casualty lines of business placed in run-off, including CNA Re. This segment also includes the results related to the centralized adjusting and settlement of APMT claims as well as the results of CNA’s participation in voluntary insurance pools, which are primarily in run-off and various other non-insurance operations.

Lorillard is engaged in the production and sale of cigarettes with its principal products marketed under the brand names Newport, Kent, True, Maverick and Old Gold, with substantially all of its sales in the United States.

Boardwalk Pipeline is engaged in the interstate transportation and storage of natural gas. This segment consists of two interstate natural gas pipeline systems originating in the Gulf Coast area and running north and east through Texas, Louisiana, Mississippi, Alabama, Florida, Arkansas, Tennessee, Kentucky, Indiana, Ohio and Illinois with 13,470 miles of pipeline.

Diamond Offshore’s business primarily consists of operating 44 offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. The majority of these rigs are located in the Gulf of Mexico region with the remainder operating in Brazil, the North Sea, and various other foreign markets.

Loews Hotels owns and/or operates 17 hotels, 15 of which are in the United States and two are in Canada.

The Corporate and other segment consists primarily of corporate investment income, including investment gains (losses) from non-insurance subsidiaries, the operations of Bulova Corporation which distributes and sells watches and clocks, corporate interest expenses and other corporate administrative costs.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. In addition, CNA does not maintain a distinct investment portfolio for each of its insurance segments, and accordingly, allocation of assets to each segment is not performed. Therefore, net investment income and investment gains (losses) are allocated based on each segment’s carried insurance reserves, as adjusted.

The following tables set forth the Company’s consolidated revenues and income (loss) by business segment:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Revenues (a):

CNA Financial:
Standard Lines	$	1,401.2		$	1,342.6		$	4,058.1		$	4,017.7
Specialty Lines		799.3			752.3			2,309.9			2,147.3
Life and Group Non-Core		336.1			365.7			973.2			1,040.1
Other Insurance		88.4			59.3			197.2			251.3
Total CNA Financial		2,625.0			2,519.9			7,538.4			7,456.4
Lorillard		1,013.4			947.3			2,889.8			2,701.3
Boardwalk Pipeline		134.9			122.3			442.4			393.0
Diamond Offshore		527.6			352.1			1,505.6			915.0
Loews Hotels		84.9			81.5			280.2			267.4
Corporate and other		121.4			114.8			372.6			176.7
Total	$	4,507.2		$	4,137.9		$	13,029.0		$	11,909.8

Pretax income (loss) (a):

CNA Financial:
Standard Lines	$	262.5		$	(189.3	)	$	672.9		$	95.0
Specialty Lines		198.1			184.4			542.7			422.4
Life and Group Non-Core		(43.4	)		(63.1	)		(105.8	)		(74.3	)
Other Insurance		40.7			34.1			56.8			107.4
Total CNA Financial		457.9			(33.9	)		1,166.6			550.5
Lorillard		356.1			308.1			966.5			814.0
Boardwalk Pipeline		31.1			7.6			132.5			93.2
Diamond Offshore		221.3			118.0			667.2			215.1
Loews Hotels		6.4			5.5			39.9			45.1
Corporate and other		42.6			45.9			150.1			(76.1	)
Total	$	1,115.4		$	451.2		$	3,122.8		$	1,641.8

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Net income (loss) (a):

CNA Financial:
Standard Lines	$	156.1		$	(100.8	)	$	416.3		$	90.5
Specialty Lines		111.1			108.5			309.1			262.1
Life and Group Non-Core		(19.4	)		(33.0	)		(45.0	)		(31.2	)
Other Insurance		33.0			32.7			41.5			120.8
Total CNA Financial		280.8			7.4			721.9			442.2
Lorillard		218.8			192.9			591.8			497.2
Boardwalk Pipeline		15.9			4.5			68.1			56.1
Diamond Offshore		81.8			40.6			241.7			74.7
Loews Hotels		5.1			3.7			25.6			32.7
Corporate and other		27.0			50.9			97.4			(29.4	)
Income from continuing operations		629.4			300.0			1,746.5			1,073.5
Discontinued operations		5.7			2.2			(1.7	)		10.6
Total	$	635.1		$	302.2		$	1,744.8		$	1,084.1

(a)	Investment gains (losses) included in Revenues, Pretax income (loss) and Net income (loss) are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005

Revenues and pretax income (loss):

CNA Financial:
Standard Lines	$	17.4		$	50.8		$	(6.2	)	$	71.1
Specialty Lines		6.0			16.2			(4.1	)		25.2
Life and Group Non-Core		(10.7	)		(2.6	)		(56.4	)		(8.3	)
Other Insurance		13.9			2.7			4.4			(11.7	)
Total CNA Financial		26.6			67.1			(62.3	)		76.3
Corporate and other		10.9			(7.1	)		8.5			(6.6	)
Total	$	37.5		$	60.0		$	(53.8	)	$	69.7

Net income (loss):

CNA Financial:
Standard Lines	$	9.9		$	30.7		$	(3.7	)	$	38.5
Specialty Lines		3.6			9.6			(2.4	)		17.5
Life and Group Non-Core		(6.3	)		(1.5	)		(33.4	)		(4.9	)
Other Insurance		16.6			(0.2	)		5.9			(9.0	)
Total CNA Financial		23.8			38.6			(33.6	)		42.1
Corporate and other		7.0			(4.6	)		5.6			(3.9	)
Total	$	30.8		$	34.0		$	(28.0	)	$	38.2

13. Legal Proceedings

INSURANCE RELATED

Insurance Brokerage Antitrust Litigation

On August 1, 2005, CNA and several of its insurance subsidiaries were joined as defendants, along with other insurers and brokers, in multidistrict litigation pending in the United States District Court for the District of New Jersey, In re Insurance Brokerage Antitrust Litigation, Civil No. 04-5184 (FSH). The plaintiffs in this litigation allege improprieties in the payment of contingent commissions to brokers and bid rigging in connection with the sale of various lines of insurance. The plaintiffs further allege the existence of a conspiracy and assert claims for federal and state antitrust law violations, for violations of the federal Racketeer Influenced and Corrupt Organizations Act and for recovery under various state common law theories. By an order entered on October 3, 2006, the Court required the plaintiffs to supplement their pleadings with a statement setting forth the details of their claims. CNA believes it has meritorious defenses to this action and intends to defend the case vigorously.

The extent of losses beyond any amounts that may be accrued are not readily determinable at this time. However, based on facts and circumstances presently known, in the opinion of management, an unfavorable outcome will not materially affect the equity of the Company, although results of operations may be adversely affected.

Global Crossing Limited Litigation

CCC has been named as a defendant in an action brought by the bankruptcy estate of Global Crossing Limited (“Global Crossing”) in the United States Bankruptcy Court for the Southern District of New York. In the Complaint, served on CCC on May 24, 2005, plaintiff seeks unspecified monetary damages from CCC and the other defendants for alleged fraudulent transfers and alleged breaches of fiduciary duties arising from actions taken by Global Crossing while CCC was a shareholder of Global Crossing. On August 3, 2006, the Court granted in part and denied in part CCC’s motion to dismiss the Estate Representative’s Amended Complaint. CCC believes it has meritorious defenses to the remaining claims in this action and intends to defend the case vigorously.

IGI Contingency

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

A portion of the premiums assumed under the IGI Program related to United States workers’ compensation “carve-out” business. Some of these premiums were received from John Hancock Mutual Life Insurance Company (“John Hancock”) under four excess of loss reinsurance treaties (the “Treaties”) issued by CNA Re Ltd. While John Hancock has indicated that it is not able to accurately quantify its potential exposure to its cedents on business which is retroceded to CNA, John Hancock has reported $266.0 million of paid and unpaid losses under these Treaties. John Hancock is disputing portions of its assumed obligations resulting in these reported losses, and has advised CNA that it is, or has been, involved in multiple arbitrations with its own cedents, in which proceedings John Hancock is seeking to avoid and/or reduce risks that would otherwise arguably be ceded to CNA through the Treaties. John Hancock has further informed CNA that it has settled several of these disputes, but has not provided CNA with details of the settlements. To the extent that John Hancock is successful in reducing its liabilities in these disputes, that development may have an impact on the recoveries it is seeking under the Treaties from CNA.

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

In addition, CNA has instituted arbitration proceedings against John Hancock in which CNA is seeking rescission of the Treaties as well as access to and the right to inspect the books and records relating to the Treaties. Discovery is ongoing in that arbitration proceeding and a hearing is currently scheduled for April 2007. Based on information known at this time, CNA believes it has strong grounds to successfully challenge its alleged exposure derived from John Hancock through the ongoing arbitration proceedings. CNA has also undertaken legal action seeking to avoid portions of the remaining exposure arising out of the IGI Program.

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

New Jersey Wage and Hour Litigation

W. Curtis Himmelman, individually and on behalf of all others similarly situated v. Continental Casualty Company, Civil Action: 06-166, District Court of New Jersey (Trenton Division) is a purported class action and representative action brought on behalf of present and former CNA environmental claims analysts and workers’ compensation claims analysts asserting they worked hours for which they should have been compensated at a rate of one and one-half times their base hourly wage. The Complaint was filed on January 12, 2006. The claims were originally brought under both federal and New Jersey state wage and hour laws on the basis that the relevant jobs are not exempt from overtime pay because the duties performed are not exempt duties. On August 11, 2006, the Court dismissed plaintiff’s New Jersey state law claims. Under federal law, plaintiff seeks to represent others similarly situated who opt in to the action and who also allege they are owed overtime pay for hours worked over eight hours per day and/or forty hours per workweek for the period January 5, 2003 to the entry of judgment. Plaintiff seeks “overtime compensation,” “compensatory, punitive and statutory damages, interest, costs and disbursements and attorneys’ fees” without specifying any particular amounts (as well as an injunction). CNA denies the material allegations of the Complaint and intends to vigorously contest the claims on numerous substantive and procedural grounds.

Voluntary Market Premium Litigation

CNA, along with dozens of other insurance companies, is currently a defendant in nine cases, including eight purported class actions, brought by large policyholders. The complaints differ in some respects, but generally allege that the defendants, as part of an industry-wide conspiracy, included improper charges in their retrospectively rated and other loss-sensitive insurance programs. Among the claims asserted are violations of state antitrust laws, breach of contract, fraud and unjust enrichment. CNA has denied the material allegations made in these cases and has entered into a settlement agreement which is subject to court approval. CNA previously recorded a liability in anticipation of this settlement, therefore resolution of this matter is not expected to have a material impact on results of operations.

APMT Reserves

CNA is also a party to litigation and claims related to APMT cases arising in the ordinary course of business. See Note 7 for further discussion.

TOBACCO RELATED

Tobacco Related Product Liability Litigation

Approximately 3,950 product liability cases are pending against cigarette manufacturers in the United States. Lorillard is a defendant in approximately 2,835 of these cases.

The pending product liability cases are composed of the following types of cases:

“Conventional product liability cases” are brought by individuals who allege cancer or other health effects caused by smoking cigarettes, by using smokeless tobacco products, by addiction to tobacco, or by exposure to environmental tobacco smoke. Approximately 1,275 cases are pending, including approximately 195 cases against Lorillard. The 1,275 cases include approximately 1,000 cases pending in a single West Virginia court that have been consolidated for trial. Lorillard is a defendant in approximately 75 of the approximately 1,000 consolidated West Virginia cases.

“Flight Attendant cases” are brought by non-smoking flight attendants alleging injury from exposure to environmental smoke in the cabins of aircraft. Plaintiffs in these cases may not seek punitive damages for injuries that arose prior to January 15, 1997. Lorillard is a defendant in each of the approximately 2,625 pending Flight Attendant cases.

“Class action cases” are purported to be brought on behalf of large numbers of individuals for damages allegedly caused by smoking. Ten of these cases are pending against Lorillard. In one of these cases, Schwab v. Philip Morris USA, Inc., et al., the court has certified a nationwide class composed of purchasers of “light” cigarettes. Lorillard is not a defendant in approximately 35 additional “lights” class actions that are pending against other cigarette manufacturers.

“Reimbursement cases” are brought by or on behalf of entities who seek reimbursement of expenses incurred in providing health care to individuals who allegedly were injured by smoking. Plaintiffs in these cases have included the U.S. federal government, U.S. state and local governments, foreign governmental entities, hospitals or hospital districts, American Indian tribes, labor unions, private companies and private citizens. Lorillard is a defendant in four of the seven Reimbursement cases pending against cigarette manufacturers in the United States. The Company is not a defendant in any of the cases pending in the United States. Lorillard and the Company are defendants in an additional case pending in Israel.

Included in this category is the suit filed by the federal government, United States of America v. Philip Morris USA, Inc., et al., that sought disgorgement of profits and injunctive relief. During 2005, an appellate court ruled that the government may not seek disgorgement of profits. During August of 2006, the court issued its verdict and granted injunctive relief. The verdict did not award monetary damages. See Reimbursement Cases below.

“Contribution cases” are brought by private companies, such as asbestos manufacturers or their insurers, who are seeking contribution or indemnity for court claims they incurred on behalf of individuals injured by their products but who also allegedly were injured by smoking cigarettes. No such cases are pending.

Excluding the flight attendant and the consolidated West Virginia suits, approximately 320 product liability cases are pending against cigarette manufacturers in U.S. courts. Lorillard is a defendant in approximately 135 of the 320 cases. The Company, which is not a defendant in any of the flight attendant or the consolidated West Virginia matters, is a defendant in four of the actions.

In addition to the above, “Filter cases” are brought by individuals, including former employees of Lorillard, who seek damages resulting from their alleged exposure to asbestos fibers that were incorporated into filter material used in one brand of cigarettes manufactured by Lorillard for a limited period of time ending more than 50 years ago. Lorillard is a defendant in approximately 35 such cases.

Plaintiffs assert a broad range of legal theories in these cases, including, among others, theories of negligence, fraud, misrepresentation, strict liability, breach of warranty, enterprise liability (including claims asserted under the federal Racketeering Influenced and Corrupt Organizations Act (“RICO”)), civil conspiracy, intentional infliction of harm, violation of consumer protection statutes, violation of antitrust statutes, injunctive relief, indemnity, restitution, unjust enrichment, public nuisance, claims based on antitrust laws and state consumer protection acts, and claims based on failure to warn of the harmful or addictive nature of tobacco products.

Plaintiffs in most of the cases seek unspecified amounts of compensatory damages and punitive damages, although some seek damages ranging into the billions of dollars. Plaintiffs in some of the cases seek treble damages, statutory damages, disgorgement of profits, equitable and injunctive relief, and medical monitoring, among other damages.

CONVENTIONAL PRODUCT LIABILITY CASES - Approximately 1,275 cases are pending against cigarette manufacturers in the United States. Lorillard is a defendant in approximately 195 of these cases. The Company is a defendant in two of the pending cases.

Approximately 1,000 of the 1,275 cases are pending in a single West Virginia court in a consolidated proceeding known as West Virginia Individual Personal Injury Cases or “IPIC.” Although the court has not yet entered a trial plan that governs how the cases will be tried, it has ordered that the first phase of a consolidated trial will begin during March of 2007. During the third quarter of 2006, the court dismissed Lorillard from approximately 800 IPIC cases because those plaintiffs had not submitted evidence that they had smoked a Lorillard product. Lorillard is a defendant in approximately 75 of the 1,000 IPIC cases. The Company is not a defendant in any of the IPIC cases.

Since January 1, 2004, verdicts have been returned in 14 cases. Lorillard was not a defendant in any of these cases. Defense verdicts were returned in ten of the 14 trials, while juries found in favor of the plaintiffs and awarded damages in the four remaining cases. The defendants in each of these four cases are pursuing appeals. In rulings addressing cases tried in earlier years, some appellate courts have reversed verdicts returned in favor of the plaintiffs while other judgments that awarded damages to smokers have been affirmed on appeal. Manufacturers have exhausted their appeals in eight Individual cases in recent years and have been required to pay damages to plaintiffs. Punitive damages were paid to the smokers in three of the eight cases. Lorillard was not a party to these eight matters.

In addition to these cases, trial has been held against Lorillard in one case in which plaintiffs asserted both Conventional Product Liability claims and Filter claims, the case of Gadaleta v. AC&S, Inc., et al. (Supreme Court, New York County, New York). During October of 2004, the jury returned a verdict in favor of Lorillard, which was the only defendant in the case at trial. Plaintiffs did not seek review of the judgment and the matter is concluded. Also see Filter Cases below.

Some cases against U.S. cigarette manufacturers are scheduled for trial during 2006 and beyond. Lorillard is not a defendant in any of the cases scheduled for trial in 2006 The Company is not a defendant in any of the cases scheduled for trial in 2006. The trial dates are subject to change.

FLIGHT ATTENDANT CASES - Approximately 2,625 Flight Attendant cases are pending. Lorillard and three other cigarette manufacturers are the defendants in each of these matters. The Company is not a defendant in any of these cases. These suits were filed as a result of a settlement agreement by the parties, including Lorillard, in Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Miami-Dade County, Florida, filed October 31, 1991), a class action brought on behalf of flight attendants claiming injury as a result of exposure to environmental tobacco smoke. The settlement agreement, among other things, permitted the plaintiff class members to file these individual suits. These individuals may not seek punitive damages for injuries that arose prior to January 15, 1997.

The judges that have presided over the cases that have been tried have relied upon an order entered during October of 2000 by the Circuit Court of Miami-Dade County, Florida. The October 2000 order has been construed by these judges as holding that the flight attendants are not required to prove the substantive liability elements of their claims for negligence, strict liability and breach of implied warranty in order to recover damages. The court further ruled that the trials of these suits are to address whether the plaintiffs’ alleged injuries were caused by their exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded.

Lorillard has been a defendant in each of the seven flight attendant cases in which verdicts have been returned. Defendants have prevailed in six of the seven trials. In the single trial decided for the plaintiff, the jury awarded $5.5 million in damages. The court, however, reduced this award to $500,000. This verdict, as reduced by the trial court, was affirmed on appeal and the defendants have paid the award. Lorillard’s share of the judgment in this matter, including interest, was approximately $60,000. In one of the six cases in which a defense verdict was returned, the court granted plaintiff’s motion for a new trial and, following appeal, the case has been returned to the trial court for a second trial that has not been scheduled. In another of the cases in which a defense verdict was returned, plaintiff has appealed.

None of the flight attendant cases are scheduled for trial. Trial dates are subject to change.

CLASS ACTION CASES - Lorillard is a defendant in ten pending cases. The Company is a defendant in two of these cases. In most of the pending cases, plaintiffs seek class certification on behalf of groups of cigarette smokers, or the estates of deceased cigarette smokers, who reside in the state in which the case was filed. One of the cases in which Lorillard is a defendant, Schwab v. Philip Morris USA, Inc., et al., is a purported national class action on behalf of purchasers of “light” cigarettes in which plaintiffs’ claims are based on defendants’ alleged RICO violations. Neither Lorillard nor the Company are defendants in approximately 35 additional class action cases in which plaintiffs assert claims on behalf of smokers or purchasers of “light” cigarettes. These cases are discussed below.

Cigarette manufacturers, including Lorillard, have defeated motions for class certification in a total of 35 cases, 13 of which were in state court and 22 of which were in federal court. These 35 cases were filed in 17 states, the District of Columbia and the Commonwealth of Puerto Rico. One of these matters, known as In re: Simon II Litigation, was a purported nationwide class action on behalf of individuals with punitive damages claims against cigarette manufacturers, but this class was decertified by a federal court of appeals during 2005. In addition, a Nevada court granted motions to deny class certification in 20 separate cases in which the class definition asserted by the plaintiffs was identical to those in which the court had previously ruled in defendants’ favor. Motions for class certification have also been ruled upon in some of the “lights” cases or in other class actions to which Lorillard was not a party. In some of these cases, courts have denied class certification to the plaintiffs, while classes have been certified in other matters.

The Engle Case - During July of 2006, in the case of Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Miami-Dade County, Florida, filed May 5, 1994), the Florida Supreme Court affirmed the 2003 holding of an intermediate appellate court that the $145.0 billion punitive damages award must be vacated, including approximately $16.3 billion against Lorillard. The Florida Supreme Court’s decision also reversed a 2003 ruling by the intermediate Florida Court of Appeal, which held that claims for punitive damages asserted by Florida smokers were barred by the 1997 settlement agreement and judgment in the case filed by the State of Florida against cigarette manufacturers, including Lorillard (see “Settlement of State Reimbursement Litigation” below). Prior to trial, Engle was certified as a class action on behalf of Florida residents, and survivors of Florida residents, who were injured or died from medical conditions allegedly caused by addiction to cigarettes, and the trial was governed by a three-phase trial plan. The Florida Supreme Court determined that the case could not proceed further as a class action and decertified the class. However, the Florida Supreme Court ruling permits members of the now-decertified class whose claims arose prior to the class certification cut-off date (November 21, 1996) to file individual claims, including claims for punitive damages, within one year from when this decision becomes final. The Florida Supreme Court held that these individual plaintiffs are entitled to rely on some of the jury’s findings in favor of the plaintiffs in the first phase of the Engle trial on a number of issues, including, among other things, that smoking cigarettes causes a number of diseases; that cigarettes are addictive or dependence-producing; and that the defendants, including Lorillard, were negligent, placed cigarettes on the market that were defective and unreasonably dangerous, and concealed or conspired to conceal the risks of smoking. The July 2006 decision by the Florida Supreme Court also reinstated the actual damages awarded during 2000 to two of the three individuals whose claims were heard during the second phase of trial. These awards totaled approximately $2.8 million to one smoker and $4.0 million to the second, and bear interest at the rate of 10.0% per year. Lorillard’s share of either of these verdicts, if any, has not been determined. The Florida Supreme Court has not ruled on the parties’ motions for reconsideration of the July 2006 decision.

Florida enacted legislation that limits the amount of an appellate bond required to be posted in order to stay execution of a judgment for punitive damages in a certified class action. While Lorillard believes this legislation is valid and that any challenges to the possible application or constitutionality of this legislation would fail, Lorillard entered into an agreement with the plaintiffs during May of 2001 in which it contributed $200.0 million to a fund held for the benefit of the Engle plaintiffs (the “Engle Agreement”). The $200.0 million contribution included the $100.0 million that Lorillard posted as collateral for the appellate bond. Accordingly, Lorillard recorded a pretax charge of $200.0 million in the year ended December 31, 2001. Two other defendants executed agreements with the plaintiffs that were similar to Lorillard’s. As a result, the class agreed to a stay of execution, with respect to Lorillard and the two other defendants on its punitive damages judgment until appellate review is completed, including any review by the U.S. Supreme Court.

The Engle Agreement provides that in the event that Lorillard, Inc.’s balance sheet net worth falls below $921.2 million (as determined in accordance with generally accepted accounting principles in effect as of July 14, 2000), the stay granted in favor of Lorillard in the Engle Agreement would terminate and the class would be free to challenge the Florida legislation. As of September 30, 2006, Lorillard, Inc. had a balance sheet net worth of approximately $1.4 billion. In addition, the Engle Agreement requires Lorillard to obtain the written consent of class

counsel or the court prior to selling any trademark of or formula comprising a cigarette brand having a U.S. market share of 0.5% or more during the preceding calendar year. The Engle Agreement also requires Lorillard to obtain the written consent of the Engle class counsel or the court to license to a third party the right to manufacture or sell such a cigarette brand unless the cigarettes to be manufactured under the license will be sold by Lorillard. It is not clear how the Engle Agreement is affected by the Florida Supreme Court’s decertification of the class and its order vacating the punitive damages judgment.

The Scott case - Another class action pending against Lorillard is Scott v. The American Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed May 24, 1996). During 1997, the court certified a class composed of certain cigarette smokers resident in the State of Louisiana who desire to participate in medical monitoring or smoking cessation programs and who began smoking prior to September 1, 1988, or who began smoking prior to May 24, 1996 and allege that defendants undermined compliance with the warnings on cigarette packages.

Trial in Scott was heard in two phases. While the jury in its July 2003 Phase I verdict rejected medical monitoring, the primary relief requested by plaintiffs, it returned sufficient findings in favor of the class to proceed to a Phase II trial on plaintiffs’ request for a state-wide smoking cessation program.

During May of 2004, the jury returned its verdict in the trial’s second phase and awarded approximately $591.0 million to fund cessation programs for Louisiana smokers. The court’s final judgment, entered during June of 2004, reflects the jury’s award of damages and also awarded judicial interest. The judicial interest award will continue to accrue until the judgment is paid or is vacated on appeal. As of October 15, 2006 judicial interest totaled an additional amount of approximately $425.0 million. Lorillard’s share of the judgment and the judicial interest has not been determined. Lorillard and the other defendants have initiated an appeal from the judgment to the Louisiana Court of Appeals. The appellate court heard defendants’ appeal during April of 2006 and a decision could be issued at any time.

The parties filed a stipulation in the trial court agreeing that an article of the Louisiana Code of Civil Procedure, and a Louisiana statute governing the amount of appellate bonds in civil cases involving a signatory to the Master Settlement Agreement, required that the amount of the bond for the appeal be set at $50.0 million for all defendants collectively. The parties further agreed that the plaintiffs have full reservations of rights to contest in the trial court, at a later date, the sufficiency or amount of the bond on any grounds. The trial court entered an order setting the amount of the bond at $50.0 million for all defendants. Defendants collectively posted a surety bond in that amount, of which Lorillard secured 25%, or $12.5 million. While Lorillard believes the limitation on the appeal bond amount is valid as required by Louisiana law, and that any challenges to the amount of the bond would fail, in the event of a successful challenge the amount of the appeal bond could be set as high as 150% of the judgment and judicial interest combined. If such an event occurred, Lorillard’s share of the appeal bond has not been determined.

Other class action cases - Two additional cases are pending against Lorillard in which motions for class certification were granted. In one of them, Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San Diego County, California, filed June 10, 1997), a California court granted defendants’ motion to decertify the class. The class decertification order has been affirmed on appeal, but the California Supreme Court has agreed to hear the case. The class originally certified in Brown was composed of residents of California who smoked at least one of defendants’ cigarettes between June 10, 1993 and April 23, 2001 and who were exposed to defendants’ marketing and advertising activities in California. In the second case, Daniels v. Philip Morris, Incorporated, et al. (Superior Court, San Diego County, California, filed August 2, 1998), the court granted defendants’ motion for summary judgment during 2002 and dismissed the case. Plaintiffs appealed, but the California Court of Appeal affirmed the dismissal during 2004. Plaintiffs are now pursuing an appeal to the California Supreme Court. Prior to granting defendants’ motion for summary judgment, the court had certified a class composed of California residents who, while minors, smoked at least one cigarette between April of 1994 and December 31, 1999 and were exposed to defendants’ marketing and advertising activities in California. It is possible that either or both of these class certification rulings could be reinstated as a result of the pending appeals.

As discussed above, other cigarette manufacturers are defendants in approximately 35 cases in which plaintiffs’ claims are based on the allegedly fraudulent marketing of “lights” or “ultra-lights” cigarettes. Among those “lights” class actions in which neither the Company nor Lorillard are defendants is the case of Price v. Philip Morris USA (Circuit Court, Madison County, Illinois, filed February 10, 2000). During March of 2003, the court returned a verdict in favor of the class and awarded it $7.1 billion in actual damages. The court also awarded $3.0 billion in punitive damages to the State of Illinois, which was not a party to the suit, and awarded plaintiffs’ counsel approximately $1.8 billion in fees and costs. During December of 2005, the Illinois Supreme Court vacated the damages awards, decertified the class, and ordered that the case be dismissed. Plaintiffs have sought review of the

case by the U.S. Supreme Court. Price is the only “lights” class action to have been tried, although classes have been certified in some of the other pending matters.

The Schwab case - Lorillard is a defendant in one “lights” class action, Schwab v. Philip Morris USA, Inc., et al. (U.S. District Court, Eastern District, New York, filed May 11, 2004). The Company is not a party to this case. Plaintiffs in Schwab base their claims on defendants’ alleged violations of the RICO statute in the manufacture, marketing and sale of “lights” cigarettes, and they have claimed damages totaling as much as $200.0 billion. Any damages awarded to the plaintiffs based on defendants’ violation of the RICO statute would be trebled. During September of 2006, the court granted plaintiffs’ motion for class certification and certified a nationwide class action on behalf of purchasers of “light” cigarettes. The court scheduled trial to begin during January of 2007. Defendants are seeking leave to pursue an interlocutory appeal of the class certification order. The federal court of appeals has granted a temporary stay of the case, including the trial date, pending its consideration of whether to accept defendants’ interlocutory appeal.

