CNA FINANCIAL CORPORATION

1997 ANNUAL REPORT




                                                                     CNA



<PAGE>
                                     PROFILE
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                        CNA FINANCIAL CORPORATION
            is a holding company whose primary subsidiaries consist
               of property/casualty and life insurance companies,
             collectively CNA. CNA is one of the largest writers of
             commercial property/casualty insurance and one of the
           ten largest insurance organizations in the United States.

--------------------------------------------------------------------------------

CNA serves  businesses and individuals with a broad range of insurance and other
risk management  products and services.  Insurance products include property and
casualty coverages;  life,  accident and health insurance;  and pension products
and  annuities.  CNA services  include risk  management,  information  services,
health care management and claims administration.  CNA products and services are
marketed through agents, brokers, general agents and direct sales.

CNA Financial  Corporation  has 1997 assets of $61.3  billion and  stockholders'
equity of $8.3 billion.  This holding  company's  primary  subsidiaries  include
Continental Casualty Company, a commercial lines writer,  Continental  Assurance
Company,  its primary life insurance  subsidiary and The  Continental  Insurance
Company, primarily a personal lines and ocean marine writer.

In 1997,  CNA observed its centennial  year,  celebrating a century of financial
strength, stability and commitment to customers and business partners.

CNA  Financial  Corporation  stock is  traded  primarily  on the New York  Stock
Exchange  and, as of December 31, 1997,  was  approximately  84 percent owned by
Loews Corporation.

                           CNA FINANCIAL CORPORATION
                           -------------------------
<PAGE>






                                      CNA
<PAGE>
                               TABLE OF CONTENTS
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                                      1997

                                        2
                              FINANCIAL HIGHLIGHTS

                                        4
                      LETTER FROM CNA FINANCIAL CORPORATION
                             CHAIRMAN EDWARD J. NOHA

                                        6
                            LETTER FROM CNA CHAIRMAN
                          AND CEO DENNIS H. CHOOKASZIAN

                                       13
                           FINANCIAL SECTION CONTENTS

                                       14
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                       40
                              FINANCIAL STATEMENTS

                                       90
                          INDEPENDENT AUDITORS' REPORT

                                       91
                            COMMON STOCK INFORMATION

                                       92
                               CORPORATE DIRECTORY




                           CNA FINANCIAL CORPORATION
                           --------------------------


<PAGE>
                              FINANCIAL HIGHLIGHTS
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                 Results of Operations and Financial Condition
--------------------------------------------------------------------------------
Year Ended December 31                   1997     1996   1995*   1994     1993
--------------------------------------------------------------------------------

(In millions of dollars,
except per share data)

RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Revenues                              $17,072  $16,988 $14,700 $11,000 $11,011
--------------------------------------------------------------------------------
Income (loss) before income tax         1,358    1,345   1,042    (134)     93
--------------------------------------------------------------------------------
Net income (loss) excluding
  net realized investment
  gains/losses
     Property/Casualty                    501      576     457     148    (267)
     Life                                 100      110     104      87      44
     Other                               (113)    (108)    (98)    (48)    (29)
--------------------------------------------------------------------------------
       Net operating income (loss)        488      578     463     187    (252)
Net realized investment gains (losses)    478      387     294    (151)    519
--------------------------------------------------------------------------------
       Net income                     $   966  $   965 $   757 $    36 $   267
================================================================================

EARNINGS PER SHARE
--------------------------------------------------------------------------------
Net operating income (loss)           $  7.78  $  9.25 $  7.37 $  2.94 $ (4.14)
Net realized investment gains (losses)   7.74     6.26    4.77   (2.43)   8.40
--------------------------------------------------------------------------------
       Net income                     $ 15.52  $ 15.51 $ 12.14 $  0.51 $  4.26
================================================================================

FINANCIAL POSITION
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Assets                                $61,269  $60,455 $60,360 $44,320 $41,912
Debt                                    2,897    2,765   3,026     914     915
Stockholders' equity                    8,309    7,060   6,736   4,546   5,381
Book value per common share            132.02   111.81  106.56   71.13   84.65
Return on average common
 stockholders' equity                    12.6%    14.0%   13.4%    0.7%    5.3%
================================================================================

STATUTORY SURPLUS
--------------------------------------------------------------------------------
Property/Casualty                     $ 7,123  $ 6,349 $ 5,696 $ 3,367 $ 3,598
Life                                    1,224    1,163   1,128   1,056   1,022
================================================================================
* Includes The Continental  Corporation since May 10, 1995, except for Statutory
Surplus which includes The Continental Corporation since January 1, 1995.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       2
<PAGE>
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                               FINANCIAL POSITION

This page of CNA Financial Corporation's annual report has four bar graphs which
illustrate the trend in revenues, assets,stockholders' equity and book value per
common share from 1987 through 1997.