REIMBURSEMENT CASES - Although the cases settled by the State Settlement Agreements, as described below, are concluded, certain matters are pending against cigarette manufacturers. The pending cases include Reimbursement cases on file in U.S. courts, a Reimbursement case on file in Israel, and cases challenging the State Settlement Agreements. Lorillard is a defendant in four pending Reimbursement cases in the U.S. and has been named as a party to the case in Israel. The Company also is a party to the case in Israel, but it is not a defendant in any of the Reimbursement cases in the U.S. The four cases pending against Lorillard are brought by a city government and a group of hospitals; a group of taxpayers; an Indian tribe; and the U.S. federal government.

U.S. Federal Government Action - During August of 2006, the U.S. District Court for the District of Columbia issued its final judgment and remedial order in the federal government’s reimbursement suit (United States of America v. Philip Morris USA, Inc., et al., U.S. District Court, District of Columbia, filed September 22, 1999). The verdict concluded a bench trial that began in September of 2004. Lorillard, other cigarette manufacturers, two parent companies and two trade associations are defendants in this action. The Company is not a party to this case.

The court determined that the defendants, including Lorillard, violated certain provisions of the RICO statute, that there was a likelihood of present and future RICO violations, and that equitable relief was warranted. Plaintiff was not awarded monetary damages. The equitable relief included permanent injunctions that prohibit the defendants, including Lorillard: from engaging in any act of racketeering, as defined under RICO; from making any material false or deceptive statements concerning cigarettes; from making any express or implied statement about health on cigarette packaging or promotional materials (these prohibitions include a ban on using such descriptors as “low tar,” “light,” “ultra-light,” “mild,” or “natural”); and from making any statements that “low tar,” “light,” “ultra-light,” “mild,” or “natural” or low-nicotine cigarettes may result in a reduced risk of disease. The final judgment and remedial order also requires the defendants, including Lorillard, to make corrective statements on their websites, in certain media, in point-of-sale advertisements, and on cigarette package “onserts” concerning: the health effects of smoking; the addictiveness of smoking; that there are no significant health benefits to be gained by smoking “low tar,” “light,” “ultra-light,” “mild,” or “natural” cigarettes; that cigarette design has been manipulated to ensure optimum nicotine delivery to smokers; and that there are adverse effects from exposure to secondhand smoke. The text of these statements, which have not been determined, are subject to the court’s approval. The final judgment and remedial order also requires the defendants, including Lorillard, to maintain and to disclose documents on their internet websites and to continue to place documents in a document depository created in the case of State of Minnesota v. Philip Morris Inc., et al. The defendants, including Lorillard, were directed in the final judgment and remedial order to disclose “disaggregated” marketing data. If the final judgment and remedial order are not modified or vacated on appeal, the costs to Lorillard for compliance could exceed $10.0 million. Defendants have noticed an appeal from the final judgment and remedial order to the U.S. Court of Appeals for the District of Columbia Circuit. Defendants have received a stay of the judgment and remedial order from the District of Columbia Court of Appeal that will remain in effect while the appeal is proceeding. The government also has noticed an appeal from the final judgment. As a result of this appeal, it is possible that the District of Columbia Court of Appeals could consider rulings regarding other claimed damages and relief. While trial was underway, the District of Columbia Court of Appeals ruled that plaintiff may not seek disgorgement of profits, but this appeal was interlocutory in nature and could be reconsidered in the present appeal. Prior to trial, the government had estimated that it was entitled to approximately $280.0 billion from the defendants for its disgorgement of profits claim. In addition, the government sought during trial more than $10.0 billion for the creation of nationwide smoking cessation, public education and counter-marketing programs. In its 2006 verdict, the trial court declined to award such relief. It is possible that these claims could be reinstated on appeal.

In another of the cases, a private insurer in Israel, Clalit Health Services, seeks damages for providing treatment to individuals allegedly injured by cigarette smoking in Israel (Clalit Health Services v. Philip Morris, Inc., et al.,

District Court of Jerusalem, Israel). The Company was dismissed from this suit during 2005, although plaintiff has appealed this ruling. The case remains pending against Lorillard, other cigarette manufacturers, and other defendants.

SETTLEMENT OF STATE REIMBURSEMENT LITIGATION - On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company, the “Original Participating Manufacturers,” entered into a Master Settlement Agreement (“MSA”) with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Commonwealth of the Northern Mariana Islands to settle the asserted and unasserted health care cost recovery and certain other claims of those states. These settling entities are generally referred to as the “Settling States.” The Original Participating Manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota, which together with the Master Settlement Agreement are generally referred to as the “State Settlement Agreements.”

The State Settlement Agreements provide that the agreements are not admissions, concessions or evidence of any liability or wrongdoing on the part of any party, and were entered into by the Original Participating Manufacturers to avoid the further expense, inconvenience, burden and uncertainty of litigation.

Lorillard recorded pretax charges of $242.8 million, $223.9 million, $696.3 million and $658.2 million ($149.3 million, $140.8 million, $426.4 million and $402.0 million after taxes) for the three and nine months ended September 30, 2006 and 2005, respectively, to accrue its obligations under the State Settlement Agreements. Lorillard’s portion of ongoing adjusted payments and legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the payment is due. Accordingly, Lorillard records its portions of ongoing settlement payments as part of cost of manufactured products sold as the related sales occur.

The State Settlement Agreements require that the domestic tobacco industry make annual payments in the following amounts, subject to adjustment for several factors, including inflation, market share and industry volume: $8.4 billion through 2007 and $9.4 billion thereafter. In addition, the domestic tobacco industry is required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500.0 million, as well as an additional amount of up to $125.0 million in each year through 2008. These payment obligations are the several and not joint obligations of each settling defendant.

The State Settlement Agreements also include provisions relating to significant advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to tobacco control and underage use laws, and other provisions. Lorillard and the other Original Participating Manufacturers have notified the States that they intend to seek an adjustment in the amount of payments made in 2003 pursuant to a provision in the MSA that permits such adjustment if the companies can prove that the MSA was a significant factor in their loss of market share to companies not participating in the MSA and that the States failed to diligently enforce certain statutes passed in connection with the MSA. If the Original Participating Manufacturers are ultimately successful, any adjustment would be reflected as a credit against future payments by the Original Participating Manufacturers under the agreement.

From time to time, lawsuits have been brought against Lorillard and other participating manufacturers to the MSA, or against one or more of the states, challenging the validity of that agreement on certain grounds, including as a violation of the antitrust laws. Lorillard is a defendant in one such case, which has been dismissed by the trial court but has been appealed by the plaintiffs. Lorillard understands that additional such cases are proceeding against other defendants.

In addition, in connection with the MSA, the Original Participating Manufacturers entered into an agreement to establish a $5.2 billion trust fund payable between 1999 and 2010 to compensate the tobacco growing communities in 14 states (the “Trust”). Payments to the Trust will no longer be required as a result of an assessment imposed under a new federal law repealing the federal supply management program for tobacco growers, although the states of Maryland and Pennsylvania are contending that payments under the Trust should continue to growers in those states since the new federal law did not cover them, and the matter is being litigated. In 2005 other litigation was resolved over the Trust’s obligation to return payments made by the Original Participating Manufacturers in 2004 or withheld from payment to the Trust for the fourth quarter of 2004, when the North Carolina Supreme Court ruled that such payments were due to the Trust. Lorillard’s share of payments into the Trust in 2004 was approximately $30.0 million and its share of the payment due for the last quarter of that year was approximately $10.0 million. Under the new law, enacted in October of 2004, tobacco quota holders and growers will be compensated with payments totaling $10.1 billion, funded by an assessment on tobacco manufacturers and importers. Payments to qualifying tobacco quota holders and growers commenced in 2005.

The Company believes that the State Settlement Agreements will materially adversely affect its cash flows and operating income in future years. The degree of the adverse impact will depend, among other things, on the rates of decline in U.S. cigarette sales in the premium price and discount price segments, Lorillard’s share of the domestic premium price and discount price cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to significant payment obligations under the State Settlement Agreements.

CONTRIBUTION CLAIMS - Plaintiffs seek recovery of funds paid by them to individuals whose asbestos disease or illness was alleged to have been caused in whole or in part by smoking-related illnesses. No such cases are pending.

FILTER CASES - In addition to the above, claims have been brought against Lorillard by individuals who seek damages resulting from their alleged exposure to asbestos fibers that were incorporated into filter material used in one brand of cigarettes manufactured by Lorillard for a limited period of time ending more than 50 years ago. Approximately 35 such matters are pending against Lorillard. The Company is not a defendant in any of these matters. Since January 1, 2004, Lorillard has paid, or has reached agreement to pay, a total of approximately $19.7 million in payments of judgments and settlements to finally resolve approximately 75 claims. In the only case with Filter claims to have been tried since January 1, 2004, Gadaleta v. AC&S, Inc., et al. (Supreme Court of New York, New York County) the jury returned a verdict in favor of Lorillard. Plaintiff did not appeal and this matter is concluded. Plaintiffs in Gadaleta asserted both Filter claims and Conventional Product Liability claims. Trial dates are scheduled in some of the pending cases. Trial dates are subject to change.

Other Tobacco - Related

TOBACCO - RELATED ANTITRUST CASES - Indirect Purchaser Suits - Approximately 30 antitrust suits were filed on behalf of putative classes of consumers in various state courts against Lorillard and its major competitors. The suits all alleged that the defendants entered into agreements to fix the wholesale prices of cigarettes in violation of state antitrust laws which permit indirect purchasers, such as retailers and consumers, to sue under price fixing or consumer fraud statutes. More than 20 states permit such suits. Lorillard was a defendant in all but one of these indirect purchaser cases. The Company was also named as a defendant in most of these indirect purchaser cases, but was voluntarily dismissed without prejudice from all of them. Three indirect purchaser suits, in New York, Florida and Michigan, were dismissed by courts in their entirety and the plaintiffs withdrew their appeals. The actions in all other states except for New Mexico and Kansas, have been voluntarily dismissed.

In the Kansas case, the District Court of Seward County certified a class of Kansas indirect purchasers in 2002. The parties are in the process of litigating certain privilege issues. The Court has appointed a Special Master to consider all privilege issues and to file a report with the Court on a date not yet established. On July 14, 2006, the Court issued an order confirming that fact discovery is closed, with the exception of privilege issues that the Court determines, based on the Special Master’s report, justify further limited fact discovery. Expert discovery, as necessary, will take place in early 2007. No date has as yet been set by the Court for dispositive motions and trial.

A decision granting class certification in New Mexico was affirmed by the New Mexico Court of Appeals on February 8, 2005. As ordered by the Court, class notice was sent out on October 30, 2005. The New Mexico plaintiffs were permitted to rely on discovery produced in the Kansas case. On June 30, 2006, the New Mexico Court granted summary judgment to all defendants, and the suit was dismissed. An appeal was filed by the plaintiffs on August 14, 2006.

Tobacco Growers Suit - DeLoach v. Philip Morris Inc., et al. (U.S. District Court, Middle District of North Carolina, filed February 16, 2000). On October 1, 2003, the Court approved a settlement by Lorillard with a class consisting of all persons holding a quota (the licenses that a farmer must either own or rent to sell the crop) to grow, and all domestic producers who sold flue-cured or burley tobacco at anytime from February 1996 to present. In addition to payments previously made, Lorillard committed to buy 20 million pounds of domestic tobacco for each crop year through 2012. Pursuant to the terms of the settlement agreement, that obligation was subsequently extended until crop year 2014 as a result of the enactment of the Fair and Equitable Tobacco Reform Act of 2004.

Lorillard has also committed to purchase at least 35% of its annual total requirements for flue-cured and burley tobacco domestically for the same period. The other major domestic tobacco companies and the major leaf buyers were also defendants, and all of the defendants with the exception of R.J. Reynolds were parties to the settlement agreement entered on October 1, 2003. R.J. Reynolds subsequently entered into a settlement agreement with the class and that agreement was approved by the Court. Lorillard contended that the R.J. Reynolds settlement agreement triggered a clause in Lorillard’s settlement agreement that would substantially reduce Lorillard’s

commitments to buy domestic tobacco. After Lorillard prevailed on an appeal related to the claimed reduction, the trial court ruled that the leaf commitment will be reduced for Lorillard by approximately 60%, effective in 2006.

MSA Federal Antitrust Suit - Sanders v. Lockyer, et al. (U.S. District Court, Northern District of California, filed June 9, 2004). Lorillard and the other major cigarette manufacturers, along with the Attorney General of the State of California, have been sued by a consumer purchaser of cigarettes in a putative class action alleging violations of the Sherman Act and California state antitrust and unfair competition laws. The plaintiff seeks treble damages of an unstated amount for the putative class as well as declaratory and injunctive relief. All claims are based on the assertion that the Master Settlement Agreement that Lorillard and the other cigarette manufacturer defendants entered into with the State of California and more than forty other states, together with certain implementing legislation enacted by California, constitute unlawful restraints of trade. On March 28, 2005 the defendants’ motion to dismiss the suit was granted. Plaintiffs appealed the dismissal to the Court of Appeals for the Ninth Circuit. Briefing on the appeal was completed in December 2005, and no date has as yet been set for argument on the appeal.

Defenses

Lorillard believes that it has valid defenses to the cases pending against it. Lorillard also believes it has valid bases for appeal of the adverse verdicts against it. To the extent the Company is a defendant in any of the lawsuits described in this section, the Company believes that it is not a proper defendant in these matters and has moved or plans to move for dismissal of all such claims against it. While Lorillard intends to defend vigorously all tobacco products liability litigation, it is not possible to predict the outcome of any of this litigation. Litigation is subject to many uncertainties. Plaintiffs have prevailed in several cases, as noted above. It is possible that one or more of the pending actions could be decided unfavorably as to Lorillard or the other defendants. Lorillard may enter into discussions in an attempt to settle particular cases if it believes it is appropriate to do so.

Lorillard cannot predict the outcome of pending litigation. Jury awards in the billions of dollars have been returned against cigarette manufacturers in recent years. In addition, health issues related to tobacco products continue to receive media attention. These events could have an adverse affect on the ability of Lorillard to prevail in smoking and health litigation. Lorillard also cannot predict the type or extent of litigation that could be brought against it and other cigarette manufacturers in the future.

Except for the impact of the State Settlement Agreements as described above, management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending litigation and, therefore, no provision has been made in the Consolidated Condensed Financial Statements for any unfavorable outcome. It is possible that the Company’s results of operations or cash flows in a particular quarterly or annual period or its financial position could be materially adversely affected by an unfavorable outcome or settlement of certain pending litigation.

OTHER LITIGATION

The Company and its subsidiaries are also parties to other litigation arising in the ordinary course of business. The outcome of this other litigation will not, in the opinion of management, materially affect the Company’s results of operations or equity.

14. Commitments and Contingencies

Guarantees

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

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

In the event that the other parties to the joint venture are unable to meet their commitments in funding the operations of this joint venture, CNA would be required to assume the obligation for the entire office building operating lease. The maximum potential future lease payments at September 30, 2006 that CNA could be required to pay under this guarantee are approximately $235.0 million. If CNA were required to assume the entire lease

obligation, CNA would have the right to pursue reimbursement from the other shareholders and would have the right to all sublease revenues.

In the course of selling business entities and assets to third parties, CNA has agreed to indemnify purchasers for losses arising out of breaches of representation and warranties with respect to the business entities or assets being sold, including, in certain cases, losses arising from undisclosed liabilities or certain named litigation. Such indemnification provisions generally survive for periods ranging from nine months following the applicable closing date to the expiration of the relevant statutes of limitation. As of September 30, 2006 the aggregate amount of quantifiable indemnification agreements in effect for sales of business entities, assets and third party loans was $923.0 million.

In addition, CNA has agreed to provide indemnification to third party purchasers for certain losses associated with sold business entities or assets that are not limited by a contractual monetary amount. As of September 30, 2006, CNA had outstanding unlimited indemnifications in connection with the sales of certain of its business entities or assets that included tax liabilities arising prior to a purchaser’s ownership of an entity or asset, defects in title at the time of sale, employee claims arising prior to closing and in some cases losses arising from certain litigation and undisclosed liabilities. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire. The liabilities related to these indemnification agreements were approximately $25.0 million and $65.0 million as of September 30, 2006 and December 31, 2005.

In connection with the issuance of preferred securities by CNA Surety Capital Trust I, CNA Surety, a 63.0% owned and consolidated subsidiary of CNA, issued a guarantee of $75.0 million to guarantee the payment by CNA Surety Capital Trust I of annual dividends of $1.5 million over 30 years and redemption of $30.0 million of preferred securities.

CNA Surety

CNA Surety has provided significant surety bond protection for a large national contractor that undertakes projects for the construction of government and private facilities, a substantial portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNA provided loans to the contractor through a credit facility. The Company, through a participation agreement with CNA, has funded and owns an interest in the credit facility. Due to reduced operating cash flow at the contractor these loans were fully impaired through realized investment losses in 2004 and 2005. For the nine months ended September 30, 2005, the Company recorded a pretax impairment charge of $47.0 million. The Company no longer provides additional liquidity to the contractor and has not recognized interest income related to the loans since June 30, 2005.

In addition to the impairment of loans outstanding under the credit facility, CNA determined that the contractor would likely be unable to meet its obligations under the surety bonds. Accordingly, during 2005, CNA Surety established $110.0 million of surety loss reserves in anticipation of future loss payments, $50.0 million of which was ceded to CCC under the reinsurance agreements discussed below. Further deterioration of the contractor’s operating cash flow could result in higher loss estimates and trigger additional reserve actions. If any such reserve additions were required, CCC would have all further surety bond exposure through the reinsurance arrangements. During the three and nine months ended September 30, 2006, CNA Surety paid $11.0 million and $32.0 million related to surety losses of the contractor. As of September 30, 2006, CNA Surety has made total surety loss payments of approximately $58.0 million related to bonded obligations of the contractor.

CNA Surety may provide surety bonds on a limited basis on behalf of the contractor to support its revised restructuring plan, subject to the contractor’s compliance with CNA Surety’s underwriting standards and ongoing management of CNA Surety’s exposure in relation to the contractor. All surety bonds written for the contractor are issued by CCC and its affiliates, other than CNA Surety, and are subject to underlying reinsurance treaties pursuant to which all bonds written on behalf of CNA Surety are 100% reinsured to one of CNA Surety’s insurance subsidiaries.

CCC provides reinsurance protection to CNA Surety for losses in excess of an aggregate of $60.0 million associated with the contractor. This treaty provides coverage for the life of bonds either in force or written from January 1, 2005 to December 31, 2005. CCC and CNA Surety agreed by addendum to extend this contract for twelve months, expiring on December 31, 2006.

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

Indemnification and subrogation rights, including rights to contract proceeds on construction projects in the event of default, reduce CNA Surety’s and ultimately the Company’s exposure to loss. While CNA believes that the contractor’s continuing restructuring efforts may be successful, the contractor’s failure to ultimately achieve its extended restructuring plan or perform its contractual obligations under CNA’s surety bonds could have a material adverse effect on CNA’s results of operations. If such failures occur, CNA estimates the additional surety loss, net of indemnification and subrogation recoveries, but before the effects of minority interest, to be approximately $90.0 million pretax.

CNA has also guaranteed or provided collateral for the contractor’s letters of credit. As of September 30, 2006 and December 31, 2005, these guarantees and collateral obligations aggregated $12.0 million and $13.0 million.

Diamond Offshore Construction Projects

As of September 30, 2006, Diamond Offshore had purchase obligations aggregating approximately $524.0 million related to the major upgrades of the Ocean Monarch and the Ocean Endeavor and construction of two new jack-up rigs, the Ocean Scepter and Ocean Shield. Diamond Offshore anticipates that expenditures related to these shipyard projects will be approximately $111.0 million, $223.0 million and $190.0 million for the remainder of 2006 and in 2007 and 2008, respectively. However, the actual timing of these expenditures will vary based on the completion of various construction milestones and the timing of the delivery of equipment, which are beyond Diamond Offshore’s control.

Regulatory and Rate Matters

Boardwalk Pipeline’s natural gas pipeline operations are regulated by the Federal Energy Regulatory Commission (“FERC”) whose regulatory policies govern the rates that each pipeline is permitted to charge customers for interstate transportation and storage of natural gas. From time to time, certain revenues collected may be subject to possible refunds upon final FERC orders. Accordingly, estimates of rate refund reserves are recorded considering regulatory proceedings, advice of counsel and estimated risk-adjusted total exposure, as well as other risks. In June of 2006, the settlement of Texas Gas’ general rate case became final. On June 30, 2006, Texas Gas refunded approximately $6.6 million consisting of $6.4 million in principal and $0.2 million of interest to its customers. The amount of the refund was accrued as a reduction to revenues and an increase to interest expense over the period from November 1, 2005 to the date of the refund. At December 31, 2005, the amount of the estimated liability for refund was approximately $5.0 million.

Due to the settlement, in the first quarter of 2006, Texas Gas began to amortize the balance of its regulatory asset for postretirement benefits other than pensions. The amortization of the remaining regulatory asset balance of approximately $27.2 million at September 30, 2006, will continue to be amortized on a straight-line basis over approximately five years.

Pipeline Expansion Projects

In February and March of 2006, Gulf South entered into long-term precedent agreements with customers providing firm commitments for most of the capacity on its 1.7 Bcf per day pipeline expansion project in East Texas/Mississippi. Boardwalk Pipeline expects the total cost for the 1.7 Bcf expansion to be approximately $800.0 million, and expects the new capacity associated with each of these projects to be in service during the second half of 2007. In September of 2006, Gulf South filed a certificate application with FERC to proceed with this project. As of September 30, 2006, Boardwalk Pipeline had purchase commitments of $284.9 million primarily related to its expansion projects.

Other

In the normal course of business, CNA has provided letters of credit in favor of various unaffiliated insurance companies, regulatory authorities and other entities. At September 30, 2006 and December 31, 2005, there were approximately $27.0 million and $30.0 million of outstanding letters of credit.

The Company is obligated to make future payments totaling $391.5 million for non-cancelable operating leases primarily for office space and data processing, office and transportation equipment. Estimated future minimum

payments under these contracts are as follows: $26.0 million in 2006; $66.3 million in 2007; $59.2 million in 2008; $48.9 million in 2009; $44.6 million in 2010; and $146.5 million in 2011 and beyond. Additionally, CNA has entered into a limited number of guaranteed payment contracts, primarily relating to telecommunication and software services, amounting to approximately $19.0 million as of September 30, 2006. Estimated future minimum payments under these contracts are as follows: $7.0 million in 2006, $10.0 million in 2007 and $2.0 million in 2008.

15. Discontinued Operations

CNA has discontinued operations which consist of run-off insurance operations acquired in its merger with The Continental Corporation in 1995. The business consists of facultative property and casualty, treaty excess casualty and treaty pro-rata reinsurance with underlying exposure to a diverse, multi-line domestic and international book of business encompassing property, casualty, the London Market and marine liabilities. The run-off operations are concentrated in United Kingdom and Bermuda subsidiaries also acquired in the merger.

Operating results of CNA’s discontinued operations were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Revenues:
Net investment income	$	5.3		$	3.2		$	13.1		$	11.3
Investment gains (losses) and other		0.2			2.9			(2.4	)		(2.4	)
Total revenues		5.5			6.1			10.7			8.9
Insurance related benefits (expenses)		(7.6	)		(4.2	)		(21.3	)		2.2
Income (loss) before income taxes and minority interest		(2.1	)		1.9			(10.6	)		11.1
Income tax benefit		8.4			0.4			8.8			0.5
Minority interest		(0.6	)		(0.1	)		0.1			(1.0	)
Net income (loss) from discontinued operations	$	5.7		$	2.2		$	(1.7	)	$	10.6

Net assets of discontinued operations are included in Other Assets in the Consolidated Condensed Balance Sheets and were as follows:

	September 30,			December 31,
	2006			2005
(In millions)

Assets:
Investments	$	331.9		$	357.8
Reinsurance receivables		47.7			77.9
Cash		37.5			28.9
Other assets		5.7			6.0
Total assets		422.8			470.6

Liabilities:
Insurance reserves		(319.7	)		(337.9	)
Other liabilities		(4.2	)		(19.4	)
Total liabilities		(323.9	)		(357.3	)

Net assets of discontinued operations	$	98.9		$	113.3

The Accumulated Other Comprehensive Income, net of tax and minority interest, reported on the Consolidated Condensed Balance Sheets includes $10.0 million and $10.1 million related to unrealized gains and $10.0 million and $5.0 million related to the cumulative foreign currency translation adjustment for discontinued operations as of September 30, 2006 and December 31, 2005.

CNA’s accounting and reporting for discontinued operations is in accordance with APB Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” At September 30, 2006 and

December 31, 2005, the insurance reserves are net of discount of $120.0 million and $104.9 million. The income (loss) from discontinued operations reported above primarily represents the net investment income, realized investment gains and losses, foreign currency gains and losses, effects of the accretion of the loss reserve discount and re-estimation of the ultimate claim and claim adjustment expense of the discontinued operations. See Note 18 for information on the restatement for discontinued operations.

16. Income Taxes

The Company’s consolidated federal income tax returns for 2002 through 2004 have been settled with the Internal Revenue Service (“IRS”), including related carryback claims for refund which were approved by the Joint Committee on Taxation. As a result, the Company recorded a federal income tax benefit of $9.1 million and net refund interest of $2.3 million, net of tax and minority interest, in the third quarter of 2006.

In 2005, the Company’s consolidated federal income tax returns were settled with the IRS through 2001 as the tax returns for 1998 through 2001, including related carryback claims and prior claims for refund, were approved by the Joint Committee on Taxation in the second quarter of 2005. As a result, the Company recorded a federal income tax benefit of $31.8 million and net refund interest of $77.4 million, net of tax and minority interest, in the second quarter of 2005. The tax benefit related primarily to the release of federal income tax reserves. Net refund interest of $129.7 million is included in Other Revenues in the Consolidated Condensed Statements of Income for the nine months ended September 30, 2005.

The federal income tax return for 2005 is currently under examination by the IRS. The Company believes the outcome of this examination will not have a material effect on its financial condition or results of operations.

17. Consolidating Financial Information

The following schedules present the Company’s consolidating balance sheet information at September 30, 2006 and December 31, 2005, and consolidating statements of income information for the nine months ended September 30, 2006 and 2005. These schedules present the individual subsidiaries of the Company and their contribution to the consolidated condensed financial statements. Amounts presented will not necessarily be the same as those in the individual financial statements of the Company’s subsidiaries due to adjustments for purchase accounting, income taxes and minority interests. In addition, many of the Company’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items. This information also does not reflect the impact of the Company’s issuance of Carolina Group stock. Lorillard is reported as a 100% owned subsidiary and does not include any adjustments relating to the tracking stock structure. See Note 4 for consolidating condensed information of the Carolina Group and Loews Group.

The Corporate and Other column primarily reflects the parent company’s investment in its subsidiaries, invested cash portfolio, corporate long-term debt and Bulova Corporation, a wholly owned subsidiary. The elimination adjustments are for intercompany assets and liabilities, interest and dividends, the parent company’s investment in capital stocks of subsidiaries, and various reclasses of debit or credit balances to the amounts in consolidation. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.

Loews Corporation

Consolidating Balance Sheet Information

CNA

Boardwalk

Diamond

Loews

Corporate

September 30, 2006

Financial

Lorillard

Pipeline

Offshore

Hotels

and Other

Eliminations

Total

(In millions)

Assets:

Investments

42,937.6

1,833.7

55.0

765.1

11.8

5,881.3

51,484.5

Cash

98.1

0.4

2.6

23.5

17.1

14.0

155.7

Receivables

13,464.9

20.9

60.5

448.2

28.9

258.2

(3.6

)

14,278.0

Property, plant and equipment

199.8

199.4

1,941.4

2,553.9

362.5

22.9

5,279.9

Deferred income taxes

942.6

424.4

19.3

(758.2

)

628.1

Goodwill and other intangible assets

106.1

163.4

21.8

2.6

5.0

298.9

Investments in capital stocks of

subsidiaries

11,845.8

(11,845.8

)

Other assets

1,016.6

384.5

281.4

116.7

70.6

87.3

(48.8

)

1,908.3

Deferred acquisition costs of

insurance subsidiaries

1,220.4

Separate account business

524.7

Total assets

60,510.8

2,863.3

2,504.3

3,929.2

493.5

18,133.8

(12,656.4

)

75,778.5

Liabilities and Shareholders’ Equity:

Insurance reserves

41,613.0

Payable for securities purchased

777.2

423.6

1,200.8

Collateral on loaned securities

2,385.4

Short-term debt

250.3

4.3

299.9

554.5

Long-term debt

2,155.2

1,161.9

956.8

233.1

865.2

5,372.2

Reinsurance balances payable

885.8

Deferred income taxes

30.2

457.4

48.8

221.8

(758.2

)

Other liabilities

2,314.5

1,497.4

325.8

351.9

42.6

170.3

(77.2

)

4,625.3

Separate account business

524.7

Total liabilities

50,906.1

1,497.4

1,517.9

1,766.1

328.8

1,980.8

(835.4

)

57,161.7

Minority interest

1,286.0

282.5

965.8

2,534.3

Shareholders’ equity

8,318.7

1,365.9

703.9

1,197.3

164.7

16,153.0

(11,821.0

)

16,082.5

Total liabilities and shareholders’ equity

60,510.8

2,863.3

2,504.3

3,929.2

493.5

18,133.8

(12,656.4

)

75,778.5

Loews Corporation

Consolidating Balance Sheet Information

	CNA				Boardwalk		Diamond		Loews		Corporate
December 31, 2005	Financial		Lorillard		Pipeline		Offshore		Hotels		and Other		Eliminations			Total
(In millions)

Assets:

Investments	$	39,692.9	$	1,747.7	$	65.0	$	819.9	$	9.5	$	3,061.0				$	45,396.0
Cash		96.4		2.4		0.8		24.9		9.6		19.0					153.1
Receivables		14,722.4		25.5		106.8		357.1		21.6		145.7	$	(65.4	)		15,313.7
Property, plant and equipment		148.5		213.9		1,867.4		2,333.7		366.6		21.5					4,951.6
Deferred income taxes		1,140.5		428.5		16.6						22.2		(702.5	)		905.3
Goodwill and other intangible assets		104.5				163.5		21.8		2.6		5.0					297.4
Investments in capital stocks of
subsidiaries												11,645.1		(11,645.1	)
Other assets		1,075.9		377.5		262.0		88.9		30.2		75.1					1,909.6
Deferred acquisition costs of
insurance subsidiaries		1,197.4															1,197.4
Separate account business		551.5															551.5
Total assets	$	58,730.0	$	2,795.5	$	2,482.1	$	3,646.3	$	440.1	$	14,994.6	$	(12,413.0	)	$	70,675.6

Liabilities and Shareholders’ Equity:

Insurance reserves	$	42,436.2														$	42,436.2
Payable for securities purchased		226.5									$	175.2					401.7
Collateral on loaned securities		767.4															767.4
Short-term debt		252.4			$	42.1			$	3.9		299.8					598.2
Long-term debt		1,437.9				1,101.3	$	968.3		236.2		864.9					4,608.6
Reinsurance balances payable		1,636.2															1,636.2
Deferred income taxes								456.9		50.2		195.4	$	(702.5	)
Other liabilities		2,239.9	$	1,455.7		347.0		335.8		11.5		206.2		(71.3	)		4,524.8
Separate account business		551.5															551.5
Total liabilities		49,548.0		1,455.7		1,490.4		1,761.0		301.8		1,741.5		(773.8	)		55,524.6
Minority interest		936.8				276.5		845.6									2,058.9
Shareholders’ equity		8,245.2		1,339.8		715.2		1,039.7		138.3		13,253.1		(11,639.2	)		13,092.1
Total liabilities and shareholders’ equity	$	58,730.0	$	2,795.5	$	2,482.1	$	3,646.3	$	440.1	$	14,994.6	$	(12,413.0	)	$	70,675.6

Loews Corporation

Consolidating Statement of Income Information

Nine Months Ended September 30, 2006

CNA

Financial

Lorillard

Boardwalk

Pipeline

Diamond

Offshore

Loews

Hotels

Corporate

and Other

Eliminations

Total

(In millions)

Revenues:

Insurance premiums

5,704.1

(0.1

)

5,704.0

Net investment income

1,721.8

71.6

1.8

26.8

0.7

216.8

2,039.5

Intercompany interest and dividends

1,047.6

(1,047.6

)

Investment gains (losses)

(63.8

)

(0.5

)

(0.1

)

1.6

(62.8

)

Gain on issuance of subsidiary stock

1.5

7.5

9.0

Manufactured products

2,818.1

136.5

2,954.6

Other

174.8

0.1

440.6

1,478.8

279.5

10.9

2,384.7

Total

7,538.4

2,889.3

442.4

1,505.5

280.2

1,420.9

(1,047.7

)

13,029.0

Expenses:

Insurance claims and policyholders'

benefits

4,446.1

Amortization of deferred acquisition costs

1,132.4

Cost of manufactured products sold

1,638.0

68.0

1,706.0

Other operating expenses

712.8

285.2

264.1

819.7

231.3

97.6

(0.1

)

2,410.6

Restructuring and other related charges

(12.9

)

(12.9

)

Interest

93.4

0.1

45.8

18.7

9.0

57.0

224.0

Total

6,371.8

1,923.3

309.9

838.4

240.3

222.6

(0.1

)

9,906.2

1,166.6

966.0

132.5

667.1

39.9

1,198.3

(1,047.6

)

3,122.8

Income tax expense (benefit)

344.4

374.5

45.2

203.7

14.3

52.9

1,035.0

Minority interest

100.3

19.2

221.8

341.3

Total

444.7

374.5

64.4

425.5

14.3

52.9

1,376.3

Income from continuing operations

721.9

591.5

68.1

241.6

25.6

1,145.4

(1,047.6

)

1,746.5

Discontinued operations, net

(1.7

)

(1.7

)

Net income

720.2

591.5

68.1

241.6

25.6

1,145.4

(1,047.6

)

1,744.8

Loews Corporation

Consolidating Statement of Income Information

Nine Months Ended September 30, 2005	CNA Financial		Lorillard			Boardwalk Pipeline		Diamond Offshore			Loews Hotels		Corporate and Other			Eliminations			Total
(In millions)

Revenues:

Insurance premiums	$	5,684.4														$	(0.1	)	$	5,684.3
Net investment income		1,345.3	$	43.4		$	2.2	$	18.0		$	5.8	$	53.8						1,468.5
Intercompany interest and dividends														652.9			(652.9	)
Investment gains (losses)		76.3		(2.0	)				(1.5	)				(3.1	)					69.7
Manufactured products				2,651.8										119.4						2,771.2
Other		350.4		6.1			390.8		897.0			261.6		10.2						1,916.1
Total		7,456.4		2,699.3			393.0		913.5			267.4		833.2			(653.0	)		11,909.8

Expenses:

Insurance claims and policyholders'
benefits		4,886.4																		4,886.4
Amortization of deferred acquisition costs		1,167.6																		1,167.6
Cost of manufactured products sold				1,605.0										57.4						1,662.4
Other operating expenses		756.0		282.3			255.1		666.2			214.5		88.1			(0.1	)		2,262.1
Interest		95.9					44.7		33.7			7.8		107.4						289.5
Total		6,905.9		1,887.3			299.8		699.9			222.3		252.9			(0.1	)		10,268.0
		550.5		812.0			93.2		213.6			45.1		580.3			(652.9	)		1,641.8

Income tax expense (benefit)		56.5		316.1			37.1		69.6			12.4		(45.1	)					446.6
Minority interest		51.8							69.9											121.7
Total		108.3		316.1			37.1		139.5			12.4		(45.1	)		-			568.3
Income from continuing operations		442.2		495.9			56.1		74.1			32.7		625.4			(652.9	)		1,073.5
Discontinued operations, net		10.6																		10.6
Net income	$	452.8	$	495.9		$	56.1	$	74.1		$	32.7	$	625.4		$	(652.9	)	$	1,084.1

18. Restatements

The Company has restated its previously reported interim financial statements for the three and nine months ended September 30, 2005 and all related disclosures. The restatement is to correct the accounting for discontinued operations acquired in CNA’s merger with The Continental Corporation in 1995 and to correct classification errors within the Company’s Consolidated Condensed Statement of Cash Flows.

Discontinued Operations

A review of discontinued operations completed in February 2006 identified an overstatement of the net assets of these discontinued operations and errors in accounting for the periodic results of these operations. CNA did not have an effectively designed control process in place to ensure adequate oversight, analysis, reconciliation, documentation and periodic evaluation of the results and balances that comprise the net assets of businesses reported as discontinued operations. There was also a lack of understanding of subsidiary ledger detail which contributed to CNA’s failure to eliminate intercompany activity within discontinued operations and between continuing and discontinued operations. As a result, the balances related to discontinued operations were incorrectly established in CNA’s current general ledger system in 1997 in connection with a general ledger conversion, creating an overstatement of the reported net assets of discontinued operations. In addition, CNA’s evaluation of the periodic results of discontinued operations was ineffective. The correction of the elimination issue noted above caused the historical results of discontinued operations to change, requiring current evaluation of the revised periodic results for reporting purposes. Further, in light of the impact of the elimination corrections, CNA reviewed its historical process to evaluate the results of discontinued operations and determined that process did not address recorded loss reserves at all consolidating levels for discontinued operations. Therefore, CNA determined that it was appropriate to recognize the impact of the revised historical periodic income or loss of discontinued operations.

The effect of the restatement on the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2005 is included in the table below.

	Three Months Ended September 30, 2005				Nine Months Ended September 30, 2005
(In millions, except per share data)	Previously Reported		Restated		Previously Reported		Restated
Consolidated Condensed Statements of Income:
Discontinued operations, net	$	-	$	2.2	$	-	$	10.6
Net income		300.0		302.2		1,073.5		1,084.1

Per Loews common share-basic and diluted
Discontinued operations, net	$	-	$	-	$	-	$	0.02
Net income		0.42		0.42		1.62		1.64

Consolidated Condensed Statement of Cash Flows

The Consolidated Condensed Statement of Cash Flows for the nine months ended September 30, 2005 has been restated to reflect the following:

CNA’s net purchases and sales of trading securities and changes in the net receivable/payable from unsettled investment purchases and sales related to trading securities, previously classified within investing activities, have been reclassified to cash flows from operating activities.

CNA’s cash flows from equity method investees were reclassified to distinguish between return on investments, which are reflected within operating cash flows, and return of investments, which are reflected within investing cash flows. Previously, all amounts were reflected within investing cash flows.

Deposits and withdrawals related to investment contract products issued by CNA have been reflected within financing cash flows. Previously, amounts related to certain investment contracts were reflected within operating cash flows.

The impact of the cumulative translation adjustment related to CNA, previously reflected within investing activities, is now classified within operating activities.

As a result of the restatements, previously reported cash flows from continuing operations provided (used) by operating activities, investing activities and financing activities were increased or decreased for the nine months ended September 30, 2005 as follows:

Nine Months Ended September 30	2005
(In millions)	Previously
	Reported			Restated

Cash flows from continuing operations provided
(used) by:
Operating activities	$	1,797.9		$	2,258.4
Investing activities		144.1			(119.4	)
Financing activities		(1,958.9	)		(2,122.5	)

In addition, the Company has revised its 2005 Consolidated Condensed Statement of Cash Flows to separately disclose the operating, investing and financing portions of the cash flows attributable to discontinued operations, as well as to include the cash balance related to discontinued operations in the Consolidated Condensed Statement of Cash Flows.

The restatements related to cash flows had no impact on the total change in cash from continuing operations within the Consolidated Condensed Statement of Cash Flows.

19. Gain on Issuance of Subsidiary Stock

In August of 2006, CNA completed a public offering of 7.0 million shares of its common stock. In addition, the Company purchased 7.86 million shares of CNA’s common stock in a private offering at the same price. As a result of these transactions, the Company’s ownership percentage in CNA declined from 91% to 89% and the Company recorded a pretax gain of $9.0 million including purchase accounting adjustments, ($5.9 million after provision for deferred income taxes).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included in Item 1 of this Report, and these Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2005. This MD&A is comprised of the following sections:

	Page
	No.

Overview
Restatement of Prior Year Results	69
Consolidated Financial Results	69
Classes of Common Stock	70
Parent Company Structure	71
Critical Accounting Estimates	71
Results of Operations by Business Segment	71
CNA Financial	71
Reserves-Estimates and Uncertainties	72
Reinsurance	77
Terrorism Insurance	78
Restructuring	78
Standard Lines	79
Specialty Lines	81
Life and Group Non-Core	83
Other Insurance	84
APMT Reserves	85
Lorillard	90
Results of Operations	90
Business Environment	93
Boardwalk Pipeline	94
Diamond Offshore	96
Loews Hotels	98
Corporate and Other	98
Liquidity and Capital Resources	100
CNA Financial	100
Lorillard	102
Boardwalk Pipeline	103
Diamond Offshore	104
Loews Hotels	105
Corporate and Other	105
Contractual Cash Payment Obligations	106
Investments	107
Accounting Standards	114
Forward-Looking Statements Disclaimer	115

OVERVIEW

We are a holding company. Our subsidiaries are engaged in the following lines of business:

commercial property and casualty insurance (CNA Financial Corporation (“CNA”), an 89% owned subsidiary);

production and sale of cigarettes (Lorillard, Inc. (“Lorillard”), a wholly owned subsidiary);

operation of interstate natural gas transmission pipeline systems (Boardwalk Pipeline Partners, LP (“Boardwalk Pipeline”), an 85% owned subsidiary);

operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (“Diamond Offshore”), a 54% owned subsidiary);

operation of hotels (Loews Hotels Holding Corporation (“Loews Hotels”), a wholly owned subsidiary) and

distribution and sale of watches and clocks (Bulova Corporation (“Bulova”), a wholly owned subsidiary).

Unless the context otherwise requires, references in this report to “Loews Corporation,” “we,” “our,” “us” or like terms refer to the business of Loews Corporation excluding its subsidiaries.

Restatement of Prior Year Results

In 2006, we restated our financial results for prior years to correct CNA’s accounting for discontinued operations acquired in CNA’s merger with The Continental Corporation in 1995 and to correct classification errors in the Consolidated Condensed Statements of Cash Flows. The following MD&A gives effect to this restatement. Please read Note 18 of the Notes to Consolidated Condensed Financial Statements included under Item 1. The impact of this revised accounting resulted in an increase in net income attributable to Loews common stock of $2.2 million and $10.6 million for three and nine months ended September 30, 2005.

Consolidated Financial Results

Consolidated net income (including both the Loews Group and Carolina Group) for the 2006 third quarter was $635.1 million, compared to $302.2 million in the 2005 third quarter. Consolidated net income for the nine months ended September 30, 2006 was $1,744.8 million, compared to $1,084.1 million in the prior year. Consolidated revenues in the third quarter and first nine months of 2006 amounted to $4.5 billion and $13.0 billion, compared to $4.1 and $11.9 billion in the comparable periods of 2005.

Net income and earnings per share information attributable to Loews common stock and Carolina Group stock is summarized in the table below.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006			2005
(In millions, except per share data)			(Restated)					(Restated)

Net income attributable to Loews common stock:
Income before net investment losses	$	480.8	$	198.5	$	1,495.1		$	865.1
Net investment gains (losses)		30.7		34.0		(27.9	)		38.7
Income from continuing operations		511.5		232.5		1,467.2			903.8
Discontinued operations, net		5.7		2.2		(1.7	)		10.6
Net income attributable to Loews common stock		517.2		234.7		1,465.5			914.4
Net income attributable to Carolina Group stock (a)		117.9		67.5		279.3			169.7
Consolidated net income	$	635.1	$	302.2	$	1,744.8		$	1,084.1

Net income per share:
Loews common stock
Income from continuing operations	$	0.93	$	0.42	$	2.64	$	1.62
Discontinued operations, net		0.01						0.02
Loews common stock	$	0.94	$	0.42	$	2.64	$	1.64
Carolina Group stock	$	1.17	$	0.99	$	3.16	$	2.49

(a)

Reflects Loews Corporation’s sales of 15 million shares of Carolina Group stock in each of August and May of 2006 and 10 million shares in November of 2005. Net income per share of Carolina Group stock was not impacted by these sales.

Net income attributable to Loews common stock for the third quarter of 2006 amounted to $517.2 million, or $0.94 per share, compared to $234.7 million, or $0.42 per share in the comparable period of the prior year. The increase in net income was primarily due to improved results at CNA and Diamond Offshore. Results in 2005 for CNA included catastrophe losses of $268.3 million (after tax and minority interest) including the impact from Hurricanes Katrina, Rita, Dennis and Ophelia, as compared to catastrophe losses of $12.9 million (after tax and minority interest) in 2006. Results for Diamond Offshore in 2006 primarily reflect increased day rates across all rig categories.

Net income attributable to Loews common stock includes net investment gains of $30.7 million (after tax and minority interest) compared to $34.0 million (after tax and minority interest) in the comparable period of the prior year.

Net income attributable to Carolina Group stock for the third quarter of 2006 was $117.9 million or $1.17 per Carolina Group share, compared to $67.5 million, or $0.99 per Carolina Group share in the third quarter of 2005. The increase in net income attributable to Carolina Group stock for the third quarter of 2006 is primarily due to higher unit sales and reflects an increase in the amount of Carolina Group shares outstanding.

Net income attributable to Loews common stock amounted to $1,465.5 million, or $2.64 per share, in the first nine months of 2006 compared to $914.4 million, or $1.64 per share, in the comparable period of the prior year. Net income attributable to Loews common stock includes net investment losses of $27.9 million (after tax and minority interest) compared to net investment gains of $38.7 million (after tax and minority interest) in the comparable period of the prior year. The results for the nine months ended September 30, 2005 included a benefit of $109.2 million related to a federal income tax settlement due primarily to net refund interest and the release of federal income tax reserves at CNA. The increase in net income was primarily due to improved results at CNA and Diamond Offshore.

Net income attributable to Carolina Group stock for the first nine months of 2006 was $279.3 million or $3.16 per Carolina Group share, compared to $169.7 million, or $2.49 per Carolina Group share in the comparable period of the prior year. The increase in net income attributable to Carolina Group stock is primarily due to higher effective unit prices reflecting lower sales promotion expenses (accounted for as a reduction to net sales) and reflects an increase in the amount of Carolina Group shares outstanding.

Classes of Common Stock

Our issuance of Carolina Group stock has resulted in a two class common stock structure for us. Carolina Group stock, commonly called a tracking stock, is intended to reflect the economic performance of a defined group of our assets and liabilities referred to as the Carolina Group. The principal assets and liabilities attributed to the Carolina Group are:

our 100% stock ownership interest in Lorillard, Inc.;

notional, intergroup debt owed by the Carolina Group to the Loews Group $1.4 billion outstanding at September 30, 2006), bearing interest at the annual rate of 8.0% and, subject to optional prepayment, due December 31, 2021; and

any and all liabilities, costs and expenses arising out of or related to tobacco or tobacco-related businesses.

As of September 30, 2006, the outstanding Carolina Group stock represents a 62.3% economic interest in the performance of the Carolina Group. The Loews Group consists of all of our assets and liabilities other than the 62.3% economic interest represented by the outstanding Carolina Group stock, and includes as an asset the notional, intergroup debt of the Carolina Group. The Loews Group’s intergroup interest in the earnings of the Carolina Group declined from 60.7% to 41.9% and from 60.8% to 48.3% for the three and nine months ended September 30, 2006, respectively, as compared to the corresponding periods of 2005, due primarily to the sales of Carolina Group stock by Loews in November of 2005 and May and August of 2006.

The existence of separate classes of common stock could give rise to occasions where the interests of the holders of Loews common stock and Carolina Group stock diverge or conflict or appear to diverge or conflict. Subject to its fiduciary duties, our board of directors could, in its sole discretion, occasionally make determinations or implement policies that disproportionately affect the groups or the different classes of stock. For example, our board of directors may decide to reallocate assets, liabilities, revenues, expenses and cash flows between groups, without the consent of shareholders. The board of directors would not be required to select the option that would result in the highest value for holders of Carolina Group stock.

As a result of the flexibility provided to our board of directors, it might be difficult for investors to assess the future prospects of the Carolina Group based on the Carolina Group’s past performance.

The creation of the Carolina Group and the issuance of Carolina Group stock does not change our ownership of Lorillard, Inc. or Lorillard, Inc.’s status as a separate legal entity. The Carolina Group and the Loews Group are notional groups that are intended to reflect the performance of the defined sets of assets and liabilities of each such group as described above. The Carolina Group and the Loews Group are not separate legal entities and the attribution of our assets and liabilities to the Loews Group or the Carolina Group does not affect title to the assets or responsibility for the liabilities.

Holders of our common stock and of Carolina Group stock are shareholders of Loews Corporation and are subject to the risks related to an equity investment in us.

Parent Company Structure

We are a holding company and derive substantially all of our cash flow from our subsidiaries, principally Lorillard , Diamond Offshore and Boardwalk Pipeline. We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to our stockholders. The ability of our subsidiaries to pay dividends is subject to, among other things, the availability of sufficient funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.

At September 30, 2006, the book value per share of Loews common stock was $29.10, compared to $23.64 at December 31, 2005.

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 amounts reported in the consolidated financial statements and the related notes. Actual results could differ from those estimates.

The 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 we believe are reasonable under the known facts and circumstances.

We consider the accounting policies discussed below to be critical to an understanding of our consolidated financial statements as their application places the most significant demands on our judgment.

Insurance Reserves

Reinsurance

Tobacco and Other Litigation

Valuation of Investments and Impairment of Securities

Long Term Care Products

Pension and Postretirement Benefit Obligations

Due to the inherent uncertainties involved with these types of judgments, actual results could differ significantly from estimates, which may have a material adverse impact on our results of operations or equity. See the Critical Accounting Estimates and the Reserves-Estimates and Uncertainties sections of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of our Form 10-K for the year ended December 31, 2005 for further information.

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

CNA Financial

Insurance operations are conducted by subsidiaries of CNA Financial Corporation (“CNA”). CNA is an 89% owned subsidiary.

CNA manages its property and casualty operations in two operating segments which represent CNA’s core operations: Standard Lines and Specialty Lines. The non-core operations are managed in the Life and Group Non-Core and Other Insurance segments. Standard Lines includes standard property and casualty coverages sold to small and middle market commercial businesses primarily through an independent agency distribution system, and excess and surplus lines, as well as insurance and risk management products sold to large corporations in the U.S., as well as globally. Specialty Lines includes professional, financial and specialty property and casualty products and services. Life and Group Non-

Core primarily includes the results of the life and group lines of business sold or placed in run-off. Other Insurance includes the results of certain property and casualty lines of business placed in run-off, including CNA Re. This segment also includes the results related to the centralized adjusting and settlement of APMT claims as well as the results of CNA’s participation in voluntary insurance pools, which are primarily in run-off, and various other non-insurance operations.

Reserves - Estimates and Uncertainties

CNA maintains reserves to cover its estimated ultimate unpaid liability for claim and claim adjustment expenses, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled (“case reserves”) and claims that have been incurred but not reported (“IBNR”). Claim and claim adjustment expense reserves are reflected as liabilities and are included on the Consolidated Condensed 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 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

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

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

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

inconsistent court decisions and developing legal theories;

continuing aggressive tactics of plaintiffs’ lawyers;

the risks and lack of predictability inherent in major litigation;

changes in the volume of APMT claims which cannot now be anticipated;

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

the number and outcome of direct actions against CNA; and

CNA’s ability to recover reinsurance for APMT claims.

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

Traditional actuarial methods and techniques employed to estimate the ultimate cost of claims for more traditional property and casualty exposures are less precise in estimating claim and claim adjustment reserves for APMT, particularly in an environment of emerging or potential claims and coverage issues that arise from industry practices and legal, judicial and social conditions. Therefore, these traditional actuarial methods and techniques are necessarily supplemented with additional estimation techniques and methodologies, many of which involve significant judgments

that are required of CNA management. For APMT, CNA regularly monitors its exposures, including reviews of loss activity, regulatory developments and court rulings. In addition, CNA performs a comprehensive ground-up analysis on its exposures annually. CNA’s actuaries, in conjunction with its specialized claim unit, use various modeling techniques to estimate CNA’s overall exposure to known accounts. CNA uses this information and additional modeling techniques to develop loss distributions and claim reporting patterns to determine reserves for accounts that will report APMT 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 APMT claim and claim adjustment expenses and the degree of variability due to, among other things, the factors described above, CNA may be required to record material changes in CNA’s claim and claim adjustment expense reserves in the future, should new information become available or other developments emerge. See the APMT Reserves section of this MD&A and Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1 for additional information relating to APMT claims and reserves.

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

increases in the number and size of claims relating to injuries from medical products;

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.

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 CNA’s claim and claim adjustment expense reserves and could lead to future reserve additions. See the Segment Results sections of this MD&A and Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1 for a discussion of changes in reserve estimates and the impact on our results of operations.

Establishing Reserve Estimates

In developing loss and loss adjustment expense (“loss” or “losses”) reserve estimates, CNA’s 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, CNA reviews actual losses emerged 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. CNA determines 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).

Most of CNA’s 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. CNA’s 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 CNA’s property/casualty segments, Standard Lines, Specialty Lines and Other Insurance, 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 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 CNA, 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, CNA uses additional methods tailored to the characteristics of the specific situation. Such products include construction defect losses and APMT.

For construction defect losses, CNA’s 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 CNA, 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, CNA’s 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 CNA’s 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, CNA will not assign any weight to the paid and incurred development methods. CNA 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 CNA’s history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, CNA may also use loss ratio, Bornhuetter-Ferguson and average loss methods for short-tail exposures.

Periodic Reserve Reviews

The reserve analyses performed by CNA’s actuaries result in point estimates. Each quarter, the results of the detailed reserve reviews are summarized and discussed with CNA’s 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 CNA’s pricing and underwriting, and overall pricing and underwriting trends in the insurance market.

CNA’s recorded reserves reflect its best estimate as of a particular point in time based upon known facts, current law and CNA’s judgment. The carried reserve may differ from the actuarial point estimate as the result of CNA’s 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 actuarial analysis. This process results in management’s best estimate which is then recorded as the loss reserve.

Currently, CNA’s reserves are slightly higher than the actuarial point estimate. CNA does not establish a specific provision for uncertainty. For Standard and Specialty Lines, the difference between CNA’s reserves and the actuarial point estimate is due to the two most recent complete accident years. The claim data from these accident years is very immature. CNA believes it is prudent to wait until actual experience confirms that the loss reserves should be adjusted. For Other Insurance the carried reserve is slightly higher than the actuarial point estimate. While the actuarial estimates

for APMT exposures reflect current knowledge, CNA feels it is prudent, based on the history of developments in this area, to reflect some margin in the carried reserve 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.

CNA’s recorded reserves are CNA management’s best estimate. In order to provide an indication of the variability associated with CNA’s net reserves, the following discussion provides a sensitivity analysis that shows the approximate estimated impact of variations in the most significant factor affecting CNA’s 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 CNA believes a material deviation to CNA’s 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 CNA believes a material deviation to its 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 one point for the entire period over which claim payments will be made, CNA estimates that CNA’s net reserves would increase by approximately $450.0 million. If estimated workers’ compensation claim cost inflation decreases by one point for the entire period over which claim payments will be made, CNA estimates that CNA’s net reserves would decrease by approximately $400.0 million. CNA’s net reserves for Standard Lines workers’ compensation were approximately $3.9 billion at December 31, 2005.

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 15.0%, CNA estimates that CNA’s net reserves would increase by approximately $380.0 million. If the estimated incurred development factor for general liability decreases by 14.0%, CNA estimates that CNA’s net reserves would decrease by approximately $340.0 million. CNA’s net reserves for Standard Lines general liability were approximately $4.1 billion at December 31, 2005.