CNA FINANCIAL CORPORATION (1987-1997)
($ in billions except per share data)

|----------------------|-----------|--------|--------------|---------------|
|Measurement Period    |           |        | Stockholders'| Book Value Per|
| (Fiscal Year Covered)| Revenues  | Assets |  Equity      |  Common Share |
|----------------------|-----------|--------|--------------|---------------|
|FYE 12/31/87..........|   6.9     |  21.6  |    3.1       |     46.40     |
|FYE 12/31/88..........|   8.3     |  25.9  |    3.6       |     54.87     |
|FYE 12/31/89..........|   9.1     |  30.9  |    4.2       |     64.74     |
|FYE 12/31/90..........|   9.9     |  34.7  |    4.5       |     70.23     |
|FYE 12/31/91..........|  11.1     |  39.2  |    5.1       |     80.24     |
|FYE 12/31/92..........|  10.8     |  39.7  |    4.8       |     75.07     |
|FYE 12/31/93..........|  11.0     |  41.9  |    5.4       |     84.65     |
|FYE 12/31/94..........|  11.0     |  44.3  |    4.5       |     71.13     |
|FYE 12/31/95..........|  14.7     |  60.4  |    6.7       |    106.56     |
|FYE 12/31/96..........|  17.0     |  60.5  |    7.1       |    111.81     |
|FYE 12/31/97..........|  17.1     |  61.3  |    8.3       |    132.02     |
|--------------------------------------------------------------------------|


                           CNA FINANCIAL CORPORATION
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                                       3
<PAGE>

                          A LETTER TO OUR SHAREHOLDERS
 ------------------------------------------------------------------------------
                                      1997

FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOHA

CNA Financial  Corporation reported strong earnings in 1997. Net income was $966
million,  or $15.52 per share,  compared  with net  income of $965  million,  or
$15.51 per share, in 1996.

Net realized  investment  gains for 1997 were $478 million,  or $7.74 per share,
compared with net realized gains of $387 million, or $6.26 per share, for 1996.

Net  income for 1997,  exclusive  of net  realized  gains and  losses,  was $488
million,  or $7.78 per share,  compared with $578  million,  or $9.25 per share.
While  down  from  the  prior  year,  our  operating  earnings  reflect  a solid
performance in an intensely competitive insurance marketplace.

Consolidated  revenues for 1997 were approximately $17.1 billion,  compared with
approximately $17.0 billion in 1996.

Along with these strong financial results,  CNA marked an important milestone in
1997--its 100th anniversary. CNA was founded in 1897 operating out of a two-room
office in Detroit. Today, CNA is one of the largest U.S. insurance organizations
with leadership  positions in many of its  businesses.

As CNA looks to its second  century,  we see an insurance  environment  of rapid
change with major opportunities for forward-looking companies.

Consolidation,   specialization   and   globalization   are   transforming   the
property/casualty  marketplace.  We see these trends in the intense  competition
that continues to hold down prices in CNA's  bread-and-butter  commercial  lines
business.

The  life  insurance  industry  is being  transformed  by the  entry  of  banks,
brokerage firms and other efficient,  aggressive  competitors.  The good news is
that the graying of America is increasing  demand for products and services that
address the need for death protection and wealth accumulation. We see this trend
in rapid growth of term  insurance,  annuities and assets invested in retirement
plans.

In health insurance,  managed care has changed the requirements for success from
centralized,  highly-efficient  claims processing capabilities to the ability to
manage  provider  networks and health care  information.  This is evident in the
trend toward professional  practice management  organizations and the assumption
of risk by provider organizations for the total cost of care.

Meanwhile,  all  segments of insurance  are being  affected by  legislative  and
regulatory  changes that are blurring the lines between  insurance,  banking and

                           CNA FINANCIAL CORPORATION
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                                       4

<PAGE>
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                                      1997
securities  and  opening  the  door  to a more  competitive  financial  services
marketplace.

Within  this  rapidly  changing  environment,  CNA is on  course to build on the
opportunities of change and increase the value of the enterprise.

CNA is one of the only  major  U.S.  multiline  insurance  organizations  with a
significant  presence  in  property/casualty,  life and health  insurance.  As a
multiline  company,  CNA's  challenge  is to  be  competitive  in  each  of  our
businesses  with  competitors  that focus on a single  business.  Along with the
challenge,  however,  are tremendous  opportunities for operating  efficiencies,
cross-marketing  and long-term  growth of  enterprise  value.  In addition,  the
multiline  strategy  diversifies  CNA's  business  risks.  We saw this advantage
clearly in 1997,  when results from our personal  insurance  business  partially
offset the market impact on our commercial property/casualty businesses.