Within Specialty Lines, CNA believes a material deviation to CNA’s net reserves is reasonably possible for the Professional Liability Insurance (“CNA Pro”) group. CNA Pro provides professional liability coverages to various professional firms as well as directors and officers (“D&O”), errors and omissions, employment practices, fiduciary and fidelity coverages. CNA Pro also offers insurance products to serve the healthcare delivery system. The most significant factor affecting CNA Pro reserve estimates is claim severity. Claim severity for CNA Pro 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 for CNA Pro increases by 7.0%, CNA estimates that CNA Pro net reserves would increase by approximately $250.0 million. If the estimated claim severity for CNA Pro decreases by 4.0%, CNA estimates that CNA Pro net reserves would decrease by approximately $140.0 million. CNA’s net reserves for CNA Pro were approximately $3.4 billion at December 31, 2005.

Within Other Insurance, the two types of business for which CNA believes a material deviation to CNA’s net reserves is reasonably possible are CNA Re and APMT.

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 20.0%, CNA estimates that CNA’s net reserves for CNA Re would increase by approximately $170.0 million. If the estimated incurred development factor for CNA Re decreases by 19.0%, CNA estimates that CNA’s net reserves would decrease by approximately $150.0 million. CNA’s net reserves for CNA Re were approximately $1.3 billion at December 31, 2005.

For APMT, the most significant factor affecting reserve estimates is overall account size trend. Overall account size trend for APMT 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 APMT increases by 6 points, CNA estimates that CNA’s APMT net reserves would increase by approximately $700.0 million. If the estimated overall account size trend for APMT decreases by 9 points, CNA estimates that CNA’s APMT net reserves would decrease by approximately $450.0 million. CNA’s net reserves for APMT were approximately $2.0 billion at December 31, 2005.

Given the factors described above, it is not possible to quantify precisely the ultimate exposure represented by claims and related litigation. As a result, CNA regularly reviews the adequacy of CNA’s reserves and reassess its 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, CNA reviews its reserve estimates on a regular basis and makes adjustments in the period that the need for such adjustments is determined. These reviews have resulted in CNA’s identification of information and trends that have caused CNA to increase CNA’s 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 CNA’s business and insurer financial strength and debt ratings and our results of operations and equity. See the Ratings section of this MD&A for further information regarding CNA’s financial strength and debt ratings.

Reinsurance

Due to significant catastrophes during 2005, the cost of CNA’s catastrophe reinsurance program has increased in 2006. CNA’s catastrophe reinsurance protection cost CNA premiums of approximately $64.0 million in 2005, including reinstatement premiums and will cost CNA approximately $79.0 million in 2006 before the impact of any reinstatement premiums.

The terms of CNA’s 2006 programs are different than those of its 2005 programs. The Corporate Property Catastrophe treaty provides coverage for the accumulation of losses between $200.0 million and $700.0 million arising out of a single catastrophe occurrence in the United States, its territories and possessions, and Canada. CNA’s co-participation is 30.0% of the first $125.0 million layer, 15.0% of the next $175.0 million layer and 10.0% of the remaining layer. CNA’s Marine treaty provides $65.0 million of protection above a $20.0 million retention on the accumulation of losses arising out of a single catastrophe occurrence.

In addition to these reinsurance treaties, CNA’s exposure to aggregation of certain catastrophe events is further mitigated by an Aggregate Property Catastrophe treaty. The Aggregate Property Catastrophe treaty covers 92.0% of $150.0 million of losses above a retention of $125.0 million from named earthquake or wind storm catastrophes in the United States, its territories and possessions, and Canada, which exceed $35.0 million. For any single event, the maximum that can be applied to CNA’s retention or recovered under the treaty is $75.0 million.

CNA’s overall ceded reinsurance program includes certain finite property and casualty contracts that were entered into and are accounted for on a funds withheld basis. Under the funds withheld basis, CNA records the cash remitted to the reinsurer for the reinsurer’s margin, or cost of the reinsurance contract, as ceded premiums. The remainder of the premiums ceded under the reinsurance contract not remitted in cash is recorded as funds withheld liabilities. CNA is required to increase the funds withheld balance at stated interest crediting rates applied to the funds withheld balance or as otherwise specified under the terms of the contract. The funds withheld liability is reduced by any cumulative claim payments made by CNA in excess of its retention under the reinsurance contract. If the funds withheld liability is exhausted, interest crediting will cease and additional claim payments are recoverable from the reinsurer.

Effective July 25, 2006, CNA commuted its CCC Cover resulting in a reduction of Reinsurance Receivables of approximately $761.0 million and a corresponding reduction of $761.0 million in the funds withheld liability, which was included in Reinsurance Balances Payable on the Consolidated Condensed Balance Sheet. This commutation had no impact on the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2006. See Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

In 2003, CNA discontinued purchases of such contracts. Given the relative maturity of the covered accident years and the amount of remaining limit under the contracts, CNA does not expect to cede a material amount of losses to these contracts in the future.

Terrorism Insurance

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

The Terrorism Risk Insurance Act of 2002 (“TRIA”) established a program within the Department of the Treasury under which insurers are required to offer terrorism insurance and the federal government will share the risk of loss by commercial property and casualty insurers arising from future terrorist attacks. Although TRIA expired on December 31, 2005, the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) extended this program through December 31, 2007 with changes such as the lines of business covered, the deductible amount that must be paid by the insurance company and the aggregate industry loss prior to federal government assistance becoming available.

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

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

Restructuring

In 2001, CNA finalized and approved a plan related to restructuring the property and casualty segments and Life and Group Non-Core segment, discontinuation of the variable life and annuity business and consolidation of real estate locations. During the second quarter of 2006, CNA reevaluated the sufficiency of the remaining accrual, which related to lease termination costs, and determined that the liability is no longer required as CNA has completed its lease obligations. As a result, the excess remaining accrual was released in the second quarter of 2006, resulting in income of $7.3 million after tax and minority interest for the nine months ended September 30, 2006.

Segment Results

The following discusses the results of operations for CNA’s operating segments. In evaluating the results of the Standard Lines and Specialty Lines, CNA management utilizes the combined ratio, the loss ratio, the expense ratio and the dividend ratio. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of 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.

Standard Lines

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions, except %)

Net written premiums	$	1,121.0		$	1,047.0		$	3,394.0		$	3,352.0
Net earned premiums		1,128.0			1,080.0			3,310.0			3,333.0
Net investment income		239.0			186.0			705.3			540.0
Net operating income (loss) before net realized
investment gains		146.2			(131.5	)		420.0			52.0
Net realized investment gains (losses)		9.9			30.7			(3.7	)		38.5
Net income (loss)		156.1			(100.8	)		416.3			90.5

Ratios:
Loss and loss adjustment expense		68.7	%		106.3	%		69.4	%		82.5	%
Expense		30.1			33.0			30.7			32.2
Dividend		0.4			0.3			0.4			0.5
Combined		99.2	%		139.6	%		100.5	%		115.2	%

Three Months Ended September 30, 2006 Compared to 2005

Net written premiums for Standard Lines increased $74.0 million for the three months ended September 30, 2006 as compared with the same period in 2005. This increase was driven by improved new business, rate and retention in the Property lines of business. In addition, there was $21.0 million of reinsurance reinstatement premiums recorded in 2005 due to the hurricanes, which reduced written premiums in the 2005 period, and favorable premium development as discussed below. These favorable impacts were partially offset by increased reinsurance costs in 2006. Net earned premiums increased $48.0 million for the three months ended September 30, 2006 as compared with the same period in 2005, consistent with the increased premiums written.

Standard Lines averaged rate increases of 1.0% for the three months ended September 30, 2006, as compared to average rate decreases of 2.0% for the three months ended September 30, 2005 for the contracts that renewed during those periods. Retention rates of 81.0% and 78.0% were achieved for those contracts that were up for renewal in each period.

Net results increased $256.9 million for the three months ended September 30, 2006 as compared with the same period in 2005. This improvement was attributable to increased net operating results, partially offset by lower net realized investment gains. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.

Net operating results increased $277.7 million for the three months ended September 30, 2006 as compared with the same period in 2005. This increase was primarily driven by the significant decrease of catastrophe impacts in 2006, an increase in net investment income and favorable impacts of net prior year development as discussed below. The 2006 net operating results included catastrophe impacts of $10.8 million after tax and minority interest. The 2005 catastrophe impacts of $255.5 million after tax and minority interest included estimated net losses related to Hurricanes Katrina, Rita, Dennis and Ophelia, net of reinsurance recoveries, and include the effect of reinstatement premiums and estimated insurance assessments. These increases to operating income were partially offset by less favorable current accident year results.

The combined ratio improved 40.4 points for the three months ended September 30, 2006 as compared with the same period in 2005. The loss ratio improved 37.6 points. The 2005 loss ratio included 40 points related to the impact of catastrophes.

The expense ratio improved 2.9 points for the three months ended September 30, 2006 as compared with the same period in 2005. This improvement was primarily due to a decrease in the bad debt provision for insurance receivables.

Favorable net prior year development of $13.0 million was recorded for the three months ended September 30, 2006, including $6.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $19.0 million of favorable premium development. Unfavorable net prior year development of $25.0 million, including $18.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $7.0 million of unfavorable premium development, was recorded for the three months ended September 30, 2005. Further information on Standard Lines Net Prior Year Development for the three months ended September 30, 2006 and 2005 is included in Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

Nine Months Ended September 30, 2006 Compared to 2005

Net written premiums for Standard Lines increased $42.0 million for the nine months ended September 30, 2006 as compared with the same period in 2005. This increase was driven by favorable rate and retention primarily in the Property lines of business. In addition, there was $21.0 million of reinsurance reinstatement premiums recorded in 2005 due to the hurricanes. This favorability is partially offset by increased ceded premiums in 2006 as compared to 2005, primarily related to favorable ceded premium development recorded in 2005 resulting from an unfavorable arbitration ruling on two reinsurance treaties and increased reinsurance costs in 2006. Net earned premiums decreased $23.0 million for the nine months ended September 30, 2006 as compared with the same period in 2005.

Standard Lines averaged flat rates for the nine months ended September 30, 2006, as compared to average rate decreases of 2.0% for the nine months ended September 30, 2005 for the contracts that renewed during those periods. Retention rates of 81.0% and 76.0% were achieved for those contracts that were up for renewal in each period.

Net income increased $325.8 million for the nine months ended September 30, 2006 as compared with the same period in 2005. This increase was attributable to increased net operating income, partially offset by lower 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 $368.0 million for the nine months ended September 30, 2006 as compared with the same period in 2005. This increase was primarily driven by a significant decrease of catastrophe impacts in 2006, an increase in net investment income and favorable impacts of net prior year development as discussed below. These increases to operating income were partially offset by less favorable current accident year results.

The combined ratio improved 14.7 points for the nine months ended September 30, 2006, as compared with the same period in 2005. The loss ratio improved 13.1 points. The 2005 loss ratio included 13.1 points related to the impact of catastrophes. In addition, the loss ratio was impacted by favorable net prior year development in 2006, as discussed in further detail below. These favorable impacts were partially offset by higher current accident year losses across most lines of business.

The expense ratio improved 1.5 points for the nine months ended September 30, 2006 as compared with the same period in 2005. This improvement was primarily due to a decrease in the bad debt provision for insurance receivables. In addition, the 2005 ratio included increased commissions as a result of an unfavorable arbitration ruling related to two reinsurance treaties. Changes in estimates for premium taxes partially offset these favorable impacts.

Favorable net prior year development of $22.0 million was recorded for the nine months ended September 30, 2006, including $70.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $92.0 million of favorable premium development. Unfavorable net prior year development of $97.0 million, including $202.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $105.0 million of favorable premium development, was recorded for the nine months ended September 30, 2005. Further information on Standard Lines Net Prior Year Development for the nine months ended September 30, 2006 and 2005 is included in Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

The following table summarizes the gross and net carried reserves as of September 30, 2006 and December 31, 2005 for Standard Lines.

	September 30,		December 31,
	2006		2005
(In millions)

Gross Case Reserves	$	6,843.0	$	7,033.0
Gross IBNR Reserves		7,979.0		8,051.0
Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	14,822.0	$	15,084.0

Net Case Reserves	$	5,117.0	$	5,165.0
Net IBNR Reserves		6,484.0		6,081.0
Total Net Carried Claim and Claim Adjustment Expense Reserves	$	11,601.0	$	11,246.0

Specialty Lines

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions, except %)

Net written premiums	$	675.0		$	649.0		$	1,948.0		$	1,838.0
Net earned premiums		654.0			628.0			1,915.0			1,831.0
Net investment income		100.2			74.0			286.6			197.0
Net operating income before net realized
investment gains (losses)		107.5			98.9			311.5			244.6
Net realized investment gains (losses)		3.6			9.6			(2.4	)		17.5
Net income		111.1			108.5			309.1			262.1

Ratios:
Loss and loss adjustment expense		60.7	%		58.4	%		60.4	%		63.3	%
Expense		25.8			27.3			26.4			26.3
Dividend		0.1			0.2			0.1			0.2
Combined		86.6	%		85.9	%		86.9	%		89.8	%

Three Months Ended September 30, 2006 Compared to 2005

Net written premiums for Specialty Lines increased $26.0 million for the three months ended September 30, 2006 as compared to the same period in 2005. This increase was primarily due to improved retention across certain professional liability insurance lines of business. Net earned premiums increased $26.0 million for the three months ended September 30, 2006 as compared with the same period in 2005, consistent with the increased premium written.

Specialty Lines averaged rate decreases of 1.0% for the three months ended September 30, 2006, as compared to average rate increases of 2.0% for the three months ended September 30, 2005 for the contracts that renewed during those periods. Retention rates of 86.0% and 84.0% were achieved for those contracts that were up for renewal in each period.

Net income increased $2.6 million for the three months ended September 30, 2006 as compared with the same period in 2005. This increase was attributable to increased net operating income, partially offset by reduced realized investment gains. See the Investments section of this MD&A for further discussion of net investment income and net realized investment results.

Net operating income increased $8.6 million for the three months ended September 30, 2006 as compared with the same period in 2005. This increase was primarily driven by an increase in net investment income and reduced catastrophe impacts in 2006. Catastrophe impacts were less than $0.9 million after tax and minority interest for the three months ended September 30, 2006, as compared to $12.8 million after tax and minority interest for the three months ended September 30, 2005. These favorable impacts were partially offset by less favorable current accident year results.

The combined ratio increased 0.7 points for the three months ended September 30, 2006 as compared with the same period in 2005. The loss ratio increased 2.3 points, primarily due to higher current accident year losses in certain professional liability insurance lines of business, partially offset by decreased catastrophe losses for the three months ended September 30, 2006 as compared with the same period in 2005.

The expense ratio decreased 1.5 points for the three months ended September 30, 2006 as compared with the same period in 2005. The 2005 ratio included a change in estimate related to profit commissions in the warranty line of business, which is entirely offset in the loss ratio.

Unfavorable net prior year development of $2.0 million, including $4.0 million of favorable claim and allocated claim adjustment expense reserve development and $6.0 million of unfavorable premium development, was recorded for the three months ended September 30, 2006. Favorable net prior year development of $1.0 million, including $7.0 million of favorable claim and allocated claim adjustment expense reserve development and $6.0 million of unfavorable premium development, was recorded for the three months ended September 30, 2005. Further information on Specialty Lines Net Prior Year Development for the three months ended September 30, 2006 and 2005 is included in Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

Nine Months Ended September 30, 2006 Compared to 2005

Net written premiums for Specialty Lines increased $110.0 million for the nine months ended September 30, 2006 as compared to the same period in 2005. This increase was primarily due to improved retention across certain lines of business. Net earned premiums increased $84.0 million for the nine months ended September 30, 2006 as compared with the same period in 2005, consistent with the increased premium written.

Specialty Lines averaged flat rates for the nine months ended September 30, 2006, as compared to average rate increases of 1.0% for the nine months ended September 30, 2005 for the contracts that renewed during those periods. Retention rates of 87.0% and 86.0% were achieved for those contracts that were up for renewal in each period.

Net income increased $47.0 million for the nine months ended September 30, 2006 as compared with the same period in 2005. This increase was attributable to increased net operating income, partially offset by reduced 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 $66.9 million for the nine months ended September 30, 2006 as compared with the same period in 2005. This improvement was primarily driven by an increase in net investment income, favorable impacts of net prior year development as discussed below and reduced catastrophe impacts in 2006. Also, the 2005 results included a $15.5 million loss, after the impact of taxes and minority interests, in the surety line of business related to a large national contractor. Further information related to the large national contractor is included in Note 14 of the Notes to Consolidated Condensed Financial Statements included under Item 1. Partially offsetting these favorable impacts were less favorable current accident year results.

The combined ratio improved 2.9 points for the nine months ended September 30, 2006 as compared with the same period in 2005. The loss ratio improved by 2.9 points due to favorable net prior year development and decreased catastrophe losses in 2006.

Favorable claim and allocated claim adjustment expense reserve development of $1.0 million was recorded for the nine months ended September 30, 2006. There was no premium development recorded for the nine months ended September 30, 2006. Unfavorable net prior year development of $41.0 million, including $31.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $10.0 million of unfavorable premium development, was recorded for the nine months ended September 30, 2005. Further information on Specialty Lines Net Prior Year Development for the nine months ended September 30, 2006 and 2005 is included in Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

The following table summarizes the gross and net carried reserves as of September 30, 2006 and December 31, 2005 for Specialty Lines.

	September 30,		December 31,
	2006		2005
(In millions)

Gross Case Reserves	$	1,724.0	$	1,907.0
Gross IBNR Reserves		3,783.0		3,298.0
Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	5,507.0	$	5,205.0

Net Case Reserves	$	1,352.0	$	1,442.0
Net IBNR Reserves		2,813.0		2,352.0
Total Net Carried Claim and Claim Adjustment Expense Reserves	$	4,165.0	$	3,794.0

Life and Group Non-Core

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
(In millions)

Net earned premiums	$	160.0		$	169.0		$	482.0		$	539.0
Net investment income		179.6			179.0			504.2			431.0
Net operating income (loss) before net realized
investment losses		(13.1	)		(31.5	)		(11.6	)		(26.3	)
Net realized investment losses		(6.3	)		(1.5	)		(33.4	)		(4.9	)
Net income (loss)		(19.4	)		(33.0	)		(45.0	)		(31.2	)

Three Months Ended September 30, 2006 Compared to 2005

Net earned premiums for Life and Group Non-Core decreased $9.0 million for the three months ended September 30, 2006 as compared with the same period in 2005. The net earned premiums relate primarily to the group and individual long term care businesses.

Net results increased $13.6 million for the three months ended September 30, 2006 as compared with the same period in 2005. The 2005 net results included a $15.5 million provision for estimated indemnification liabilities related to the sold individual life business. This improvement was offset by increased net realized investment losses. See the Investment section of this MD&A for further discussion of net investment income and net realized investment results.

Nine Months Ended September 30, 2006 Compared to 2005

Net earned premiums for Life and Group Non-Core decreased $57.0 million for the nine months ended September 30, 2006 as compared with the same period in 2005. The net earned premiums relate primarily to the group and individual long term care businesses.

Net results decreased by $13.8 million for the nine months ended September 30, 2006 as compared with the same period in 2005. The decrease in net results is primarily due to higher net realized investment losses. In addition, the 2005 net results included a change in estimate which reduced a prior accrual of state premium taxes and income related to agreements with buyers of sold businesses which ended as of December 31, 2005. Partially offsetting these unfavorable impacts was increased net investment income. The net investment income was largely offset by a corresponding increase in the policyholders’ funds reserves supported by the trading portfolio. Also, included in the 2006 results is $11.7 million of income related to the resolution of contingencies, and the absence of a 2005 $15.5 million provision for estimated indemnification liabilities related to the sold individual life business. See the Investment section of this MD&A for further discussion of net investment income and net realized investment results.

Other Insurance

The following table summarizes the results of operations for the Other Insurance segment, including APMT and intrasegment eliminations.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006		2005
(In millions)

Net investment income	$	81.0	$	61.0		$	226.0	$	177.0
Revenues		88.4		59.3			197.2		251.3
Net operating income before net realized
investment gains (losses)		16.4		32.9			35.6		129.8
Net realized investment gains (losses)		16.6		(0.2	)		5.9		(9.0	)
Net income (loss)		33.0		32.7			41.5		120.8

Three Months Ended September 30, 2006 Compared to 2005

Revenues increased $29.1 million for the three months ended September 30, 2006 as compared with the same period in 2005. The increase in revenues was primarily due to increased net investment income, improved realized investment results and interest income related to a federal income tax settlement. See the Investments section of this MD&A for further discussion of net investment income and realized investment results. See Note 16 of the Notes to Consolidated Condensed Financial Statements included under Item 1 for further discussion on the federal income tax settlement.

Net income was essentially unchanged for the three months ended September 30, 2006 as compared with the same period in 2005. Net income benefited from the increased revenue as discussed above and a $3.0 million benefit related to a federal income tax settlement. These increases were offset by the discontinuation of royalty income related to a sold business, an increase in current accident year losses related to mass torts and increased interest costs related to the issuance of $750.0 million of senior notes in August 2006.

There was $3.0 million of unfavorable claim and allocated claim adjustment expense reserve development and $3.0 million of favorable premium development, resulting in no net prior year development for the three months ended September 30, 2006. Unfavorable net prior year premium development of $1.0 million was recorded for the three months ended September 30,2005. There was no net prior year claim and allocated claim adjustment expense reserve development for the three months ended September 30, 2005. Further information on Other Insurance Net Prior Year Development for 2006 and 2005 is included in Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

Nine Months Ended September 30, 2006 Compared to 2005

Revenues decreased $54.1 million for the nine months ended September 30, 2006 as compared with the same period in 2005. Revenues in 2006 and 2005 included interest income related to federal income tax settlements of $4.0 million and $121.0 million as further discussed in Note 16 of the Notes to Consolidated Condensed Financial Statements included under Item 1. This decrease was partially offset by increased net investment income and improved realized investment results.

Net income decreased $79.3 million for the nine months ended September 30, 2006 as compared with the same period in 2005. The decrease in net income was due to the reduced federal income tax settlement and the items discussed in the three month comparison above. Partially offsetting these decreases was a commutation loss in 2005 of $32.9 million after tax and minority interest, which is a component of the 2005 unfavorable net prior year development referenced below.

Unfavorable net prior year development of $16.0 million was recorded for the nine months ended September 30, 2006, including $15.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $1.0 million of unfavorable premium development. Unfavorable net prior year development of $89.0 million was recorded for the nine months ended September 30, 2005, including $74.0 million of unfavorable net prior year claim and allocated claim adjustment expense reserve development and $15.0 million of unfavorable premium development. Further information on Other Insurance Net Prior Year Development for 2006 and 2005 is included in Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

The following table summarizes the gross and net carried reserves as of September 30, 2006 and December 31, 2005 for Other Insurance.

	September 30,		December 31,
	2006		2005
(In millions)

Gross Case Reserves	$	2,766.0	$	3,297.0
Gross IBNR Reserves		3,777.0		4,075.0
Total Gross Carried Claim and Claim Adjustment Expense Reserves	$	6,543.0	$	7,372.0

Net Case Reserves	$	1,390.0	$	1,554.0
Net IBNR Reserves		2,023.0		1,902.0
Total Net Carried Claim and Claim Adjustment Expense Reserves	$	3,413.0	$	3,456.0

APMT Reserves

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

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

In addition to the difficulties described above, estimating the ultimate cost of both reported and unreported APMT claims is subject to a higher degree of variability due to a number of additional factors, including among others: the number and outcome of direct actions against CNA; 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 federal legislation to address asbestos claims; an increase in asbestos, environmental pollution and mass tort claims which cannot now be anticipated; an increase in costs to defend asbestos, pollution and mass tort claims; expanding liability against CNA’s policyholders in environmental and mass tort matters; broadened scope of clean-up resulting in increased liability to CNA’s policyholders; a further increase of claims and claims payment that may exhaust underlying umbrella and excess coverage at accelerated rates; and future developments pertaining to CNA’s ability to recover reinsurance for asbestos, pollution and mass tort claims.

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

CNA has annually performed ground up reviews of all open APMT claims to evaluate the adequacy of its APMT reserves. In performing CNA’s comprehensive ground up analysis, CNA considers input from its professionals with direct responsibility for the claims, inside and outside counsel with responsibility for CNA’s representation and CNA’s actuarial staff. These professionals review, among many factors, the policyholder’s present and predicted future exposures, including such factors as claims volume, trial conditions, prior settlement history, settlement demands and defense costs; the impact of asbestos defendant bankruptcies on the policyholder; the policies CNA issued, including such factors as aggregate or per occurrence limits, whether the policy is primary, umbrella or excess, and the existence of policyholder retentions and/or deductibles; the existence of other insurance; and reinsurance arrangements.

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

	September 30, 2006						December 31, 2005
	Asbestos			Environmental Pollution and Mass Tort			Asbestos			Environmental Pollution and Mass Tort
(In millions)

Gross reserves	$	2,735.0		$	585.0		$	2,992.0		$	680.0
Ceded reserves		(1,255.0	)		(220.0	)		(1,438.0	)		(257.0	)
Net reserves	$	1,480.0		$	365.0		$	1,554.0		$	423.0

Asbestos

In the past several years, CNA 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 subsequent years, the rate of new filings has decreased. Various challenges to mass screening claimants have been mounted. 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.

Several factors are, in CNA’s view, negatively impacting asbestos claim trends. Plaintiff attorneys who previously sued entities that are now bankrupt continue to seek other viable targets. As a result, companies with few or no previous asbestos claims are becoming targets in asbestos litigation and, although they may have little or no liability, nevertheless must be defended. Additionally, plaintiff attorneys and trustees for future claimants are demanding that policy limits be paid lump-sum into the bankruptcy asbestos trusts prior to presentation of valid claims and medical proof of these claims. Various challenges to these practices are currently in litigation and the ultimate impact or success of these tactics remains uncertain. Plaintiff attorneys and trustees for future claimants are also attempting to devise claims payment procedures for bankruptcy trusts that would allow asbestos claims to be paid under lax standards for injury, exposure and causation. This also presents the potential for exhausting policy limits in an accelerated fashion.

As a result of bankruptcies and insolvencies, CNA had in the past observed an increase in the total number of policyholders with current asbestos claims as additional defendants are added to existing lawsuits and are named in new asbestos bodily injury lawsuits. The rate of new bodily injury claims moderated in 2004 and 2005, although the number of policyholders claiming coverage for asbestos related claims has remained relatively flat in the past several years.

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

In 1985, 47 asbestos producers and their insurers, including CIC, executed the Wellington Agreement. The agreement intended to resolve all issues and litigation related to coverage for asbestos exposures. Under this agreement, signatory insurers committed scheduled policy limits and made the limits available to pay asbestos claims based upon coverage blocks designated by the policyholders in 1985, subject to extension by policyholders. CIC was a signatory insurer to the Wellington Agreement.

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

CNA categorizes active asbestos accounts as large or small accounts. CNA defines a large account as an active account with more than $100,000 of cumulative paid losses. CNA has made closing large accounts a significant

management priority. Small accounts are defined as active accounts with $100,000 or less of cumulative paid losses. Approximately 81% of CNA’s total active asbestos accounts are classified as small accounts at September 30, 2006.

CNA also evaluate its asbestos liabilities arising from CNA’s assumed reinsurance business and its participation in various pools, including Excess & Casualty Reinsurance Association (“ECRA”).

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

The tables below depict CNA’s overall pending asbestos accounts and associated reserves at September 30, 2006 and December 31, 2005.

September 30, 2006	Number of Policyholders		Net Paid Losses			Net Asbestos Reserves		Percent of Asbestos Net Reserves
(In millions of dollars)

Policyholders with settlement agreements
Structured settlements		15	$	33.0		$	151.0		10.2	%
Wellington		3		1.0			14.0		0.9
Coverage in place		37		(12.0	)		90.0		6.1
Fibreboard		1					54.0		3.6
Total with settlement agreements		56		22.0			309.0		20.8

Other policyholders with active accounts
Large asbestos accounts		209		36.0			246.0		16.6
Small asbestos accounts		1,096		14.0			84.0		5.7
Total other policyholders		1,305		50.0			330.0		22.3

Assumed reinsurance and pools				4.0			143.0		9.7
Unassigned IBNR							698.0		47.2
Total		1,361	$	76.0		$	1,480.0		100.0	%

December 31, 2005

Policyholders with settlement agreements
Structured settlements		13	$	30.0		$	167.0		10.7	%
Wellington		4		2.0			15.0		1.0
Coverage in place		34		13.0			58.0		3.7
Fibreboard		1					54.0		3.5
Total with settlement agreements		52		45.0			294.0		18.9

Other policyholders with active accounts
Large asbestos accounts		199		68.0			273.0		17.6
Small asbestos accounts		1,073		23.0			135.0		8.7
Total other policyholders		1,272		91.0			408.0		26.3

Assumed reinsurance and pools				6.0			143.0		9.2
Unassigned IBNR							709.0		45.6
Total		1,324	$	142.0		$	1,554.0		100.0	%

Some asbestos-related defendants have asserted that their insurance policies are not subject to aggregate limits on coverage. CNA has such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called “non-products” liability coverage contained within their policies rather than products liability coverage, and that the claimed “non-products” coverage is not subject to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what extent, if any, the attempts to assert “non-products” claims outside the products liability aggregate will succeed. CNA’s policies also contain other limits applicable to these claims and CNA has additional coverage defenses to certain claims. CNA has attempted to

manage its asbestos exposure by aggressively seeking to settle claims on acceptable terms. There can be no assurance that any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to CNA. Where CNA cannot settle a claim on acceptable terms, CNA aggressively litigates the claim. A court ruling by the United States Court of Appeals for the Fourth Circuit has supported certain of CNA’s positions with respect to coverage for “non-products” claims. However, adverse developments with respect to such matters could have a material adverse effect on 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, CNA evaluates the exposure presented by each insured. As part of this evaluation, CNA considers the available insurance coverage; limits and deductibles; the potential role of other insurance, particularly underlying coverage below any of CNA’s 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 CNA’s 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.

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

CNA is involved in significant asbestos-related claim litigation, which is described in Note 7 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

Environmental Pollution and Mass Tort

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

Many policyholders have made claims against CNA for defense costs and indemnification in connection with environmental pollution matters. The vast majority of these claims relate to accident years 1989 and prior, which coincides with CNA’s adoption of the Simplified Commercial General Liability coverage form, which includes what is referred to in the industry as absolute pollution exclusion. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether cleanup costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and the definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues.

CNA has made resolution of large environmental pollution exposures a management priority. CNA has resolved a number of its large environmental accounts by negotiating settlement agreements. In CNA’s settlements, CNA sought to resolve those exposures and obtain the broadest release language to avoid future claims from the same policyholders seeking coverage for sites or claims that had not emerged at the time CNA settled with its policyholder. While the terms of each settlement agreement vary, CNA sought to obtain broad environmental releases that include known and unknown sites, claims and policies. The broad scope of the release provisions contained in those settlement agreements should, in

many cases, prevent future exposure from settled policyholders. It remains uncertain, however, whether a court interpreting the language of the settlement agreements will adhere to the intent of the parties and uphold the broad scope of language of the agreements.

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

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

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

CNA also evaluates its environmental pollution exposures arising from CNA’s assumed reinsurance and its participation in various pools, including ECRA.

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

The tables below depict CNA’s overall pending environmental pollution accounts and associated reserves at September 30, 2006 and December 31, 2005.

September 30, 2006

Number of Policyholders

Net Paid Losses

Net Environmental Pollution Reserves

Percent of Environmental Pollution Net Reserve

(In millions of dollars)

Policyholders with Settlement Agreements

Structured settlements

14.0

10.0

3.4

Coverage in place

4.0

22.0

7.5

Total with Settlement Agreements

18.0

32.0

10.9

Other Policyholders with Active Accounts

Large pollution accounts

110

16.0

52.0

17.8

Small pollution accounts

358

8.0

37.0

12.6

Total Other Policyholders

468

24.0

89.0

30.4

Assumed Reinsurance & Pools

1.0

32.0

10.9

Unassigned IBNR

140.0

47.8

Total

498

43.0

293.0

100.0

December 31, 2005	Number of Policyholders		Net Paid Losses		Net Environmental Pollution Reserves		Percent of Environmental Pollution Net Reserve
(In millions of dollars)

Policyholders with Settlement Agreements
Structured settlements		6	$	10.0	$	17.0		5.1	%
Coverage in place		16		10.0		23.0		6.8
Total with Settlement Agreements		22		20.0		40.0		11.9

Other Policyholders with Active Accounts
Large pollution accounts		120		18.0		63.0		18.8
Small pollution accounts		362		15.0		50.0		14.9
Total Other Policyholders		482		33.0		113.0		33.7

Assumed Reinsurance & Pools				3.0		33.0		9.8
Unassigned IBNR						150.0		44.6
Total		504	$	56.0	$	336.0		100.0	%

Lorillard

Lorillard, Inc. and subsidiaries (“Lorillard”). Lorillard is a wholly owned subsidiary.

The following table summarizes the results of operations for Lorillard for the three and nine months ended September 30, 2006 and 2005 as presented in Note 17 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006			2005
(In millions)

Revenues:
Manufactured products	$	986.0	$	928.4	$	2,818.1		$	2,651.8
Net investment income		27.4		18.9		71.6			43.4
Investment (losses) gains		0.1				(0.5	)		(2.0	)
Other						0.1			6.1
Total		1,013.5		947.3		2,889.3			2,699.3
Expenses:
Cost of sales		573.7		543.9		1,638.0			1,605.0
Other operating		83.6		95.3		285.3			282.3
Total		657.3		639.2		1,923.3			1,887.3
		356.2		308.1		966.0			812.0
Income tax expense		137.3		115.2		374.5			316.1
Net income	$	218.9	$	192.9	$	591.5		$	495.9

Revenues increased by $66.2 million and $190.0 million, or 7.0% and 7.0%, and net income increased by $26.0 million and $95.6 million, or 13.5% and 19.3%, in the three and nine months ended September 30, 2006, as compared to the corresponding periods of 2005.

The increase in revenues in the three months ended September 30, 2006, as compared to the corresponding period of 2005, is due to higher net sales of $57.6 million and higher investment income of $8.6 million. Net sales revenue increased $59.6 million due to increased unit sales volume, assuming prices were unchanged from the prior year, partially offset by $2.0 million due to lower effective unit prices reflecting higher sales promotion expenses (accounted for as a reduction to net sales). Net investment income increased due primarily to higher invested balances and higher interest rates.

Net income increased in the three months ended September 30, 2006, as compared to the corresponding period of 2005, due primarily to the higher revenues discussed above and lower pretax charges of $7.9 million due to a federal assessment relating to the repeal of the federal supply management program for tobacco growers partially offset by a $4.3 million increase in promotional expenses included in cost of sales, higher State Settlement Agreement costs and higher other operating expenses as described below. Lorillard recorded pretax charges of $242.8 million and $223.9 million ($149.3 million and $140.8 million after taxes) for the three months ended September 30, 2006 and 2005, to record its obligations under settlement agreements entered into between the major cigarette manufacturers, including Lorillard, and each of the 50 states, the District of Columbia, the Commonwealth of Puerto Rico and certain U.S. territories (together, the “State Settlement Agreements”). Lorillard’s portion of ongoing adjusted settlement payments and related legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the payment is due. Accordingly, Lorillard records its portion of ongoing settlement payments as part of cost of manufactured products sold as the related sales occur. The $18.9 million pretax increase in tobacco settlement costs for the three months ended September 30, 2006 is due to the impact of the inflation adjustment ($9.0 million) and higher gross unit sales ($11.9 million), partially offset by other adjustments ($2.0 million) under the State Settlement Agreements.

The increase in revenues in the nine months ended September 30, 2006, as compared to the corresponding period of 2005, is primarily due to higher net sales of $166.3 million and higher investment income of $29.7 million, partially offset by a decrease in other income of $6.0 million. Net sales revenue increased $96.1 million due to increased unit sales volume, assuming prices were unchanged from the prior year and $70.2 million due to higher effective unit prices reflecting lower sales promotion expenses. Other revenues in 2005 included interest of $6.1 million relating to a refund of income taxes paid in prior years.

Net income increased in the nine months ended September 30, 2006, as compared to the corresponding period of 2005, due primarily to the higher revenues discussed above and a $9.9 million reduction in promotional expenses included in cost of sales, partially offset by higher State Settlement Agreement costs and higher other operating expenses. Lorillard recorded pretax charges of $696.3 million and $658.2 million ($426.4 million and $402.0 million after taxes) for the nine months ended September 30, 2006 and 2005, to record its obligations under the State Settlement Agreements. The $38.1 million pretax increase in tobacco settlement costs in the nine months ended September 30, 2006, as compared to the comparable period of 2005, is due to the impact of the inflation adjustment ($31.9 million) and charges for higher gross unit sales ($12.2 million), partially offset by other adjustments ($6.0 million) under the State Settlement Agreements. In April of 2006, Lorillard commenced a restructuring of its sales and market research organization and offered an early retirement program to eligible employees. For the nine months ended September 30, 2006, Lorillard recorded restructuring costs of $16.4 million in other operating expenses primarily for early retirement and curtailment charges on pension and other postretirement benefit plans.

Lorillard regularly reviews results of its promotional spending activities and adjusts its promotional spending programs in an effort to maintain its competitive position. Accordingly, unit sales volume and sales promotion costs in any particular quarter are not necessarily indicative of sales and costs that may be realized in subsequent periods.

Overall, domestic industry unit sales volume decreased 3.3% and 2.3% in the three and nine months ended September 30, 2006, as compared with the corresponding periods of 2005. Industry sales for premium brands were 72.9% and 72.5% of the total market in the three and nine months ended September 30, 2006, as compared to 71.0% and 71.3% for the corresponding periods of 2005.

Lorillard’s total (domestic, Puerto Rico and certain U.S. Territories) gross unit sales volume increased 5.1% and 1.8% in the three and nine months ended September 30, 2006, as compared to the corresponding periods of 2005. Domestic wholesale volume increased 5.7% and 2.0% in the three and nine months ended September 30, 2006, as compared to the corresponding periods of 2005. Total Newport unit sales volume increased 5.5% and 2.0% in the three and nine months ended September 30, 2006. Newport domestic volume increased 6.2% and 2.2% in the three and nine months ended September 30, 2006, as compared with the corresponding periods of 2005. These results continue to be affected by on-going competitive promotions and the availability of deep discount brands.

Deep discount brands are produced by manufacturers that are subject to lower payment obligations under State Settlement Agreements. This cost advantage enables them to price their brands more than 50% lower than the list prices of premium brand offerings from major manufacturers. As a result of this price differential, deep discount brands have grown from an estimated share in 1998 of less than 1.5% to an estimated 12.3% for the first nine months of 2006. Although deep discount brands have shown a decrease of 0.8% for the first nine months of 2006 versus the first nine months of 2005, these brands continue to be a significant competitive factor in the domestic U.S. market.

Menthol cigarettes as a percent of the total industry increased to 27.8% and 27.7% for the three and nine months ended September 30, 2006, as compared to 27.1% for each of the corresponding periods of 2005. Newport, the industry’s largest menthol brand, has a 33.6% and 33.1% share of the menthol segment for the three and nine months ended September 30, 2006, as compared to 32.5% and 32.7% for the corresponding periods of 2005.

Newport, a premium brand, accounted for approximately 91.8% of Lorillard’s unit sales volume for each of the three and nine months ended September 30, 2006, as compared to 91.5% and 91.7% for the corresponding periods of 2005.

The costs of litigating and administering product liability claims, as well as other legal expenses, are included in other operating expenses. Lorillard’s outside legal fees and other external product liability defense costs were $12.7 million, $22.8 million, $48.9 million, and $61.8 million for the three and nine months ended September 30, 2006 and 2005. Numerous factors affect product liability defense costs. The principal factors are as follows:

the number and types of cases filed and appealed;

the number of cases tried and appealed;

the development of the law;

the application of new or different theories of liability by plaintiffs and their counsel; and

litigation strategy and tactics.

Please read Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report for detailed information regarding tobacco litigation. The factors that have influenced past product liability defense costs are expected to continue to influence future costs. Although Lorillard does not expect that product liability defense costs will increase significantly in the future, it is possible that adverse developments in the factors discussed above, as well as other circumstances beyond the control of Lorillard, could have a material adverse effect on our financial condition, results of operations or cash flows.

Selected Market Share Data

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(Units in billions)

Total domestic Lorillard unit volume (1)		9.623			9.101			27.232			26.710
Total domestic industry unit volume (1)		96.000			99.258			280.624			287.177

Lorillard’s share of the domestic market (1)		10.0	%		9.2	%		9.7	%		9.3	%
Lorillard’s premium segment as a percentage of its
total domestic volume (1)		94.7	%		95.0	%		94.9	%		95.3	%
Lorillard’s share of the premium segment (1)		13.0	%		12.3	%		12.7	%		12.4	%

Newport share of the domestic market (1)		9.2	%		8.4	%		8.9	%		8.5	%
Newport share of the premium segment (1)		12.6	%		11.8	%		12.3	%		11.9	%
Total menthol segment market share for the industry (2)		27.8	%		27.1	%		27.7	%		27.1	%
Total discount segment market share for the industry (1)		27.1	%		29.0	%		27.5	%		28.7	%
Newport’s share of the menthol segment (2)		33.6	%		32.5	%		33.1	%		32.7	%
Newport as a percentage of Lorillard’s (3):
Total volume		91.8	%		91.5	%		91.8	%		91.7	%
Net sales		93.4	%		92.8	%		93.2	%		92.9	%

Sources:

(1)	Management Science Associates, Inc.
(2)	Lorillard proprietary data
(3)	Lorillard shipment reports

Unless otherwise specified, market share data in this MD&A is based on data made available by Management Science Associates, Inc. (“MSAI”), an independent third-party database management organization that collects wholesale shipment data from various cigarette manufacturers. MSAI divides the cigarette market into two price segments, the premium price segment and the discount or reduced price segment. MSAI’s information relating to unit sales volume and market share of certain of the smaller, primarily deep discount, cigarette manufacturers is based on estimates derived by MSAI and therefore may differ from previously reported data, as estimates are updated on a monthly basis by MSAI.

Lorillard management continues to believe that volume and market share information for deep discount manufacturers are understated and, correspondingly, share information for the larger manufacturers, including Lorillard, are overstated by MSAI.

Business Environment

The tobacco industry in the United States, including Lorillard, continues to be faced with a number of issues that have impacted or may adversely impact the business, results of operations and financial condition of Lorillard and us, including the following:

A substantial volume of litigation seeking compensatory and punitive damages ranging into the billions of dollars, as well as equitable and injunctive relief, arising out of allegations of cancer and other health effects resulting from the use of cigarettes, addiction to smoking or exposure to environmental tobacco smoke, including claims for economic damages relating to alleged misrepresentation concerning the use of descriptors such as “lights,” as well as other alleged damages. Please read Item 3 - Legal Proceedings of our 2005 Annual Report on Form 10-K and Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report for information with respect to litigation and the State Settlement Agreements.

Substantial annual payments by Lorillard, continuing in perpetuity, and significant restrictions on marketing and advertising agreed to under the terms of the State Settlement Agreements. The State Settlement Agreements impose a stream of future payment obligations on Lorillard and the other major U.S. cigarette manufacturers and place significant restrictions on their ability to market and sell cigarettes.

The cigarette market is highly concentrated with Lorillard’s two major competitors, Philip Morris USA and Reynolds American Inc. having a combined market share of approximately 77.2% in the first nine months of 2006. In addition, Reynolds American Inc. owns the third and fourth leading menthol brands, Kool and Salem, which have a combined share of the menthol segment of approximately 18.4%. The concentration of U.S. market share could make it more difficult for Lorillard to compete for shelf space in retail outlets, which is already exacerbated by restrictive marketing programs of Lorillard’s larger competitors, and could impact price competition among menthol brands.

The continuing contraction of the U.S. cigarette market, in which Lorillard currently conducts its only significant business. As a result of price increases, restrictions on advertising and promotions, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of smoking, increased pressure from anti-tobacco groups and other factors, U.S. industry cigarette shipments have decreased at a compound annual rate of approximately 2.4% over the period 1996 through 2005, according to volume information provided by MSAI.

Competition from deep discounters who enjoy competitive cost and pricing advantages because they are not subject to the same payment obligations under the State Settlement Agreements as Lorillard. Market share for the deep discount brands decreased from 13.1% in the first nine months of 2005 as compared to 12.3% for the first nine months of 2006, as estimated by MSAI. Lorillard’s focus on the premium market and its obligations under the State Settlement Agreements make it very difficult to compete successfully in the deep discount market.

Continuing sizable industry-wide promotional expenses and sales incentives are being implemented in response to declining unit volume, state excise tax increases and continuing competition among the three largest cigarette manufacturers, including Lorillard, and smaller participants who have established a competitive level of market share in recent years, principally in the deep discount cigarette segment. As a result of on-going high levels of competition based on the retail price of brands and the competitive price advantages of deep discounters, the ability of Lorillard and the other major manufacturers to raise prices has been adversely affected. While the environment remains highly price competitive, during 2005 and for the first nine months of 2006, Lorillard reduced promotional and sales incentives which had the effect of increasing unit prices.

Substantial federal, state and local excise taxes which are reflected in the retail price of cigarettes. In the first nine months of 2006, the federal excise tax was $0.39 per pack and combined state and local excise taxes ranged from $0.07 to $3.00 per pack. In the first nine months of 2006, excise tax increases ranging from $0.05 to $1.00 per pack were implemented in five states and two municipalities. Proposals continue to be made to increase federal, state and local excise taxes. Lorillard believes that increases in excise and similar taxes have had an adverse impact on sales of cigarettes and that future increases, the extent of which cannot be predicted, could result in further volume declines for the cigarette industry, including Lorillard, and an increased sales shift toward lower priced discount cigarettes rather than premium brands. In addition, Lorillard and other cigarette manufacturers are required to pay an assessment under a federal law designed to fund payments to tobacco quota holders and growers.

Substantial and increasing regulation of the tobacco industry and governmental restrictions on smoking. Bills have been introduced in the U.S. Congress to grant the Food and Drug Administration (“FDA”) authority to regulate tobacco products. Lorillard believes that FDA regulations, if enacted, could among other things result in new restrictions on the manner in which cigarettes can be advertised and marketed, and may alter the way cigarette products are developed and manufactured. Lorillard also believes that any such proposals, if enacted, would provide Philip Morris, as the largest tobacco company in the country, with a competitive advantage.

Sales of counterfeit cigarettes in the United States continue to adversely impact sales by the manufacturer of the counterfeited brands, including Lorillard, and potentially damage the value and reputation of those brands.

Boardwalk Pipeline

Boardwalk Pipeline Partners, LP and subsidiaries (“Boardwalk Pipeline”). Boardwalk Pipeline is an 85% owned subsidiary.

The following table summarizes the results of operations for Boardwalk Pipeline for the three and nine months ended September 30, 2006 and 2005 as presented in Note 17 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
(In millions)

Revenues:
Operating	$	134.3	$	121.5	$	440.6	$	390.8
Net investment income		0.6		0.8		1.8		2.2
Total		134.9		122.3		442.4		393.0
Expenses:
Operating		88.8		99.7		264.1		255.1
Interest		15.0		15.0		45.8		44.7
Total		103.8		114.7		309.9		299.8
		31.1		7.6		132.5		93.2
Income tax expense		10.7		3.1		45.2		37.1
Minority interest		4.5				19.2
Net income	$	15.9	$	4.5	$	68.1	$	56.1

Boardwalk Pipeline derives revenues primarily from the interstate transportation and storage of natural gas for third parties. Transportation and storage services are provided under firm service and interruptible service agreements. Transportation rates are subject to maximum tariff rates established by the Federal Energy Regulatory Commission (“FERC”), although many services are provided at a discount to the maximum tariff rate due to the competitive marketplace.

Under firm transportation agreements, customers generally pay a fixed “demand” or “capacity reservation” charge to reserve pipeline capacity at certain receipt and delivery points, plus a commodity and fuel charge paid on the volume of gas actually transported. Firm storage customers reserve a specific amount of storage capacity and generally pay a capacity reservation charge based on the amount of capacity being reserved plus an injection and/or withdrawal fee.

Capacity reservation revenues derived from firm services generally remain constant over the term of the contract because the charges are based upon the capacity reserved and do not vary with actual use.

Interruptible transportation and storage services are typically short-term in nature and are generally used by customers that do not require the certainty of delivery that is provided with firm services. Customers pay for interruptible services when capacity is used.

Revenues for Boardwalk Pipeline’s parking and lending (“PAL”) services and certain of its storage service for which it is authorized to charge market-based rates are affected by period-to-period natural gas price spreads (for example, summer to winter). In recent periods, these price spreads have been wider and more volatile than in previous years, resulting in significant increases in parking and lending and storage revenues. Boardwalk Pipeline is uncertain if these recent favorable trends in period-to-period natural gas price spreads will continue. A reversal of this trend could result in lower revenues and profits from these services in future periods.

Operating expenses typically do not vary significantly based upon the amount of gas transported with the exception of gas consumed by Gulf South’s compressor stations. Gulf South’s fuel recoveries are included as part of transportation revenues.

Total revenues increased by $12.6 million to $134.9 million for the three months ended September 30, 2006, compared to $122.3 million for the three months ended September 30, 2005. Storage and parking and lending services increased revenues by $9.0 million primarily due to favorable natural gas price spreads and volatility in forward gas prices. In addition, operating revenues increased due to higher transportation fees of $7.7 million related to higher reservation rates on demand for capacity and additional capacity reserved by shippers due to higher production in the East Texas region. These increases were partially offset by a $3.6 million decrease in usage fees on interruptible services due to 2006 volumes being transported on new firm contracts.

Net income increased by $11.4 million to $15.9 million for the three months ended September 30, 2006, compared to $4.5 million for the three months ended September 30, 2005. The increase was primarily due to the higher revenues discussed above and a decrease in operating expenses of $10.9 million. Minority interest expense reflects the impact of Boardwalk Pipeline’s initial public offering of a 14.5% limited partnership interest in November of 2005. Operating expenses in the third quarter of 2006, as compared to the corresponding period of 2005, include an $8.1 million decrease in company used gas due to lower natural gas prices and operational efficiencies resulting in decreased usage and a $4.6 million reduction in hurricane-related expense as compared to the corresponding period of 2005.

Total revenues increased by $49.4 million to $442.4 million for the nine months ended September 30, 2006, compared to $393.0 million for the nine months ended September 30, 2005. Storage and parking and lending services improved revenues by $25.5 million primarily due to favorable natural gas price spreads and volatility in forward gas prices. In addition, operating revenues increased due to higher transportation fees of $20.0 million related to higher reservation rates on demand for capacity and additional capacity reserved by shippers due to higher production in the East Texas region. Fuel related revenues increased by $5.5 million due to an increase in realized gas prices, including revenues locked in at favorable rates through hedging activities.

Net income increased by $12.0 million to $68.1 million for the nine months ended September 30, 2006, as compared to $56.1 million for the nine months ended September 30, 2005, primarily due to the increased revenues discussed above, partially offset by $19.2 million of minority interest expense and a $9.0 million increase in operating expenses. Operating expenses in the first nine months of 2006, as compared to the corresponding period of 2005, include a $6.9 million increase in labor and outside services, a $6.5 million increase related to postretirement benefits other than pensions and pension expense recognition as a result of the Texas Gas rate case settlement and a $3.5 million increase in benefits expense due to the recognition of a special termination benefit charge as a result of the Texas Gas early retirement incentive program. Operating expenses also reflect a $3.1 million increase in various overhead costs primarily from growth in operations and a $2.8 million increase in costs for transportation of gas on third-party pipelines to provide additional deliveries to the market area. These increases were partially offset by an $8.7 million reduction in hurricane-related expense as compared to the corresponding period of 2005, and a $6.1 million decrease in company used gas due to operational efficiencies resulting in decreased usage. Interest expense for the nine months ended September 30, 2006 increased by $1.1 million, primarily due to borrowings under a credit facility.

Diamond Offshore

Diamond Offshore Drilling, Inc. and subsidiaries (“Diamond Offshore”). Diamond Offshore is a 54% owned subsidiary.

The following table summarizes the results of operations for Diamond Offshore for the three and nine months ended September 30, 2006 and 2005 as presented in Note 17 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006			2005
(In millions)

Revenues:
Operating	$	517.6	$	346.0		$	1,478.8		$	897.0
Net investment income		10.0		6.1			26.8			18.0
Investment gains (losses)		0.1		(0.2	)		(0.1	)		(1.5	)
Total		527.7		351.9			1,505.5			913.5
Expenses:
Operating		300.1		225.8			819.7			666.2
Interest		6.2		8.4			18.7			33.7
Total		306.3		234.2			838.4			699.9
		221.4		117.7			667.1			213.6
Income tax expense		64.5		39.8			203.7			69.6
Minority interest		75.1		37.4			221.8			69.9
Net income	$	81.8	$	40.5		$	241.6		$	74.1

Diamond Offshore’s revenues vary based upon demand, which affects the number of days the fleet is utilized and the dayrates earned. When a rig is idle, no dayrate is earned and revenues will decrease as a result. Revenues can also be affected as a result of the acquisition or disposal of rigs, required surveys and shipyard upgrades. In order to improve utilization or realize higher dayrates, Diamond Offshore may mobilize its rigs from one market to another. However, during periods of unpaid mobilization, revenues may be adversely affected. As a response to changes in demand, Diamond Offshore may withdraw a rig from the market by stacking it or may reactivate a rig stacked previously, which may decrease or increase revenues, respectively.

The two most significant variables affecting revenues are dayrates for rigs and rig utilization rates, each of which is a function of rig supply and demand in the marketplace. As utilization rates increase, dayrates tend to increase as well, reflecting the lower supply of available rigs, and vice versa. Demand for drilling services is dependent upon the level of expenditures set by oil and gas companies for offshore exploration and development as well as a variety of political and economic factors. The availability of rigs in a particular geographical region also affects both dayrates and utilization rates. These factors are not within Diamond Offshore’s control and are difficult to predict.

Diamond Offshore’s operating income is primarily affected by revenue factors, but is also a function of varying levels of operating expenses. Diamond Offshore’s operating expenses represent all direct and indirect costs associated with the operation and maintenance of Diamond Offshore’s drilling equipment. The principal components of Diamond Offshore’s operating costs are, among other things, direct and indirect costs of labor and benefits, repairs and maintenance, freight, regulatory inspections, boat and helicopter rentals and insurance. Labor and repair and maintenance costs represent the most significant components of Diamond Offshore’s operating expenses. In general, Diamond Offshore’s labor costs increase primarily due to higher salary levels, rig staffing requirements, inflation and the geographic regions in which Diamond Offshore’s rigs operate. In the recent past there has been, and continues to be, upward pressure on salaries and wages as a result of the strengthening offshore drilling market and increased competition for skilled workers. Costs to repair and maintain equipment fluctuate depending upon the type of activity the drilling unit is performing, as well as the age and condition of the equipment.

Operating expenses generally are not affected by changes in dayrates and may not be significantly affected by short-term fluctuations in utilization. For instance, if a rig is to be idle for a short period of time, Diamond Offshore may realize few decreases in operating expenses since the rig is typically maintained in a prepared or “ready stacked” state with a full crew. In addition, when a rig is idle, Diamond Offshore is responsible for certain operating expenses such as rig fuel and supply boat costs, which are typically a cost of the operator when a rig is under contract. However, if the rig

is to be idle for an extended period of time, Diamond Offshore may reduce the size of a rig’s crew and take steps to “cold stack” the rig, which lowers expenses and partially offsets the impact on operating income.

Periods of high, sustained utilization may result in cost increases for maintenance and repairs in order to maintain Diamond Offshore’s equipment in proper, working order. In addition, during periods of high activity and dayrates, higher prices generally pervade the entire offshore drilling industry and its support businesses, which cause Diamond Offshore’s costs for goods and services to increase.