CNA continues to build on a solid  financial  foundation.  We strive to maintain
conservative  loss  reserves.  We take a similar  approach  with our  investment
portfolio,  which is weighted heavily toward high-quality bonds. In addition, at
year end 1997,  the  statutory  surplus of our  property/casualty  companies was
approximately $7.1 billion,  one of the largest in the industry.  The surplus of
our life companies was approximately $1.2 billion, also substantial.

CNA remains committed to managing its investment portfolio to maximize the total
return,  including  capital gains. This approach provides CNA the flexibility to
take advantage of favorable market conditions, as we saw in 1997.

Finally,  CNA continues to focus on building the long-term economic value of the
Company. We believe this is the right approach,  because insurance is a business
of long-term commitments to customers.  As a result, we manage CNA for long-term
stability, growth and overall return.

In summary,  CNA marked its Centennial  year with strong  financial  results and
continued progress toward our goal of building  long-term value.  Looking to the
future,  we  believe  that  CNA's  history  and  traditions  combined  with  the
dedication of our employees and business  partners will be the springboard to an
even more successful second century.

On  behalf  of  the  board  of  directors,  I  would  like  to  thank  you,  our
shareholders, for your commitment and support.

Sincerely,

S/EDWARD J. NOHA

Edward J. Noha
Chairman of the Board
CNA Financial Corporation



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       5


<PAGE>
                          A LETTER TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------
                                      1997

FROM CNA CHAIRMAN AND CHIEF EXECUTIVE
OFFICER DENNIS H. CHOOKASZIAN

CNA continued as a profitable  market leader under some of the most  competitive
conditions  ever seen in the commercial  insurance  market-place.  We maintained
market share,  produced a solid  profit,  strengthened  our  financial  base and
launched several  important  initiatives that position CNA for profitable growth
and continued success.

Several  factors  contributed  to CNA's 1997 results.  Heavy  competition in the
commercial  property/  casualty  marketplace  adversely affected results in this
part of our business.  Meanwhile,  our life,  personal insurance and reinsurance
businesses  benefited from strong demand and a lower level of catastrophe losses
as compared to recent historical amounts. In addition,  we realized  substantial
capital gains on our investment portfolio.

In addition to strong financial  results,  1997 was a year of several  important
corporate  initiatives.  CNA spun off its surety business  through a merger with
Capsure  Holdings  Corp. The result of the merger is the formation of CNA Surety
Corporation,  a new, publicly traded company in which CNA has an approximate 62%
interest.  CNA Surety Corporation is currently the largest U.S. surety operation
with the broadest product line and largest distribution force.

The stock  market  has  responded  very  positively  to the  transaction.  CNA's
pre-merger  interest in the business was valued at about $298  million.  At year
end  1997,  based on the  stock  price of the new  company,  the  value of CNA's
interest was $418 million, an increase in value of $120 million.  CNA expects to
use a similar  approach to unlock the value of more of its  businesses  over the
next several years.

Another significant  development was the launch of CNA UniSource, a professional
employer  organization,  or  PEO.  PEOs  are in the  business  of  handling  the
administrative  functions of  employment,  payroll,  employee  benefits and risk
management.  PEOs are a growth industry  because they relieve small employers of
major administrative  burdens. They also enable their customers to provide their
employees with benefits  comparable to those offered by large companies.  As the
first major  insurance  organization to launch a PEO, CNA is well positioned for
the opportunities of this high-growth business.

Also in 1997, CNA launched Hedge Financial  Products to pursue  opportunities in
the business of insurance  securitization.  In this business,  insurance risk is
converted into financial instruments that can be traded by investors. Over time,
insurance  securitization  will create an important new bridge between insurance
and the capital  markets.  The staff of Hedge  Financial  is uniquely  suited to
launching  this business  successfully.  Several of them played leading roles in
the development of the catastrophe options traded on the Chicago Board of Trade.

As in any organization of CNA's size, we experienced  changes in some leadership
positions  during  the past year.  During  1997  several of our senior  officers
announced their retirements from CNA. We are grateful to Donald M. Lowry, senior

                           CNA FINANCIAL CORPORATION
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                                       6

<PAGE>
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                                      1997

vice president,  secretary and general counsel,  Carolyn L. Murphy,  senior vice
president Commercial  Operations,  and Adrian M. Tocklin,  senior vice president
Diversified  Operations for their years of committed  service.  Their leadership
and expertise will be missed, but we have ensured an orderly transition of their
responsibilities.