Operating income is also negatively impacted when Diamond Offshore performs certain regulatory inspections that are due every five years (“5-year survey”) for each of Diamond Offshore’s rigs as well as intermediate surveys, which are performed at interim periods between 5-year surveys. Operating revenue decreases because these surveys are performed during scheduled down-time in a shipyard. Operating expenses increase as a result of these surveys due to the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs. Repair and maintenance costs may be required resulting from the survey or may have been previously planned to take place during this mandatory down-time. The number of rigs undergoing a 5-year survey will vary from year to year.

Diamond Offshore’s contract drilling backlog at October 16, 2006, was $7.0 billion, consisting of $6.0 billion related to executed contracts and $1.0 billion related to anticipated performance bonuses and customer commitments for which contracts had not yet been executed as of such date. Approximately $0.5 billion of the contracted backlog is expected to be realized during the remainder of 2006, $2.3 billion in 2007 and the remaining $3.2 billion in 2008 through 2012. Diamond Offshore’s contract drilling backlog at July 3, 2006 (the date reported in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2006) was $5.4 billion. Contract drilling backlog is calculated assuming full utilization of drilling equipment for the contract period; however, utilization rates, which generally approach 95-98% can be adversely impacted by downtime due to various operating factors including, but not limited to, unscheduled repairs, maintenance and weather.

Revenues increased by $175.8 million and $592.0 million, or 50.0% and 64.8%, and net income increased by $41.3 million and $167.5 million in the three and nine months ended September 30, 2006, as compared to the corresponding periods of 2005.

Revenues from high specification floaters and intermediate semisubmersible rigs increased by $149.9 million and $477.6 million or 64.8% and 75.7% in the three and nine months ended September 30, 2006, as compared to the corresponding periods of 2005. The increase primarily reflects increased dayrates of $114.3 million and $405.3 million and improved utilization of $35.5 million and $73.7 million.

Revenues from jack-up rigs increased $48.2 million and $130.6 million, or 69.8% and 67.7%, in the three and nine months ended September 30, 2006, as compared to the corresponding periods of 2005, due primarily to increased dayrates of $61.1 million and $157.9 million, partially offset by decreased utilization of $10.3 million and $16.3 million, respectively. In addition, there was a $1.4 million and $0.8 million reduction in the amortization of deferred mobilization revenue for the three and nine months ended September 30, 2006.

In the third quarter of 2005, one of Diamond Offshore’s jack-up drilling rigs, the Ocean Warwick, was damaged beyond repair during Hurricane Katrina. The Company recognized a $33.6 million casualty gain during the third quarter of 2005 as a result of the constructive total loss of the Ocean Warwick. During the three and nine months ended September 30, 2005, this drilling unit generated $4.0 million and $11.8 million in revenues.

Investment income increased by $3.9 million and $8.8 million, for the three and nine months ended September 30, 2006 primarily due to the combined effect of higher interest rates earned on higher average cash balances in 2006, as compared to the prior year.

Net income increased in the three and nine months ended September 30, 2006 due primarily to the increased revenues noted above, and reduced interest expense, partially offset by increased contract drilling expenses driven by higher labor and benefit costs as a result of wage increases and other compensation enhancement programs implemented subsequent to the second quarter of 2005. In addition, Diamond Offshore incurred higher repair and maintenance costs for most of its rigs primarily due to the high utilization of its fleet and higher prices experienced throughout the offshore drilling industry and support busineses.

Loews Hotels

Loews Hotels Holding Corporation and subsidiaries (“Loews Hotels”). Loews Hotels is a wholly owned subsidiary.

The following table summarizes the results of operations for Loews Hotels for the three and nine months ended September 30, 2006 and 2005 as presented in Note 17 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
(In millions)

Revenues:
Operating	$	84.6	$	81.1	$	279.5	$	261.6
Net investment income		0.3		0.4		0.7		5.8
Total		84.9		81.5		280.2		267.4
Expenses:
Operating		75.3		73.0		231.3		214.5
Interest		3.2		3.0		9.0		7.8
Total		78.5		76.0		240.3		222.3
		6.4		5.5		39.9		45.1
Income tax expense		1.3		1.8		14.3		12.4
Net income	$	5.1	$	3.7	$	25.6	$	32.7

Revenues increased by $3.4 million and $12.8 million, or 4.2% and 4.8%, and net income increased by $1.4 million and decreased by $7.1 million, or 37.8% and 21.7%, for the three and nine months ended September 30, 2006, as compared to the corresponding periods of 2005.

Revenues and net income increased for the three months ended September 30, 2006, as compared to the corresponding period of 2005, due to an increase in revenue per available room to $160.82 compared to $151.94 in the prior year, reflecting improvements in average room rates of $15.70, or 8.3%, partially offset by decreased occupancy rates of 2.3%. Net income for the three months ended September 30, 2005 also includes a lower effective tax rate related to a federal income tax settlement.

Revenues increased in the nine months ended September 30, 2006, as compared to the corresponding period of 2005, due to an increase in revenue per available room to $168.72, compared to $152.91 in the prior year, reflecting improvements in average room rates of $19.03, or 9.7%, and a 0.6% increase in occupancy rates. These increases were partially offset by a non-recurring gain in 2005 of $4.5 million from the early repayment of a note in connection with the sale of a hotel property and lower equity income of $3.0 million due primarily to higher land rent at the Orlando property.

Revenue per available room is an industry measure of the combined effect of occupancy rates and average room rates on room revenues. Other hotel operating revenues primarily include guest charges for food and beverages.

Net income for the nine months ended September 30, 2006 decreased primarily due to the non-recurring gain in 2005 of $4.5 million as discussed above and increased linen and service upgrade costs. The decline in net income was partially offset by the increased revenues and a lower effective tax rate related to a federal income tax settlement.

Corporate and Other

Corporate operations consist primarily of investment income, including investment gains (losses) from non-insurance subsidiaries, the operations of Bulova, corporate interest expenses and other corporate administrative costs.

The following table summarizes the results of operations for Corporate and Other for the three and nine months ended September 30, 2006 and 2005 as presented in Note 17 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006		2005
(In millions)

Revenues:
Manufactured products	$	49.5	$	39.9		$	136.5	$	119.4
Net investment income		56.6		81.8			216.8		53.8
Investment gains (losses)		10.7		(6.9	)		9.1		(3.1	)
Other		4.4		0.2			10.8		10.1
Total		121.2		115.0			373.2		180.2
Expenses:
Cost of sales		24.3		18.7			68.0		57.4
Operating		35.7		31.3			97.5		88.0
Interest		18.8		18.8			57.0		107.4
Total		78.8		68.8			222.5		252.8
		42.4		46.2			150.7		(72.6	)
Income tax expense (benefit)		15.5		(4.8	)		52.9		(45.1	)
Net income (loss)	$	26.9	$	51.0		$	97.8	$	(27.5	)

Revenues increased by $6.2 million and $193.0 million and net income decreased by $24.1 million and increased by $125.3 million in the three and nine months ended September 30, 2006, as compared to the corresponding periods of 2005.

Revenues and net income increased in the three months ended September 30, 2006, as compared to the corresponding period of 2005, due primarily to increased investment gains of $17.6 million, partially offset by lower net investment income of $25.2 million. The decrease in investment income is primarily due to the performance of the Company’s trading portfolio that decreased to $23.8 million from $67.9 million ($15.5 million and $44.1 million after taxes) for the three months ended September 30, 2006 and 2005, respectively. In 2005, the trading portfolio included a $40.7 million gain related to interest rate swaps. Interest income in 2006 increased due to improved yields on higher invested amounts.

Revenues increased in the nine months ended September 30, 2006, as compared to the corresponding period of 2005, due primarily to higher net investment income of $163.0 million and increased investment gains of $12.2 million. Net investment income includes income from the trading portfolio of $117.7 million and $9.7 million ($76.5 million and $6.3 million after taxes) for the nine months ended September 30, 2006 and 2005, respectively, partially offset by a $9.3 million loss for the nine months ended September 30, 2005 related to interest rate swaps. In addition, interest income in 2006 increased due to improved yields on higher invested amounts.

Net income decreased in the three months ended September 30, 2006 due primarily to decreased net investment income, partially offset by increased investment gains.

Net income increased in the nine months ended September 30, 2006 due primarily to the increased revenues discussed above and the absence of costs ($23.1 million after taxes) incurred in 2005 associated with the early retirement of the Company’s $400.0 million principal amount of 7.0% senior notes due 2023 and $1,150.0 million principal amount of 3.1% exchangeable subordinated notes due 2007. Net income for 2005 also reflected a lower effective tax rate related to the federal income tax settlement as discussed below.

Subsequent to the settlement of the Company’s 1998 through 2001 tax returns with the Internal Revenue Service, a review of the tax liabilities was performed. As a result, the Company reduced its deferred tax liabilities by $21.2 million in the three months ended September 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

CNA Financial

Cash Flow

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

For the nine months ended September 30, 2006, net cash provided by operating activities was $1,783.0 million as compared with $1,460.0 million for the same period in 2005. Cash provided by operating activities was favorably impacted by strong premium collections, reinsurance recoveries on catastrophe losses and net investment income, partially offset by increased loss payments, primarily related to 2005 catastrophe losses paid in 2006.

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

For the nine months ended September 30, 2006, net cash used by investing activities was $1,490.0 million as compared with $796.0 million for the same period in 2005. Cash flows used for investing activities related principally to purchases of fixed maturity securities and short term investments.

Cash flows from financing activities include proceeds from the issuance of debt or 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 CNA.

For the nine months ended September 30, 2006, net cash used by financing activities was $282.0 million as compared with $667.0 million for the same period in 2005. Cash flows used by financing activities in 2006 were primarily related to the repurchase of the Series H Cumulative Preferred Stock Issue (the Series H Issue) and return of investment contract balances, partially offset by proceeds from the issuance of new debt and common stock. The proceeds from the issuance of new debt and common stock in excess of the amount used to repurchase the Series H Issue will be used to repay at maturity CNA’s 6.75% notes due November 15, 2006.

CNA believes that its present cash flows from operations, investing activities and financing activities are sufficient to fund its working capital needs.

CNA has an effective shelf registration statement under which it may issue an aggregate of $515.0 million of debt or equity securities. In August 2006, CNA issued common stock and new five and ten-year senior notes in public offerings. See the CNA Series H Preferred Stock section below for further discussion.

CNA Series H Preferred Stock

In December 2002, CNA sold $750.0 million of a new issue of preferred stock, the Series H Issue, to us. The Series H Issue accrued cumulative dividends at an initial rate of 8.0% per year, compounded annually. In August 2006, CNA repurchased the Series H Issue for approximately $993.0 million, a price equal to the liquidation preference.

CNA financed the repurchase of the Series H Issue with the proceeds from its sales of: (i) 7.0 million shares of CNA’s common stock in a public offering for approximately $235.5 million; (ii) $400.0 million of new 6.0% five-year senior notes and $350.0 million of new 6.5% ten-year senior notes in a public offering; and (iii) 7.86 million shares of CNA’s common stock to us in a private placement for approximately $264.5 million. CNA will use the proceeds in excess of the amount used to repurchase the Series H Issue to fund the repayment of its $250.0 million outstanding 6.75% senior notes at maturity in November 2006.

Commitments, Contingencies and Guarantees

CNA has various commitments, contingencies and guarantees which it became involved with during the ordinary course of business. The impact of these commitments, contingencies and guarantees should be considered when evaluating CNA’s liquidity and capital resources.

Further information on CNA’s commitments, contingencies and guarantees is provided in Notes 2, 7, 13, and 14 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

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Regulatory Matters

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

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

Subsequent to receipt of the SEC subpoena, CNA has been producing documents and providing additional information at the SEC’s request. In addition, the SEC and representatives of the United States Attorney’s Office for the Southern District of New York have conducted interviews with several of CNA’s current and former executives relating to the restatement of its financial results for 2004, including CNA’s relationship with and accounting for transactions with an affiliate that were the basis for the restatement. The SEC has also requested information relating to CNA’s 2006 restatements. It is possible that CNA’s analyses of, or accounting treatment for, finite reinsurance contracts or discontinued operations could be questioned or disputed by regulatory authorities. As a result, further restatements of our financial results are possible.

Ratings

Ratings are an important factor in establishing the competitive position of insurance companies. CNA’s insurance company subsidiaries are rated by major rating agencies, and these ratings reflect the rating agency’s opinion of the insurance company’s financial strength, operating performance, strategic position and ability to meet CNA’s obligations to policyholders. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating. One or more of these agencies could take action in the future to change the ratings of CNA’s insurance subsidiaries.

The table below reflects the various group ratings issued by A.M. Best Company (“A.M. Best”), Fitch Ratings (“Fitch”), Moody’s Investors Service (“Moody’s”) and Standard & Poor’s (“S&P”) as of October 19, 2006 for the Property and Casualty and Life companies. The table also includes the ratings for CNA’s senior debt and Continental senior debt.

	Insurance Financial Strength Ratings (a)		Debt Ratings (a)
	Property & Casualty	Life	CNA	Continental
	CCC		Senior	Senior
	Group	CAC	Debt	Debt

A.M. Best	A	A-	bbb	Not rated
Fitch	A-	A-	BBB-	BBB-
Moody’s	A3	Baa1	Baa3	Baa3
S&P	A-	BBB+	BBB-	BBB-

(a)	A.M. Best, Fitch, Moody’s and Standard & Poor’s outlooks are stable for CNA’s debt and insurance financial strength ratings.

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On October 10, 2006, Fitch affirmed CNA’s current debt and financial strength ratings. The stable rating outlook was unchanged. On August 22, 2006, Standard & Poor’s revised its outlook on CNA Financial Corporation and its insurance subsidiaries to stable from negative.

If CNA’s property and casualty insurance financial strength ratings were downgraded below current levels, CNA’s business and our results of operations could be materially adversely affected. The severity of the impact on CNA’s business is dependent on the level of downgrade and, for certain products, which rating agency takes the rating action. Among the adverse effects in the event of such downgrades would be the inability to obtain a material volume of business from certain major insurance brokers, the inability to sell a material volume of CNA’s insurance products to certain markets and the required collateralization of certain future payment obligations or reserves.

In addition, CNA believes that a lowering of our debt ratings by certain of these agencies could result in an adverse impact on CNA’s ratings, independent of any change in our circumstances. None of the major rating agencies which rates us currently maintains a negative outlook or has us on negative Credit Watch.

CNA has entered into several settlement agreements and assumed reinsurance contracts that require collateralization of future payment obligations and assumed reserves if its ratings or other specific criteria fall below certain thresholds. The ratings triggers are generally more than one level below CNA’s current ratings.

Dividend Paying Ability

Lorillard

Lorillard and other cigarette manufacturers continue to be confronted with substantial litigation. Plaintiffs in most of the cases seek unspecified amounts of compensatory damages and punitive damages, although some seek damages ranging into the billions of dollars. Plaintiffs in some of the cases seek treble damages, statutory damages, disgorgement of profits, equitable and injunctive relief, and medical monitoring, among other remedies.

Lorillard believes that it has valid defenses to the cases pending against it. Lorillard also believes it has valid bases for appeal of the adverse verdicts against it. To the extent we are a defendant in any of the lawsuits, we believe that we are not a proper defendant in these matters and have moved or plan to move for dismissal of all such claims against us. While Lorillard intends to defend vigorously all tobacco products liability litigation, it is not possible to predict the outcome of any of this litigation. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably. Lorillard may enter into discussions in an attempt to settle particular cases if it believes it is appropriate to do so.

Except for the impact of the State Settlement Agreements as described below, we are unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco related litigation and, therefore, no provision has been made in the Consolidated Condensed Financial Statements for any unfavorable outcome. It is possible that our results of operations, cash flows and financial position could be materially adversely affected by an unfavorable outcome of certain pending litigation.

The State Settlement Agreements require Lorillard and the other Original Participating Manufacturers (“OPMs”) to make aggregate annual payments of $8.4 billion through 2007 and $9.4 billion thereafter, subject to adjustment for several factors described below. In addition, the OPMs are required to pay plaintiffs’ attorneys’ fees, subject to an aggregate annual cap of $500.0 million, as well as an additional aggregate amount of up to $125.0 million in each year through 2008. These payment obligations are several and not joint obligations of each of the OPMs. We believe that Lorillard’s obligations under the State Settlement Agreements will materially adversely affect our cash flows and operating income in future years.

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Both the aggregate payment obligations of the OPMs, and the payment obligations of Lorillard, individually, under the State Settlement Agreements are subject to adjustment for several factors which include:

inflation;

aggregate volume of domestic cigarette shipments;

market share; and

industry operating income.

The inflation adjustment increases payments on a compounded annual basis by the greater of 3.0% or the actual total percentage change in the consumer price index for the preceding year. The inflation adjustment is measured starting with inflation for 1999. The volume adjustment increases or decreases payments based on the increase or decrease in the total number of cigarettes shipped in or to the 50 U.S. states, the District of Columbia and Puerto Rico by the OPMs during the preceding year, as compared to the 1997 base year shipments. If volume has increased, the volume adjustment would increase the annual payment by the same percentage as the number of cigarettes shipped exceeds the 1997 base number. If volume has decreased, the volume adjustment would decrease the annual payment by 98.0% of the percentage reduction in volume. In addition, downward adjustments to the annual payments for changes in volume may, subject to specified conditions and exceptions, be reduced in the event of an increase in the OPMs aggregate operating income from domestic sales of cigarettes over base year levels established in the State Settlement Agreements, adjusted for inflation. Any adjustments resulting from increases in operating income would be allocated among those OPMs who have had increases.

Lorillard’s cash payment under the State Settlement Agreements in the nine months ended September 30, 2006 was $713.4 million including Lorillard’s deposit of $108.0 million in an interest-bearing escrow account in accordance with procedures established in the MSA pending resolution of a claim by Lorillard and other OPMs that they are entitled to reduce their MSA payments based on a loss of market share to non-participating manufacturers. Most of the states that are parties to the MSA are disputing the availability of the reduction and Lorillard believes that this dispute will ultimately be resolved by judicial and arbitration proceedings. Lorillard’s $108.0 million reduction is based upon the OPMs collective loss of market share in 2003.

Lorillard and other OPMs have the right to claim additional reductions of MSA payments in subsequent years under provisions of the MSA. In addition to the payments made in March and April of 2006, Lorillard anticipates the additional amount payable in 2006 will be approximately $175.0 million to $200.0 million, primarily based on 2006 estimated industry volume.

See Item 3 - Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2005 and Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report for additional information regarding this settlement and other litigation matters.

Lorillard’s cash and investments, net of receivables and payables, totaled $1,834.1 million and $1,750.1 million at September 30, 2006 and December 31, 2005, respectively. At September 30, 2006, 77.6% of Lorillard’s cash and investments were invested in money market accounts and 10.7% invested in Treasury Bills with an average duration of approximately 6 months.

The principal source of liquidity for Lorillard’s business and operating needs is internally generated funds from its operations. Lorillard’s operating activities resulted in a net cash inflow of $635.1 million for the nine months ended September 30, 2006, compared to a net cash inflow of $670.8 million for the corresponding period of the prior year. Lorillard believes, based on current conditions, that cash flows from operating activities will be sufficient to enable it to meet its obligations under the State Settlement Agreements and to fund its capital expenditures. Lorillard cannot predict the impact on its cash flows of cash requirements related to any future settlements or judgments, including cash required to bond any appeals, if necessary, or the impact of subsequent legislative actions, and thus can give no assurance that it will be able to meet all of those requirements.

Boardwalk Pipeline

At September 30, 2006 and December 31, 2005, cash and investments amounted to $57.6 million and $65.8 million, respectively. Cash flow from operating activities for the nine months ended September 30, 2006 amounted to $184.9

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million, compared to $159.7 million in the first nine months of 2005. In the nine months ended September 30, 2006 and 2005, Boardwalk Pipeline’s capital expenditures were $120.2 million and $50.4 million, respectively.

In June of 2006, Boardwalk Pipeline and certain of its subsidiaries entered into a $400.0 million unsecured revolving credit facility which amended and restated the previous $200.0 million facility entered into at the time of its initial public offering. As of September 30, 2006, $60.0 million was outstanding under this facility. The interest rate for the borrowing was 5.73%. The revolving credit facility has a maturity date of June 29, 2011.

In February and March of 2006, Gulf South entered into long-term precedent agreements with customers providing firm commitments for most of the capacity on its 1.7 Bcf per day pipeline expansion project in East Texas/Mississippi. Boardwalk Pipeline expects the total cost for the 1.7 Bcf expansion to be approximately $800.0 million, and expects the new capacity associated with each of these projects to be in service during the second half of 2007. In September of 2006, Gulf South filed a certificate application with FERC to proceed with this project. Gulf South has ordered the critical materials needed to construct this project.

For the year ending December 31, 2006, Boardwalk Pipeline expects to make capital expenditures of approximately $275.0 million, of which it expects $54.0 million to be for maintenance capital and $221.0 million to be for expansion capital, including approximately $170.0 million to fund its East Texas/Mississippi pipeline expansion project. The amount of expansion capital Boardwalk Pipeline expends in 2006 could vary significantly depending on the progress made with these projects, the number and types of other capital projects Boardwalk Pipeline decides to pursue, the timing of any of those projects and numerous other factors beyond Boardwalk Pipeline’s control.

To hedge the risk attributable to changes in the risk-free component of forward 10-year interest rates through December 1, 2006, on October 5, 2006 Boardwalk Pipeline entered into a Treasury rate lock for a notional amount of $250.0 million of principal. The reference rate on the Treasury rate lock was 4.60%. In addition, Boardwalk Pipeline entered into Treasury rate locks with two counterparties in August of 2006 each for a notional amount of $100.0 million of principal to hedge the risk attributable to changes in the risk-free component of forward 10-year interest rates through August 1, 2007. The reference rates on the Treasury rate locks were 5.00% and 4.96%. Under the terms of the Treasury rate locks, settlement amounts will be paid to either Boardwalk Pipeline or the counterparties depending on the movement of the 10-year Treasury rate versus the reference rates.

Boardwalk Pipeline expects to fund its 2006 maintenance capital expenditures from operating cash flows and its 2006 expansion capital expenditures with borrowings under the revolving credit facility and other borrowings which it expects to be available. Thereafter, Boardwalk Pipeline expects to fund the balance of the cost of the East Texas/Mississippi pipeline expansion project with a combination of borrowings under the revolving credit facility and proceeds from sales of debt and equity securities.

During the nine months ended September 30, 2006, Boardwalk Pipeline paid cash distributions of $0.9188 per unit. On October 23, 2006, Boardwalk Pipeline declared a quarterly distribution of $0.40 per unit.

Diamond Offshore

Cash and investments, net of receivables and payables, totaled $788.6 million at September 30, 2006 compared to $844.8 million at December 31, 2005. Cash provided by operating activities was $536.1 million in the first nine months of 2006, compared to $214.5 million in the comparable period of 2005. The increase in cash flow from operations is the result of higher average dayrates and, to a lesser extent, higher utilization earned by Diamond Offshore’s offshore drilling units as a result of an increase in worldwide demand for offshore contract drilling services.

Diamond Offshore estimates that capital expenditures for rig modifications and new construction in 2006 will be approximately $320.1 million. As of September 30, 2006, Diamond Offshore had spent approximately $209.1 for the upgrade costs for two rigs and construction of two new jack-up rigs.

Diamond Offshore estimates that capital expenditures in 2006 associated with its ongoing rig equipment replacement and enhancement programs and other corporate requirements will be approximately $298.6 million. As of September 30, 2006, Diamond Offshore had spent approximately $158.6 million for capital additions.

In November of 2006, Diamond Offshore entered into a $285.0 million syndicated, 5-year senior unsecured revolving credit facility for general corporate purposes, including loans and performance or standby letters of credit. As of November 2, 2006 there were no amounts outstanding under this credit facility.

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Diamond Offshore’s liquidity and capital requirements are primarily a function of its working capital needs, capital expenditures and debt service requirements. Cash required to meet Diamond Offshore’s capital commitments is determined by evaluating the need to upgrade rigs to meet specific customer requirements and by evaluating Diamond Offshore’s ongoing rig equipment replacement and enhancement programs, including water depth and drilling capability upgrades. It is the opinion of Diamond Offshore’s management that its operating cash flows and cash reserves will be sufficient to meet these capital commitments; however, Diamond Offshore will continue to make periodic assessments based on industry conditions.

Under current conditions in the insurance marketplace, insurance coverage for offshore drilling rigs, if available, is offered at substantially higher insurance premium rates than in the past and is subject to an increasing number of coverage limitations, due in part to underwriting losses suffered by the insurance industry in recent years and damage caused by hurricanes in the Gulf of Mexico in 2004 and 2005. In some cases, quoted renewal premiums have increased by more than 200%, with the addition of substantial deductibles and limits on the amount of claims payable for losses arising from named windstorms. In light of these factors, Diamond Offshore determined that retention of additional risk was preferable to paying dramatically higher premiums for limited coverage. Accordingly, beginning in May of 2006 Diamond Offshore elected to self-insure for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico. For Diamond Offshore’s other physical damage coverage, its deductible will be $150.0 million per occurrence. As a result of Diamond Offshore’s reduced coverage, Diamond Offshore’s premiums for this coverage have been reduced from the amounts it paid in 2005 and are lower than the renewal rates quoted by its insurance carriers. Diamond Offshore also renewed its liability policies in May of 2006, with an increase in premiums and deductibles.Diamond Offshore’s new deductibles under these policies have generally increased to $5.0 million per occurrence, but Diamond Offshore’s deductibles arising in connection with certain liabilities relating to named windstorms in the U.S. Gulf of Mexico have increased to approximately $10.0 million per occurrence, with no annual aggregate deductible. In addition, Diamond Offshore has elected to self-insure a portion of its excess liability coverage related to named windstorms in the U.S. Gulf of Mexico. To the extent that Diamond Offshore incurs liabilities related to named windstorms in the U.S. Gulf of Mexico in excess of $75.0 million, Diamond Offshore is self-insured for up to a maximum retention of $17.5 million per occurrence. If named windstorms in the U.S. Gulf of Mexico cause significant damage to Diamond Offshore’s rigs or equipment, or to the property of others for which Diamond Offshore may be liable, it could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In the first quarter of 2006, Diamond Offshore paid a special cash dividend of $1.50 per share. In addition, Diamond Offshore paid regular quarterly cash dividends aggregating $0.375 per share during the nine months ended September 30, 2006.

Loews Hotels

In October of 2006, Loews Hotels entered into a joint venture with a single investor, pursuant to which they will, subject to their respective approval rights set forth in the joint venture agreement, co-invest up to $300.0 million, of which Loews Hotels has committed $75.0 million and the investor has committed $225.0 million, for the acquisition and development of hotels and resorts to be operated by Loews Hotels.

Cash and investments increased to $28.9 million at September 30, 2006 from $19.1 million at December 31, 2005. Funds from operations continue to exceed operating requirements. Funds for other capital expenditures and working capital requirements, including the joint venture discussed above, are expected to be provided from existing cash balances and operations and advances or capital contributions from us.

Corporate and Other

Parent Company cash and investments, net of receivables and payables, at September 30, 2006 totaled $5.6 billion, as compared to $2.9 billion at December 31, 2005. The increase in net cash and investments is primarily due to the receipt of $804.7 million in dividends from subsidiaries and net proceeds of $728.4 million from CNA’s repurchase of their Series H preferred stock. We also received net proceeds of $876.8 million and $751.5 million from the sale of 15,000,000 shares of Carolina Group stock in each of August and May of 2006, partially offset by $224.4 million of dividends paid to our shareholders and $254.8 million related to repurchases of our common stock.

As of September 30, 2006, there were 550,506,326 shares of Loews common stock outstanding and 108,309,871 shares of Carolina Group stock outstanding. Depending on market and other conditions, we may purchase shares of our, and our subsidiaries’, outstanding common stock in the open market or otherwise. During the nine months ended September 30, 2006, we purchased 7,502,500 shares of Loews common stock at an aggregate cost of $254.8 million.

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We have an effective Registration Statement on Form S-3 registering the future sale of an unlimited amount of our debt and equity securities.

We continue to pursue conservative financial strategies while seeking opportunities for responsible growth. These include the expansion of existing businesses, full or partial acquisitions and dispositions, and opportunities for efficiencies and economies of scale

Contractual Cash Payment Obligations

Our consolidated contractual cash payment obligations are as follows:

Payments Due by Period

September 30, 2006

Total

Less than

1 year

1-3 years

4-5 years

More than

5 years

(In millions)

Debt (a)

8,047.9

715.0

1,379.6

463.1

5,490.2

Operating leases

391.5

26.0

125.5

93.5

146.5

Claim and claim expense reserves (b)

31,980.0

2,122.0

11,800.0

6,225.0

11,833.0

Future policy benefits reserves (c)

10,163.0

66.0

353.0

343.0

9,401.0

Policyholder funds reserves (c)

1,032.0

197.0

506.0

181.0

148.0

Guaranteed payment contracts (d)

19.0

7.0

12.0

Purchase obligations (e)

897.4

459.2

438.1

0.1

Total

52,530.8

3,592.2

14,614.2

7,305.7

27,018.7

(a)	Includes estimated future interest payments.
(b)	Claim and claim adjustment expense reserves are not discounted and represent CNA's estimate of the amount and timing of the ultimate settlement and administration of claims based on its assessment of facts and circumstances known as of September 30, 2006. See the Reserves - Estimates and Uncertainties section of this MD&A for further information. Claim and claim adjustment expense reserves of $12.0 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 CNA’s estimate of the ultimate amount and timing of the settlement of benefits based on its assessment of facts and circumstances known as of September 30, 2006. Future policy benefit reserves of $907.0 million and policyholder fund reserves of $49.0 million related to business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included.
(d)	Primarily relating to telecommunications and software services.
(e)	Consists primarily of obligations aggregating approximately $524.0 million relating to Diamond Offshores’ major upgrade of its Ocean Endeavor and Ocean Monarch rigs and construction of two new jack-up rigs, the Ocean Scepter and Ocean Shield. Also included in this amount is approximately $284.9 million primarily relating to Boardwalk Pipelines' East Texas and Mississippi pipeline expansion projects.

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INVESTMENTS

Insurance

Net Investment Income

The significant components of CNA’s net investment income are presented in the following table:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Fixed maturity securities	$	476.4		$	393.6			1,371.4		$	1,167.4
Short-term investments		61.2			42.3			184.2			103.0
Limited partnerships		46.0			72.3			172.8			189.2
Equity securities		3.4			5.7			17.7			17.7
Income (loss) from trading portfolio (a)		30.4			41.3			62.9			25.1
Interest on funds withheld and other deposits		(10.8	)		(49.2	)		(65.4	)		(138.6	)
Other		2.7			2.5			10.8			15.3
Total investment income		609.3			508.5			1,754.4			1,379.1
Investment expenses		(9.7	)		(8.5	)		(32.6	)		(33.8	)
Net investment income		599.6		$	500.0			1,721.8		$	1,345.3

(a)	The change in net unrealized gains (losses) on trading securities, included in net investment income, was $3.0 million, $3.0 million, $(1.0) million and $(4.0) million for the three and nine months ended September 30, 2006 and 2005.

Net investment income increased by $99.6 million for the three months ended September 30, 2006 compared with the same period of 2005. The improvement was primarily driven by interest rate increases across fixed maturity securities and short term investments, an increase in asset base and a reduction of interest expense on funds withheld and other deposits. Commutations of significant finite reinsurance contracts completed in 2005 contributed to the increase in asset base. In addition, commutations of significant finite reinsurance contracts completed in 2005 and 2006 contributed to the decrease in interest expense. These increases were partially offset by a decrease in investment income from limited partnerships and the trading portfolio. The decreased income from the trading portfolio was largely 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 Condensed Statements of Income. See Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1 regarding additional information about interest costs on funds withheld and other deposits.

Net investment income increased by $376.5 million for the nine months ended September 30, 2006 compared with the same period of 2005. The improvement was primarily driven by interest rate increases across fixed maturity securities and short term investments, an increase in asset base and a reduction of interest expense on funds withheld and other deposits. Commutations of significant finite reinsurance contracts completed in 2005 contributed to the increase in asset base. In addition, commutations of significant finite reinsurance contracts completed in 2005 and 2006 contributed to the decrease in interest expense. Also impacting net investment income was increased income from the trading portfolio of approximately $37.8 million. The increased income from the trading portfolio was largely offset by a corresponding increase in the policyholders’ funds reserves supported by the trading portfolio, which is included in Insurance Claims and Policyholders’ Benefits on the Consolidated Condensed Statements of Income.

The bond segment of the investment portfolio yielded 5.6% and 4.8% for the nine months ended September 30, 2006 and 2005.

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Net Realized Investment Gains (Losses)

The components of CNA’s net realized investment gains (losses) are presented in the following table:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
(In millions)

Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds	$	18.6		$	2.5		$	22.0		$	(9.9	)
Corporate and other taxable bonds		(17.9	)		9.7			(114.2	)		(36.0	)
Tax-exempt bonds		40.2			3.6			51.5			38.0
Asset-backed bonds		(1.5	)		7.0			(15.2	)		18.4
Redeemable preferred stock		(2.1	)		(0.5	)		(3.0	)		9.7
Total fixed maturity securities		37.3			22.3			(58.9	)		20.2
Equity securities		(2.9	)		6.7			3.0			45.5
Derivative securities		(13.0	)		53.1			(7.5	)		34.4
Short-term investments		(1.6	)		1.2			(5.6	)		1.4
Other invested assets, including dispositions		6.5			(16.5	)		4.7			(27.5	)
Allocated to participating policyholders’ and
minority interests		0.3			0.3			2.0			2.3
Total realized investment gains (losses)		26.6			67.1			(62.3	)		76.3
Income tax (expense) benefit		(0.6	)		(24.8	)		25.5			(30.3	)
Minority interest		(2.2	)		(3.7	)		3.2			(3.9	)
Net realized investment gains (losses)	$	23.8		$	38.6		$	(33.6	)	$	42.1

Net realized investment gains were $23.8 million and $38.6 million for the three months ended September 30, 2006 and 2005. The decrease in net realized investment results was primarily driven by an increase in interest related other-than-temporary impairment (“OTTI”) losses on securities for which CNA did not assert an intent to hold until an anticipated recovery in value. For the three months ended September 30, 2006, OTTI losses of $27.0 million were recorded primarily in the corporate and other taxable bonds sector. This compares to OTTI losses for the three months ended September 30, 2005 of $10.0 million recorded across various sectors.

Net realized investment losses were $33.6 million for the nine months ended September 30, 2006 as compared to net realized investment gains of $42.1 million for the nine months ended September 30, 2005. The decrease in net realized investment results was primarily driven by decreased gains on sales as a result of increasing interest rates between the two periods, the effect of interest rates on derivative positions and increases in interest related OTTI losses on securities for which CNA did not assert an intent to hold until an anticipated recovery in value. For the nine months ended September 30, 2006, OTTI losses of $50.8 million were recorded primarily in the corporate and other taxable bonds sector. This compares to OTTI losses for the nine months ended September 30, 2005 of $42.0 million recorded across various sectors, including an OTTI loss of $20.1 million related to loans to a large national contractor. For additional information on loans to the large national contractor, see Note 14 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

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. CNA 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. CNA also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on CNA’s views of a specific issuer or industry sector.

The investment portfolio is periodically analyzed for changes in duration and related price change risk. Additionally, CNA periodically reviews the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in Item 3 - Quantitative and Qualitative Disclosures about Market Risk included herein.

CNA invests in certain derivative financial instruments primarily to reduce its exposure to market risk (principally interest rate, equity price and foreign currency risk) and credit risk (risk of nonperformance of underlying obligor).

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Derivative securities are recorded at fair value at the reporting date. CNA also uses derivatives to mitigate market risk by purchasing S&P 500^â index futures in a notional amount equal to the contract liability relating to Life and Group Non-Core indexed group annuity contracts. CNA provided collateral to satisfy margin deposits on exchange-traded derivatives totaling $30.0 million as of September 30, 2006. For over-the-counter derivative transactions CNA utilizes International Swaps and Derivatives Association (“ISDA”) Master Agreements that specify certain limits over which collateral is exchanged. As of September 30, 2006, CNA provided $14.0 million of cash as collateral for over-the-counter derivative instruments.

A further consideration in the management of the investment portfolio is the characteristics of the underlying liabilities and the ability to align the duration of the portfolio to those liabilities to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and long term in nature, CNA segregates assets for asset liability management purposes.

CNA classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity securities as either available-for-sale or trading, and as such, they are carried at fair value. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in net investment income. Changes in fair value related to available-for-sale securities are reported as a component of other comprehensive income. Changes in fair value of trading securities are reported within net investment income.

The following table provides further detail of gross realized gains and losses on available-for sale fixed maturity and equity securities, which includes OTTI losses:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
(In millions)

Net realized gains (losses) on fixed maturity
and equity securities:
Fixed maturity securities:
Gross realized gains	$	114.0		$	65.0		$	216.0		$	330.0
Gross realized losses		(77.0	)		(43.0	)		(275.0	)		(310.0	)
Net realized gains (losses) on fixed maturity securities		37.0			22.0			(59.0	)		20.0
Equity securities:
Gross realized gains		1.0			16.0			9.0			70.0
Gross realized losses		(4.0	)		(10.0	)		(6.0	)		(25.0	)
Net realized gains on equity securities		(3.0	)		6.0			3.0			45.0
Net realized gains (losses) on fixed maturity
and equity securities	$	34.0		$	28.0		$	(56.0	)	$	65.0

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The following table provides details of the largest realized losses from sales of securities aggregated by issuer, including: the fair value of the securities at date of sale, the amount of the loss recorded and the period of time that the security had been in an unrealized loss position prior to sale for the nine months ended September 30, 2006. The period of time that the security had been in an unrealized loss position prior to sale can vary due to the timing of individual security purchases. Also included is a narrative providing the industry sector along with the facts and circumstances giving rise to the loss.

Issuer Description and Discussion	Fair Value Date of Sale		Loss On Sale		Months in Unrealized Loss Prior To Sale (a)
(In millions)

Various notes and bonds issued by the United States Treasury,
including Treasury Inflation-Protected Securities.
Securities sold due to inflationary outlook and asset class
reallocation.	$	3,050.0	$	12.0		0-6

State of New York revenue bonds. Position was sold to reduce
municipal holdings.		289.0		6.0		0-12

Company provides property and casualty, managed care, life and
various other insurance products in the United States. Position
was sold to reduce exposure in the insurance sector.		56.0		5.0		0-6

Corporation operated hybrid fiber-coaxial broadband cable
communications and provides high-speed internet access and
digital video applications. Position was sold to reduce exposure.		92.0		5.0		0-6
Total	$	3,487.0	$	28.0

(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.

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Valuation and Impairment of Investments

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

	September 30, 2006				December 31, 2005
(In millions of dollars)

General account investments:

Fixed maturity securities available-for-sale:
U.S. Treasury securities and obligations of
government agencies	$	2,424.0	5.7	%	$	1,469.0	3.7	%
Asset-backed securities		14,030.0	32.7			12,859.0	32.4
States, municipalities and political subdivisions-
tax-exempt		4,437.0	10.3			9,209.0	23.2
Corporate securities		6,734.0	15.7			6,165.0	15.5
Other debt securities		3,475.0	8.1			3,044.0	7.7
Redeemable preferred stock		851.0	2.0			216.0	0.5
Options embedded in convertible debt securities		1.0				1.0
Total fixed maturity securities available-for-sale		31,952.0	74.5			32,963.0	83.0
Fixed maturity securities trading:
U.S. Treasury securities and obligations of
government agencies		3.0				4.0
Asset-backed securities		51.0	0.1			87.0	0.2
Corporate securities		127.0	0.3			154.0	0.4
Other debt securities		17.0				26.0	0.1
Total fixed maturity securities trading		198.0	0.4			271.0	0.7
Equity securities available-for-sale:
Common stock		373.0	0.9			289.0	0.7
Preferred stock		147.0	0.3			343.0	0.9
Total equity securities available-for-sale		520.0	1.2			632.0	1.6
Equity securities trading		56.0	0.1			49.0	0.1
Short-term investments available-for-sale		8,297.0	19.3			3,870.0	9.8
Short-term investments trading		163.0	0.4			368.0	0.9
Limited partnerships		1,723.0	4.0			1,509.0	3.8
Other investments		30.0	0.1			33.0	0.1
Total general account investments	$	42,939.0	100.0	%	$	39,695.0	100.0	%

CNA’s general account investment portfolio consists primarily of asset-backed securities, short term investments, municipal bonds and corporate bonds.

A significant judgment in the valuation of investments is the determination of when an OTTI has occurred. CNA analyzes securities on at least a quarterly basis. Part of this analysis is to monitor the length of time and severity of the decline below book value for those securities in an unrealized loss position. Information on CNA’s OTTI process and OTTI losses recorded for the three and nine months ended September 30, 2006 and 2005 is set forth in Note 2 of the Notes to Consolidated Condensed Financial Statements included under Item 1.

Investments in the general account had a total net unrealized gain of $874.0 million at September 30, 2006 compared with a net unrealized gain of $787.0 million at December 31, 2005. The unrealized position at September 30, 2006 was comprised of a net unrealized gain of $693.0 million for fixed maturities, a net unrealized gain of $181.0 million for equity securities and less than $1.0 million of unrealized gains for short term securities. The unrealized position at December 31, 2005 was comprised of a net unrealized gain of $618.0 million for fixed maturities, a net unrealized gain of $170.0 million for equity securities and a net unrealized loss of $1.0 million for short term securities. See Note 2 of the Notes to Consolidated Condensed Financial Statements included under Item 1 for further detail on the unrealized position of CNA’s general account investment portfolio.

CNA’s investment policies for both the general account and separate account emphasize high credit quality and diversification by industry, issuer and issue. Assets supporting interest rate sensitive liabilities are segmented within the general account to facilitate asset/liability duration management.

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The following table provides the composition of fixed maturity securities with an unrealized loss at September 30, 2006 in relation to the total of all fixed maturity securities with an unrealized loss by maturity profile. Weighted average life is used in place of contractual maturity for asset-backed securities.

	Percent of Market Value			Percent of Unrealized Loss

Due in one year or less		6.0	%		2.0	%
Due after one year through five years		45.0			45.0
Due after five years through ten years		33.0			30.0
Due after ten years		16.0			23.0
Total		100.0	%		100.0	%

CNA’s non-investment grade fixed maturity securities available-for-sale as of September 30, 2006 that were in a gross unrealized loss position had a fair value of $724.0 million. The following tables summarize the fair value and gross unrealized loss of non-investment grade securities categorized by the length of time those securities have been in a continuous unrealized loss position and further categorized by the severity of the unrealized loss position in 10.0% increments as of September 30, 2006 and December 31, 2005.

	Estimated		Fair Value as a Percentage of Book Value								Unrealized
September 30, 2006	Fair Value		90-99%		80-89%		70-79%		<70%		Loss
(In millions)

Fixed maturity securities:
Non-investment grade:
0-6 months	$	622.0	$	5.0							$	5.0
7-12 months		30.0		1.0								1.0
13-24 months		70.0		3.0								3.0
Greater than 24 months		2.0
Total non-investment grade	$	724.0	$	9.0	$	-	$	-	$	-	$	9.0

December 31, 2005

Fixed maturity securities:
Non- investment grade:
0-6 months	$	632.0	$	20.0	$	8.0	$	1.0			$	29.0
7-12 months		118.0		4.0		6.0						10.0
13-24 months		122.0		3.0								3.0
Greater than 24 months		2.0
Total non-investment grade	$	874.0	$	27.0	$	14.0	$	1.0	$	-	$	42.0

As part of the ongoing OTTI monitoring process, CNA evaluated the facts and circumstances based on available information for each of the non-investment grade securities and determined that the securities presented in the above tables were temporarily impaired when evaluated at September 30, 2006 or December 31, 2005. This determination was based on a number of factors that CNA regularly considers including, but not limited to: the issuers’ ability to meet current and future interest and principal payments, an evaluation of the issuers’ financial condition and near term prospects, CNA’s 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, CNA has the intent and ability to hold these securities for a period of time sufficient to recover the book value of its 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, CNA continually assesses its ability to hold securities for a time sufficient to recover any temporary loss in value or until maturity. CNA believes it has sufficient levels of liquidity so as to not impact the asset/liability management process.

CNA’s equity securities classified as available-for-sale as of September 30, 2006 that were in an unrealized loss position had a fair value of $7.0 million and unrealized losses of less than $1.0 million. Under the same process as followed for fixed maturity securities, CNA monitors the equity securities for other-than-temporary declines in value. In all cases where a decline in value is judged to be temporary, CNA expects to recover the book value of its investment through an anticipated recovery in the fair value of the security.

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

The general account portfolio consists primarily of high quality bonds, 90.6% and 92.1% of which were rated as investment grade (rated BBB or higher) at September 30, 2006 and December 31, 2005. The following table summarizes the ratings of CNA's general account bond portfolio at carrying value.

	September 30, 2006				December 31, 2005
(In millions of dollars)

U.S. Government and affiliated agency securities	$	2,580.0	8.2	%	$	1,628.0	4.9	%
Other AAA rated		15,749.0	50.3			18,233.0	55.2
AA and A rated		5,076.0	16.2			6,046.0	18.3
BBB rated		4,974.0	15.9			4,499.0	13.7
Non investment-grade		2,920.0	9.4			2,612.0	7.9
Total	$	31,299.0	100.0	%	$	33,018.0	100.0	%

At September 30, 2006 and December 31, 2005, approximately 94.0% and 95.0% of the general account 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 CNA.

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

The carrying value of securities that are either subject to trading restrictions or trade in illiquid private placement markets at September 30, 2006 was $152.0 million which represents 0.4% of CNA’s total investment portfolio. These securities were in a net unrealized gain position of $112.0 million at September 30, 2006. Of these securities, 74.0% are priced by unrelated third party sources.

Included in CNA’s general account fixed maturity securities at September 30, 2006 were $14,081.0 million of asset-backed securities, at fair value, consisting of approximately 62.0% in collateralized mortgage obligations (“CMOs”), 19.0% in corporate asset-backed obligations, 17.0% in corporate mortgage-backed pass-through certificates and 2.0% in U.S. Government agency issued pass-through certificates. The majority of CMOs held are actively traded in liquid markets and are primarily priced by a third party pricing service.

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

	September 30,		December 31,
	2006		2005
(In millions)

Short-term investments available-for-sale:
Commercial paper	$ 1,619.0		$ 1,906.0
U.S. Treasury securities		3,169.0		251.0
Money market funds		376.0		294.0
Other, including collateral held related to securities lending		3,133.0		1,419.0
Total short-term investments available-for-sale		8,297.0		3,870.0

Short-term investments trading:
Commercial paper		38.0		94.0
U.S. Treasury securities		2.0		64.0
Money market funds		123.0		200.0
Other				10.0
Total short-term investments trading		163.0		368.0

Total short-term investments	$	8,460.0	$	4,238.0

The fair value of collateral held related to securities lending, included in other short term investments, was $2,385.4 million and $767.4 million at September 30, 2006 and December 31, 2005.

ACCOUNTING STANDARDS

In September of 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This bulletin summarizes the SEC staff’s views regarding the process of quantifying financial statement misstatements. SAB No. 108 is effective for reporting periods ending after November 15, 2006. SAB No. 108 is not expected to have a material impact on our results of operations or equity.

In September of 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires an employer to recognize the funded status of a defined benefit postretirement plan in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. We are currently evaluating the impact that adopting SFAS No. 158 will have on our results of operations and equity.

In September of 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that adopting SFAS No. 157 will have on our results of operations and equity.

In July of 2006, the FASB issued FASB Interpretation (”FIN”) No. 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109.” FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact that adopting FIN 48 will have on our results of operations and equity.

In March of 2006, the FASB issued FASB Staff Position (“FSP”) 85-4-1, “Accounting for Life Settlement Contracts by Third-Party Investors.” A life settlement contract for purposes of FSP 85-4-1 is a contract between the owner of a life

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insurance policy (the “policy owner”) and a third-party investor (“investor”). The previous accounting guidance, FASB Technical Bulletin (“FTB”) No. 85-4, Accounting for Purchases of Life Insurance, 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 the policy. 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 shall be made on an instrument-by-instrument basis and is irrevocable. FSP 85-4-1 is effective for fiscal years beginning after June 15, 2006. We are currently evaluating the impact that adopting FSP 85-4-1 will have on our results of operations and equity.

In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 05-01, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” SOP 05-01 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” SOP 05-01 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-01 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We are currently evaluating the impact that adopting SOP 05-01 will have on our results of operations and equity.

FORWARD-LOOKING STATEMENTS DISCLAIMER

Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements made by our officials and our subsidiaries during presentations about us, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, which may be provided by management are also forward-looking statements as defined by the Act.

Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those anticipated or projected. These risks and uncertainties include, among others:

Risks and uncertainties primarily affecting us and our insurance subsidiaries

the impact of competitive products, policies and pricing and the competitive environment in which CNA operates, including changes in CNA’s book of business;

product and policy availability and demand and market responses, including the level of CNA’s 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 performance of reinsurance companies under reinsurance contracts with CNA;

the effects upon insurance markets and upon industry business practices and relationships of current litigation, investigations and regulatory activity by the New York State Attorney General’s office and other authorities concerning contingent commission arrangements with brokers and bid solicitation activities;

legal and regulatory activities with respect to certain non-traditional and finite-risk insurance products, and possible resulting changes in accounting and financial reporting in relation to such products, including our restatement of financial results in May of 2005 and CNA’s relationship with an affiliate, Accord Re Ltd., as disclosed in connection with that restatement;

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regulatory limitations, impositions and restrictions upon CNA, including the effects of assessments and other surcharges for guaranty funds and second-injury funds and other mandatory pooling arrangements;

weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, as well as of natural disasters such as hurricanes and earthquakes;

man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence or insufficiency of applicable terrorism legislation on coverages;

the unpredictability of the nature, targets, severity or frequency of potential terrorist events, as well as the uncertainty as to CNA’s ability to contain its terrorism exposure effectively, notwithstanding the extension until 2007 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, mass tort, construction defect claims and exposure to liabilities due to claims made by insureds relating to lead-based paint;

whether a national privately financed trust to replace litigation of asbestos claims with payments to claimants from the trust will be established or approved through federal legislation, or, if established and approved, whether it will contain funding requirements in excess of CNA’s established loss reserves or carried loss reserves;

the sufficiency of CNA’s loss reserves and the possibility of future increases in reserves;

regulatory limitations and restrictions, including limitations upon CNA’s ability to receive dividends from its insurance subsidiaries and to pay dividends to us, 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 CNA’s loss reserves as outlined in the Critical Accounting Estimates section of this MD&A;

the level of success in integrating acquired businesses and operations, and in consolidating, or selling existing ones;

the possibility of further changes in CNA’s ratings by ratings agencies, including the inability to access certain markets or distribution channels, and the required collateralization of future payment obligations as a result of such changes, and changes in rating agency policies and practices;

the effects of corporate bankruptcies, such as Enron and WorldCom, on capital markets and on the markets for directors and officers and errors and omissions coverages;

general economic and business conditions, including inflationary pressures on medical care costs, construction costs and other economic sectors that increase the severity of claims;

the effectiveness of current initiatives by claims management to reduce loss and expense ratios through more efficacious claims handling techniques; and

changes in the composition of CNA’s operating segments.

Risks and uncertainties primarily affecting us and our tobacco subsidiaries

health concerns, claims and regulations relating to the use of tobacco products and exposure to environmental tobacco smoke;

legislation, including actual and potential excise tax increases, and the effects of tobacco litigation settlements on pricing and consumption rates;

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continued intense competition from other cigarette manufacturers, including significant levels of promotional activities and the presence of a sizable deep-discount category;

the continuing decline in volume in the domestic cigarette industry;

increasing marketing and regulatory restrictions, governmental regulation and privately imposed smoking restrictions;

litigation, including risks associated with adverse jury and judicial determinations, courts reaching conclusions at variance with the general understandings of applicable law, bonding requirements and the absence of adequate appellate remedies to get timely relief from any of the foregoing; and

the impact of each of the factors described under “Results of Operations—Lorillard” in the MD&A portion of this report.

Risks and uncertainties primarily affecting us and our energy subsidiaries

the impact of changes in demand for oil and natural gas and oil and gas price fluctuations on exploration and production activity;

costs and timing of rig upgrades;

utilization levels and dayrates for offshore oil and gas drilling rigs;

the availability and cost of insurance, and the risks associated with self-insurance, covering drilling rigs;

regulatory issues affecting natural gas transmission, including ratemaking and other proceedings particularly affecting our gas transmission subsidiaries;

the ability of Texas Gas and Gulf South to renegotiate, extend or replace existing customer contracts on favorable terms;

the successful development and projected cost of planned expansion projects and investments; and

the development of additional natural gas reserves and the completion of projected new liquefied natural gas facilities and expansion of existing facilities.

Risks and uncertainties affecting us and our subsidiaries generally

general economic and business conditions;

changes in financial markets (such as interest rate, credit, currency, commodities and equities markets) or in the value of specific investments;

changes in domestic and foreign political, social and economic conditions, including the impact of the global war on terrorism, the war in Iraq, the future outbreak of hostilities and future acts of terrorism;

the economic effects of the September 11, 2001 terrorist attacks, other terrorist attacks and the war in Iraq;

potential changes in accounting policies by the Financial Accounting Standards Board (the “FASB”), the SEC or regulatory agencies for any of our subsidiaries’ industries which may cause us or our subsidiaries to revise their financial accounting and/or disclosures in the future, and which may change the way analysts measure our and our subsidiaries business or financial performance;

the impact of regulatory initiatives and compliance with governmental regulations, judicial rulings and jury verdicts;

the results of financing efforts;

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the closing of any contemplated transactions and agreements; and

the outcome of pending litigation.

Developments in any of these areas, which are more fully described elsewhere in this Report, could cause our results to differ materially from results that have been or may be anticipated or projected. Forward-looking statements speak only as of the date of this Report and we expressly disclaim any obligation or undertaking to update these statements to reflect any change in our expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a large diversified financial services company. As such, we and our subsidiaries have significant amounts of financial instruments that involve market risk. Our measure of market risk exposure represents an estimate of the change in fair value of our financial instruments. Changes in the trading portfolio are recognized in the Consolidated Condensed Statements of Income. Market risk exposure is presented for each class of financial instrument held by us at September 30, 2006 and December 31, 2005, assuming immediate adverse market movements of the magnitude described below. We believe that the various rates of adverse market movements represent a measure of exposure to loss under hypothetically assumed adverse conditions. The estimated market risk exposure represents the hypothetical loss to future earnings and does not represent the maximum possible loss nor any expected actual loss, even under adverse conditions, because actual adverse fluctuations would likely differ. In addition, since our investment portfolio is subject to change based on our portfolio management strategy as well as in response to changes in the market, these estimates are not necessarily indicative of the actual results which may occur.

Exposure to market risk is managed and monitored by senior management. Senior management approves our overall investment strategy and has responsibility to ensure that the investment positions are consistent with that strategy with an acceptable level of risk. We may manage risk by buying or selling instruments or entering into offsetting positions.

Interest Rate Risk - We have exposure to interest rate risk arising from changes in the level or volatility of interest rates. We attempt to mitigate our exposure to interest rate risk by utilizing instruments such as interest rate swaps, interest rate caps, commitments to purchase securities, options, futures and forwards. We monitor our sensitivity to interest rate risk by evaluating the change in the value of our financial assets and liabilities due to fluctuations in interest rates. The evaluation is performed by applying an instantaneous change in interest rates by varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on the recorded market value of our investments and the resulting effect on shareholders’ equity. The analysis presents the sensitivity of the market value of our financial instruments to selected changes in market rates and prices which we believe are reasonably possible over a one-year period.

The sensitivity analysis estimates the change in the market value of our interest sensitive assets and liabilities that were held on September 30, 2006 and December 31, 2005 due to instantaneous parallel shifts in the yield curve of 100 basis points, with all other variables held constant.

The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Accordingly, the analysis may not be indicative of, is not intended to provide, and does not provide a precise forecast of the effect of changes of market interest rates on our earnings or shareholders’ equity. Further, the computations do not contemplate any actions we could undertake in response to changes in interest rates.

Our debt is denominated in U.S. Dollars and has been primarily issued at fixed rates, therefore, interest expense would not be impacted by interest rate shifts. The impact of a 100 basis point increase in interest rates on fixed rate debt would result in a decrease in market value of $494.0 million and $528.5 million at September 30, 2006 and December 31, 2005, respectively. A 100 basis point decrease would result in an increase in market value of $342.4 million and $328.4 million at September 30, 2006 and December 31, 2005, respectively.

Equity Price Risk - We have exposure to equity price risk as a result of our investment in equity securities and equity derivatives. Equity price risk results from changes in the level or volatility of equity prices which affect the value of equity securities or instruments that derive their value from such securities or indexes. Equity price risk was measured assuming an instantaneous 25% decrease in the underlying reference price or index from its level at September 30, 2006 and December 31, 2005, with all other variables held constant.

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Foreign Exchange Rate Risk - Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the value of financial instruments. We have foreign exchange rate exposure when we buy or sell foreign currencies or financial instruments denominated in a foreign currency. This exposure is mitigated by our asset/liability matching strategy and through the use of futures for those instruments which are not matched. Our foreign transactions are primarily denominated in Australian dollars, Canadian dollars, British pounds, Japanese yen and the European Monetary Unit. The sensitivity analysis assumes an instantaneous 20% decrease in the foreign currency exchange rates versus the U.S. dollar from their levels at September 30, 2006 and December 31, 2005, with all other variables held constant.

Commodity Price Risk - We have exposure to commodity price risk as a result of our investments in gold options. Commodity price risk results from changes in the level or volatility of commodity prices that impact instruments which derive their value from such commodities. Commodity price risk was measured assuming an instantaneous decrease of 20% from their levels at September 30, 2006 and December 31, 2005.

Credit Risk - We are exposed to credit risk which relates to the risk of loss resulting from the nonperformance by a customer of its contractual obligations. Boardwalk Pipeline has exposure related to receivables for services provided, as well as volumes owed by customers for imbalances or gas lent by Boardwalk Pipeline to them generally under parking and lending services and no-notice services. Boardwalk Pipeline maintains credit policies intended to minimize this risk and actively monitors these policies. Average natural gas prices have increased dramatically in recent years. This rise in gas prices has materially increased Boardwalk Pipeline’s credit risk related to gas loaned to its customers. As of September 30, 2006, the amount of gas loaned out was approximately 5 trillion British thermal units (“TBtu”) and, assuming an average market price during September 2006 of $4.88 per million British thermal units (“MMBtu”), the market value of gas loaned out at September 30, 2006 would have been approximately $24.4 million. As of December 31, 2005, the amount of gas loaned out was approximately 15.0 TBtu and, assuming an average market price during December 2005 of $12.34 per MMBtu, the market value of gas was approximately $185.1 million. If any significant customer should have credit or financial problems resulting in a delay or failure to repay the gas it owes Boardwalk Pipeline, it could have a material adverse effect on our financial condition, results of operations and cash flows.

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The following tables present our market risk by category (equity markets, interest rates, foreign currency exchange rates and commodity prices) on the basis of those entered into for trading purposes and other than trading purposes.

Trading portfolio:

Category of risk exposure:	Fair Value Asset (Liability)						Market Risk
	September 30,			December 31,			September 30,			December 31,
	2006			2005			2006			2005
(In millions)

Equity markets (1):
Equity securities (a)	$	621.7		$	441.8		$	(155.0	)	$	(110.0	)
Options - purchased		29.0			33.5			6.0			(1.0	)
-written		(10.5	)		(9.1	)		2.0			2.0
Warrants		0.3			0.1
Short sales		(67.5	)		(67.3	)		17.0			17.0
Limited partnership investments		328.7			371.7			(25.0	)		(25.0	)

Interest rate (2):
Treasury - short		(307.5	)		(78.6	)		(25.0	)		(7.0	)
Futures - short								(136.0	)		(10.0	)
Interest rate swaps - short		(3.9	)		(0.1	)		(16.0	)		(2.0	)
Interest rate swaps - long		3.7						14.0
Short sales - foreign					(19.9	)					(2.0	)
Fixed maturities - long		769.1			415.7			79.0			3.0
Short-term investments		4,669.8			367.7
Other derivatives		1.4			0.1			(3.0	)		(3.0	)

Gold (3):
Options - purchased					0.5						10.0
-written					(0.7	)					(14.0	)

Note:

The calculation of estimated market risk exposure is based on assumed adverse changes in the underlying reference price or index of (1) a decrease in equity prices of 25%, (2) a decrease in interest rates of 100 basis points and (3) a decrease in gold prices of 20%. Adverse changes on options which differ from those presented above would not necessarily result in a proportionate change to the estimated market risk exposure.

(a)

A decrease in equity prices of 25% would result in market risk amounting to $(151.0) and $(255.0) at September 30, 2006 and December 31, 2005, respectively. This market risk would be offset by decreases in liabilities to customers under variable insurance contracts.

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Other than trading portfolio:

Category of risk exposure:	Fair Value Asset (Liability)						Market Risk
	September 30,			December 31,			September 30,			December 31,
	2006			2005			2006			2005
(In millions)

Equity markets (1):
Equity securities:
General accounts (a)	$	519.5		$	631.8		$	(130.0	)	$	(158.0	)
Separate accounts		40.1			43.5			(10.0	)		(11.0	)
Limited partnership investments		1,685.6			1,397.3			(133.0	)		(112.0	)

Interest rate (2):
Fixed maturities (a)(b)		31,953.8			32,965.5			(1,862.0	)		(1,897.0	)
Short-term investments (a)		10,877.0			8,738.9			(18.0	)		(4.0	)
Other invested assets		26.2			27.8
Other derivative securities		3.7			3.6			128.0			66.0
Separate accounts (a):
Fixed maturities		461.9			466.1			(23.0	)		(23.0	)
Short-term investments		16.8			36.2
Debt		(5,811.0	)		(5,530.0	)

Note:

The calculation of estimated market risk exposure is based on assumed adverse changes in the underlying reference price or index of (1) a decrease in equity prices of 25% and (2) an increase in interest rates of 100 basis points.

	(a)	Certain securities are denominated in foreign currencies. An assumed 20% decline in the underlying exchange rates would result in an aggregate foreign currency exchange rate risk of $(273.0) and $(245.0) at September 30, 2006 and December 31, 2005, respectively.

	(b)	Certain fixed maturities positions include options embedded in convertible debt securities. A decrease in underlying equity prices of 25% would result in market risk amounting to $(212.0) and $(54.0) at September 30, 2006 and December 31, 2005, respectively.

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Item 4. Controls and Procedures.

The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company’s management on a timely basis to allow decisions regarding required disclosure.

The Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”) undertook an evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. CNA has engaged in a number of efforts to remediate the two material weaknesses in internal control over financial reporting, described in our Annual Report on Form 10-K for the period ended December 31, 2005. In the opinion of the Company’s management, the revised control processes have now been operating for a sufficient period of time so as to provide reasonable assurance as to their effectiveness and, therefore, the control deficiencies have been fully remediated. As a result, the CEO and CFO have concluded that the Company’s controls and procedures were effective as of September 30, 2006.

There were no other changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the foregoing evaluation that occurred during the quarter ended September 30, 2006, that have materially affected or that are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

1.	Insurance Related.

Information with respect to insurance related legal proceedings is incorporated by reference to Note 13 of the Notes to Consolidated Condensed Financial Statements included in Part I of this Report.

2.	Tobacco Related.

Information with respect to tobacco related legal proceedings is incorporated by reference to Item 3, Legal Proceedings, and Exhibit 99.01, Pending Tobacco Litigation, of the Company’s Report on Form 10-K for the year ended December 31, 2005. Additional developments in relation to the foregoing are described below and incorporated by reference to Note 13 of the Notes to Consolidated Condensed Financial Statements in Part I of this Report.

CLASS ACTION CASES:

In the case of Willard Brown v. The American Tobacco Company, et al. (Superior Court, San Diego County, California, filed June 10, 1997), the California Court of Appeal has affirmed the lower court’s order that decertified a previously-ordered class. The California Supreme Court has agreed to hear this case.

In the case of Engle v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Miami-Dade County, Florida, filed May 5, 1994), the Florida Supreme Court issued a ruling during July of 2006 that, among other things, reversed the verdict that awarded punitive damages to the certified class totaling approximately $145.0 billion, including approximately $16.3 billion against Lorillard. Please read Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report for detailed information regarding tobacco litigation.

In the case of In re: Simon II Litigation v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court, Eastern District, New York), the court has dismissed the case and this matter is concluded.

In the case of Lowe v. Philip Morris Incorporated, et al. (Circuit Court, Multnomah County, Oregon, filed November 19, 2001), the Oregon Court of Appeals has affirmed the lower court’s ruling that granted defendants’ motion to dismiss the case. Plaintiffs have initiated administrative filings that indicate they will pursue an appeal to the Oregon Supreme Court.

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In the case of Schwab v. Philip Morris USA, Inc., et al. (U.S. District Court, Eastern District, New York, filed May 11, 2004), the court has granted plaintiffs’ motion for class certification. Please read Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report for detailed information regarding tobacco litigation.

In the case of Scott v. The American Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed May 24, 1996), the Louisiana Court of Appeal has heard argument of defendants’ appeal. Please read Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of the Report for detailed information regarding tobacco litigation.

REIMBURSEMENT CASES:

In the case of Clalit Health Services v. Philip Morris Inc., et al. (District Court, Jerusalem, Israel), plaintiff has appealed the order that dismissed the Company from this action.

In the case of The Republic of Panama v. The American Tobacco Company, Inc., et al. (Superior Court of Delaware, New Castle County, filed July 19, 2005), Lorillard Tobacco Company, Lorillard Inc. and the Company have been dismissed from this action.

In the case of The State of Sáo Paulo of the Federative Republic of Brazil v. The American Tobacco Company, Inc., et al. (Superior Court of Delaware, New Castle County, filed July 19, 2005), Lorillard Tobacco Company, Lorillard Inc. and the Company have been dismissed from this action.

In the case of United States of America v. Philip Morris Incorporated, et al. (U.S. District Court, District of Columbia, filed September 22, 1999), the court has issued a final judgment and remedial order. Please read Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report for detailed information regarding tobacco litigation.

In the case of United Seniors Association, Inc., as a private attorney general v. Philip Morris USA, et al. (U.S. District Court, Massachusetts, filed August 4, 2005), the court granted defendants’ motion to dismiss the case and has entered final judgment in their favor. Plaintiff has noticed an appeal from the final judgment to the U.S. Court of Appeals for the First Circuit.

CONTRIBUTION CLAIMS:

In the case of Fibreboard Corporation, et al. v. R.J. Reynolds Tobacco Company, et al. (Superior Court, Alameda County, California, filed December 11, 1997), plaintiffs have voluntarily dismissed the case with prejudice. Fibreboard was the final Contribution Claim pending against cigarette manufacturers.

Item 1A. Risk Factors.

The following updates and supplements the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2005.

Risks Related to Us and Our Subsidiary, Lorillard, Inc.

The verdict returned in the federal government’s reimbursement case, while not final, could impose significant financial burdens on Lorillard and adversely affect future sales and profits.

During August of 2006, a final judgment and remedial order was entered in United States of America v. Philip Morris USA, Inc., et al. (U.S. District Court, District of Columbia, filed September 22, 1999). Lorillard is one of the defendants in the case. The Company is not a party to this action. Although the verdict did not award monetary damages to the plaintiff, the final judgment and remedial order granted equitable relief and imposes a number of requirements on the defendants. Such requirements include, but are not limited to, corrective statements by defendants related to the health effects of smoking. The remedial order also would place certain prohibitions on the manner in which defendants market their cigarette products and would eliminate any use of “lights” or similar product descriptors. It is likely that the remedial order, including the prohibitions on the use of the descriptors relating to low tar cigarettes, will negatively affect Lorillard’s future sales and profits. Defendants, including Lorillard, have noticed appeals from the final judgment and the remedial order. Plaintiff also has noticed an appeal from the final judgment. Defendants have received a stay of the judgment and remedial order from the District of Columbia Court of Appeal that will remain in effect while the appeal is proceeding. As a result of the government’s appeal, it is possible that certain of the government’s claims could consider rulings regarding other claimed damages and relief. While trial was underway, the District of Columbia Court

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of Appeals ruled that plaintiff may not seek disgorgement of profits, but this appeal was interlocutory in nature and could be reconsidered in the present appeal. Prior to trial, the government had estimated that it was entitled to approximately $280.0 billion from the defendants for its disgorgement of profits claim. In addition, the government sought during trial more than $10.0 billion for the creation of nationwide smoking, cessation, public education and counter-marketing programs. In its 2006 verdict, the trial court declined to award such relief. It is possible that these claims could be reinstated on appeal. Please read Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report for detailed information regarding tobacco litigation.

Lorillard is a defendant in a case that has been certified as a nation-wide class action and that could result in a substantial verdict.

Schwab v. Philip Morris USA, Inc., et al. (U.S. District Court, Eastern District, New York, filed May 11, 2004), was certified as a nationwide class action on behalf of individuals who purchased “lights” cigarettes as the result of a September 2006 order. Plaintiffs’ claims in Schwab are based on defendants’ RICO violations in the manufacture, marketing and sale of “lights” cigarettes. Plaintiffs claim damages totaling as much as $200.0 billion. Any damages awarded to the plaintiffs based on defendants’ violation of the RICO statute would be trebled. During September of 2006, the court granted plaintiffs’ motion for class certification and certified a nationwide class action on behalf of purchasers of “light” cigarettes. Trial of Schwab has been scheduled to begin during January of 2007. Lorillard, other cigarette manufacturers and two parent companies are the defendants in Schwab. The Company is not a party to this action. Defendants are seeking leave to pursue an interlocutory appeal of the class certification order. The federal court of appeals has granted a temporary stay of the case, including the trial date, pending its consideration of whether to accept defendants’ interlocutory appeal. It is not known whether trial will begin during January of 2007. Please read Note 13 of the Notes to Consolidated Condensed Financial Statements included in Item 1 of this Report for detailed information regarding tobacco litigation.

The Florida Supreme Court’s approval of an order vacating a $16.3 billion judgment against Lorillard in the Engle litigation is not final.

Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994) was certified as a class action on behalf of Florida residents, and survivors of Florida residents, who were injured or died from medical conditions allegedly caused by addiction to cigarettes. During 2000, a jury awarded approximately $16.3 billion in punitive damages against Lorillard as part of a $145.0 billion verdict against Lorillard and the other major tobacco companies, which bears interest at the rate of 10.0% per year. During July of 2006, the Florida Supreme Court affirmed the 2003 holding of an intermediate appellate court that the $145.0 billion punitive damages award must be vacated. The Florida Supreme Court also determined that the case could not proceed further as a class action and decertified the class. As of the date of this Report, the Florida Supreme Court’s ruling is not final because the parties have sought reconsideration of this decision. Even if the Florida Supreme Court’s ruling becomes final in its present form, plaintiffs will not have exhausted all of the appellate options available to them as they could seek review of the case by the U.S. Supreme Court.

In the event that the circuit court’s $16.3 billion punitive damages judgment against Lorillard is reinstated and ultimately upheld, the amount of that judgment would significantly exceed the assets of Lorillard. Even if the circuit court’s $16.3 billion punitive damages judgment were reduced, the reduced amount of the final judgment might ultimately exceed the assets of Lorillard and result in a liquidation or bankruptcy of Lorillard. For additional information on the Engle case, please read Note 13 of the Notes to Consolidated Condensed Financial Statements included in Part I of this report.

The Florida Supreme Court’s ruling in Engle could encourage additional litigation against cigarette manufacturers, including Lorillard.

The July 2006 ruling by the Florida Supreme Court in Engle permits members of the decertified class whose claims arose prior to the class certification cut-off date (November 21, 1996) to file individual claims, including claims for punitive damages, within one year from when this decision becomes final. The Florida Supreme Court held that these individual plaintiffs are entitled to rely on some of the jury’s findings in favor of the plaintiffs in the first phase of the Engle trial on a number of issues including, among other things, that smoking cigarettes causes a number of diseases; that cigarettes are addictive or dependence-producing; and that the defendants, including Lorillard, were negligent, placed cigarettes on the market that were defective and unreasonably dangerous, and concealed or conspired to conceal the risks of smoking. The Supreme Court further held that these first phase jury findings will be binding on the Engle defendants, including Lorillard, in any such future case in Florida. Should the Florida Supreme Court’s decision become final in its present form, it is possible that a significant number of additional individual lawsuits will be filed in the state of Florida against cigarette manufacturers, including Lorillard. It is not possible to estimate the number or ultimate

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outcome of lawsuits that could be filed as a result of this decision. In the aggregate, these claims may have a material adverse effect on our financial condition, results of operations, and cash flows.

The United States Surgeon General has issued a report regarding the risks of cigarette smoking to non-smokers that could result in additional litigation against cigarette manufacturers, additional restrictions placed on the use of cigarettes, and additional regulations placed on the manufacture or sale of cigarettes.

In a report entitled “The Health Consequences of Involuntary Exposure to Tobacco Smoke: A Report of the Surgeon General, 2006,” the United States Surgeon General summarized conclusions from previous Surgeon General’s reports concerning the health effects of exposure to second-hand smoke by non-smokers. According to this report, scientific evidence now supports six major conclusions:

Second hand smoke causes premature death and disease in children and in adults who do not smoke.

Children exposed to secondhand smoke are at an increased risk for sudden infant death syndrome (SIDS), acute respiratory infections and ear problems.

Exposure of adults to secondhand smoke has immediate adverse effects on the cardiovascular system and causes heart disease and lung cancer.

The scientific evidence indicates that there is no risk-free level of exposure to secondhand smoke.

Many millions of Americans, both children and adults, are exposed to secondhand smoke in their homes and workplaces.

Eliminating smoking in indoor spaces fully protects non-smokers from exposure to secondhand smoke. Separating smokers from non-smokers, cleaning the air, and ventilating buildings cannot eliminate exposures of non-smokers to secondhand smoke.

This report could form the basis of additional litigation against cigarette manufacturers, including Lorillard. The report could be used to support existing litigation against Lorillard or other cigarette manufacturers. It also is possible that the Surgeon General’s report could result in additional restrictions placed on cigarette smoking or in additional regulations placed on the manufacture or sale of cigarettes. It is possible that such additional restrictions or regulations could result in a decrease in cigarette sales in the United States, including sales of Lorillard brands. These developments may have a material adverse effect on our financial condition, results of operations, and cash flows.

Risks Related to Us and Our Subsidiary, Boardwalk Pipeline Partners, LP

Boardwalk Pipeline’s expansion projects that commence may not be completed or completed on materially different terms or timing than initially anticipated. If completed, the expansion project may not achieve the intended benefits.

Boardwalk Pipeline has announced significant expansion projects and may consider additional expansion projects in the future. Additional financing may also be required to fund current and future expansion projects and such financing may not be secured on favorable terms, or at all. The expansion projects may not be completed on time as a result of delays in obtaining regulatory approvals, delays in obtaining key materials and land owner opposition. Further, even if expansion projects are completed the total costs of the expansion projects may be higher than anticipated and the business performance following the expansion projects may not meet expectations. In addition, the expansion projects may not be timely and effectively integrated into operations, such integration may result in unforeseen operating difficulties or unanticipated costs and may divert management’s attention from other business concerns. Any of these or other factors could adversely affect Boardwalk Pipeline's ability to realize the anticipated benefits from the expansion projects and could have a material adverse effect on our financial condition, results of operations and cash flows.

Risks Related to Us and Our Subsidiary, Diamond Offshore Drilling, Inc.

Diamond Offshore’s industry is highly competitive and cyclical, with intense price competition.

The offshore contract drilling industry is highly competitive with numerous industry participants, none of which at the present time has a dominant market share. Some of Diamond Offshore’s competitors may have greater financial or other resources than Diamond Offshore. Drilling contracts are traditionally awarded on a competitive bid basis. Intense price competition is often the primary factor in determining which qualified contractor is awarded a job, although rig

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availability and location, a drilling contractor’s safety record and the quality and technical capability of service and equipment may also be considered. Mergers among oil and natural gas exploration and production companies have reduced the number of available customers.

Diamond Offshore’s industry has historically been cyclical. There have been periods of high demand, short rig supply and high dayrates (such as we are currently experiencing), followed by periods of lower demand, excess rig supply and lower dayrates. Periods of excess rig supply intensify the competition in the industry and often result in rigs being idle for long periods of time.

Although oil and natural gas prices are currently significantly above historical averages, resulting in higher utilization and dayrates earned by our drilling units, generally beginning in the third quarter of 2004, Diamond Offshore can provide no assurance that the current industry cycle of high demand, short rig supply and higher dayrates will continue. Diamond Offshore may be required to idle rigs or to enter into lower rate contracts in response to market conditions in the future.

Significant new rig construction could also intensify price competition. Diamond Offshore believes that there are currently 60 jack-up rigs and 32 floaters (semisubmersible rigs and drillships) on order for delivery between 2006 and 2009. Upon delivery of these rigs, the offshore drilling industry’s worldwide jack-up and floater fleets will increase by approximately 15% and 16%, respectively. Improvements in dayrates and expectations of sustained improvements in rig utilization rates and dayrates may result in the construction of additional new rigs. These increases in rig supply could result in depressed rig utilization and greater price competition. In addition, competing contractors are able to adjust localized supply and demand imbalances by moving rigs from areas of low utilization and dayrates to areas of greater activity and relatively higher dayrates.

Prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges on certain of our drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these rigs may not be recoverable.

Diamond Offshore’s business involves numerous operating hazards and is not fully insured against all of them.

Diamond Offshore’s operations are subject to the usual hazards inherent in drilling for oil and gas offshore, such as blowouts, reservoir damage, loss of production, loss of well control, punchthroughs, craterings and natural disasters such as hurricanes or fires. The occurrence of these events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury or death to rig personnel, damage to producing or potentially productive oil and gas formations and environmental damage. Operations also may be suspended because of machinery breakdowns, abnormal drilling conditions, failure of subcontractors to perform or supply goods or services or personnel shortages. In addition, offshore drilling operators are subject to perils peculiar to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. Damage to the environment could also result from our operations, particularly through oil spillage or extensive uncontrolled fires. We may also be subject to damage claims by oil and gas companies or other parties.

Pollution and environmental risks generally are not fully insurable, and Diamond Offshore does not typically retain loss-of-hire insurance policies to cover its rigs. Diamond Offshore’s insurance policies and contractual rights to indemnity may not adequately cover its losses, or may have exclusions of coverage for some losses. Diamond Offshore does not have insurance coverage or rights to indemnity for all risks, including, among other things, war risk, liability risk for certain amounts of excess coverage and certain physical damage risk. If a significant accident or other event occurs and is not fully covered by insurance or contractual indemnity, it could adversely affect our financial position, results of operations or cash flows. There can be no assurance that Diamond Offshore will continue to carry the insurance it currently maintains or that those parties with contractual obligations to indemnify Diamond Offshore will necessarily be financially able to indemnify it against all these risks. In addition, no assurance can be made that Diamond Offshore will be able to maintain adequate insurance in the future at rates it considers to be reasonable or that it will be able to obtain insurance against some risks.

Diamond Offshore significantly increased its insurance deductibles and has elected to self-insure for a portion of its liability exposure and for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico.

Because the amount of insurance coverage available to Diamond Offshore has been significantly limited and the cost for such coverage has increased substantially, Diamond Offshore has elected to self-insure for a portion of its liability exposure and for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico. Although Diamond Offshore continues to carry physical damage insurance for certain other losses, Diamond Offshore

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significantly increased its deductibles to offset or mitigate premium increases. Diamond Offshore’s deductible for physical damage insurance is currently $150.0 million per occurrence. Diamond Offshore continues to carry liability insurance with coverages similar to prior years, except that Diamond Offshore elected to self-insure for a portion of its excess liability coverage related to named windstorms in the U.S. Gulf of Mexico. Diamond Offshore’s deductible for liability coverage generally has increased to $5.0 million per occurrence, but its deductibles arising in connection with certain liabilities relating to named windstorms in the U.S. Gulf of Mexico have increased to approximately $10.0 million per occurrence, with no annual aggregate deductible. To the extent that Diamond Offshore incurs certain liabilities related to named windstorms in the U.S. Gulf of Mexico in excess of $75.0 million, Diamond Offshore is self-insured for up to a maximum retention of $17.5 million per occurrence. These changes result in a higher risk of losses that are not covered by third party insurance contracts. If named windstorms in the U.S. Gulf of Mexico cause significant damage to Diamond Offshore’s rigs or equipment or to the property of others for which it may be liable, it could have a material adverse effect on our financial position, results of operations or cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Items 2(a) and (b) are inapplicable.

Period	(a) Total number of shares purchased	(b) Average price paid per share	(c) Total number of shares purchased as part of publicly announced plans or programs	(d) Maximum number of shares (or approximate dollar value) of shares that may yet be purchased under the plans or programs (in millions)

August 1, 2006 -	278,500	$37.17	N/A	N/A
August 30, 2006

Item 4. Submission of Matters to a Vote of Security Holders

Set forth below is information relating to a Special Meeting of Shareholders of the Registrant.

A special meeting of shareholders was held on August 3, 2006. Represented at the meeting, in person or by proxy, were shares representing 536,792,998 votes, approximately 92.3% of the votes represented by issued and outstanding shares entitled to vote.

The following business was transacted:

Proposal relating to an increase in the number of shares of the Registrant’s common stock authorized for issuance

Approved - 454,306,506 votes, approximately 78.4% of the votes represented by outstanding voting stock, voted for this proposal. 80,166,139 votes, approximately 13.8% of the votes represented by outstanding voting stock, voted against, and shares representing 2,320,353 votes, approximately 0.4% of the votes represented by outstanding voting stock, abstained.

Proposal relating to a reduction of the par value per share of the Registrant’s common stock

Approved - 531,720,738 votes, approximately 91.8% of the votes represented by outstanding voting stock, voted for this proposal. 2,613,977 votes, approximately 0.5% of the votes represented by outstanding voting stock, voted against, and shares representing 2,458,283 votes, approximately 0.4% of the votes represented by outstanding voting stock, abstained.

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Item 6. Exhibits.

Description of Exhibit	Number

Certification by the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) and Rule 15d-14(a)	31.1*

Certification by the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) and Rule 15d-14(a)	31.2*

Certification by the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of 2002)	32.1*

Certification by the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of 2002)	32.2*

Pending Tobacco Litigation, incorporated by reference to Exhibit 99.01 to Registrant’s Report on Form 10-K for the year ended December 31, 2005	99.1

*Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

	LOEWS CORPORATION
	(Registrant)



Dated: November 8, 2006	By:	/s/ Peter W. Keegan
		PETER W. KEEGAN
		Senior Vice President and
		Chief Financial Officer
		(Duly authorized officer
		and principal financial
		officer)

128

Unassociated Document

Exhibit 31.1

I, James S. Tisch, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Loews Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 8, 2006	By:	/s/ James S. Tisch
		JAMES S. TISCH
		Chief Executive Officer

Unassociated Document

Exhibit 31.2

I, Peter W. Keegan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Loews Corporation;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 8, 2006	By:	/s/Peter W. Keegan
		PETER W. KEEGAN
		Chief Financial Officer

Unassociated Document

Exhibit 32.1

Certification by the Chief Executive Officer

of Loews Corporation pursuant to 18 U.S.C. Section 1350

(as adopted by Section 906 of the

Sarbanes-Oxley Act of 2002)

Pursuant to 18 U.S.C. Section 1350, the undersigned chief executive officer of Loews Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 8, 2006	By:	/s/ James S. Tisch
		JAMES S. TISCH
		Chief Executive Officer

Unassociated Document

Exhibit 32.2

Certification by the Chief Financial Officer

of Loews Corporation pursuant to 18 U.S.C. Section 1350

(as adopted by Section 906 of the

Sarbanes-Oxley Act of 2002)

Pursuant to 18 U.S.C. Section 1350, the undersigned chief financial officer of Loews Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 8, 2006	By:	/s/ Peter W. Keegan
		PETER W. KEEGAN
		Chief Financial Officer