On February 4, 1998, we announced the  appointment of Bernard L.  Hengesbaugh to
the newly  created  position of executive  vice  president  and chief  operating
officer.  Hengesbaugh will have responsibility for overall operating performance
of the Company's eight operating departments and 30 strategic business units.

CNA celebrated its 100th anniversary in 1997 with Centennial activities designed
to strengthen  business  relationships and reinforce the CNA values of financial
strength,  stability and commitment.  In one of these activities,  more than 700
CNA officers came together and built a playground at a Chicago  public school in
a  neighborhood  that had not had a safe  place  for  children  to play for many
years.

The  experience  was so positive that CNA decided to sponsor the KaBOOM!  LET US
PLAY campaign. Over the next three years, CNA employees will have an opportunity
to  build  50  playgrounds  nationwide.  By  bringing  new  playgrounds  to  our
communities,  CNA will be  supporting  "America's  Promise -- The  Alliance  for
Youth",  the campaign  chaired by General Colin Powell to help at-risk  children
and teens.

Beyond  these  initiatives,  CNA  continued  to move ahead with  strategies  for
leadership in a broad range of insurance and risk management businesses.

PROPERTY/CASUALTY

CNA is the premier  provider of  commercial  insurance for small and medium size
businesses in the United States. In 1997, we enhanced our leadership position by
applying  a proven  strategy  of  industry  segmentation  and  knowledge  of the
customer workplace.

We identified  profitable growth opportunities in both new and existing industry
segments. Nine new Commercial Affiliation Marketing (CAM) programs were launched
for targeted  segments,  while  several  current  offerings  were  significantly
enhanced.

Many new programs were designed to meet a broader spectrum of insurance needs in
such areas as surety, professional liability,  warranty and international.  This
approach  continued  our  emphasis  on  total  customer   satisfaction   through
collaboration  among CNA business units and marketing  across the full portfolio
of CNA products and services.

In addition, investments in automation strengthened our processing and marketing
capabilities.   New  direct  billing  systems  were  introduced,  small  account
processing  was  enhanced,  and multiple  Internet  sites were  established  for
marketing  purposes.  We also completed the  groundwork  for a  state-of-the-art
processing system that will improve service and efficiency.


                           CNA FINANCIAL CORPORATION
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                                       7

<PAGE>
                          A LETTER TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------
                                      1997

In  the  risk  management   marketplace  for  large  commercial  accounts,   CNA
differentiates  itself  on the  basis of  customized  programs  that  lower  the
customer's  total cost of risk. We are unique in our ability to tailor  programs
for customers who want a package of insurance and services, as well as those who
prefer to buy services on an unbundled, a la carte basis.

In the very competitive  risk management  marketplace of 1997, CNA increased its
market share of Fortune 100  customers and enhanced its  reputation  for serving
the most demanding buyers of risk management products and services.

Meanwhile,  CNA is  working  to  address  a broader  range of needs  for  large,
multinational  businesses.   Our  new,  excess  insurance  product  makes  us  a
one-stop-shopping  solution  for covering  very large  liability  risks.  We are
developing  capabilities to insure and service large, complex property risks, as
well  as the  international  risks  of  U.S.-based  companies.  With  these  new
capabilities,  CNA's large  commercial  business will be well positioned for the
global marketplace.

CNA's strength in the commercial  insurance  marketplace extends to professional
and  specialty  coverages.  These  businesses  include  liability  insurance for
healthcare providers,  architects & engineers, lawyers,  accountants,  corporate
officers  and other  professionals.  CNA also is a major  presence in excess and
surplus lines insurance,  fidelity,  surety, marine insurance,  credit, warranty
and aviation  insurance.

CNA has developed  leadership  positions in many of these businesses by focusing
on select customer groups,  developing exceptional knowledge of their risks, and
aligning  its  resources  around  their  coverage  needs.  In  several  of these
businesses,  we have  developed  valuable  marketing and  processing  advantages
through  partnerships  with  managing  general  underwriters,  such as Victor O.
Schinnerer, Aon Corporation and Poe & Brown.

In  1997,  CNA's   professional   and  specialty   businesses  faced  increasing
competitive  pressure.  We  strengthened  this business  through the purchase of
Caronia  Corporation,  a leading third-party  administrator for liability claims
against health care  organizations.  In early 1998, we formed a  fee-for-service
risk  management  consulting  business  for  the  health  care  industry.  These
initiatives  enable CNA to serve customers in whatever way they choose to manage
their health-related liability risks.

We also  strengthened our  capabilities in warranty,  a rapidly growing field of
insurance.  Under a five-year  agreement  with Pre-Paid Legal Services Inc., CNA
will market legal service insurance to employers, associations and other groups.
In early 1998, we formed a joint venture with Specialty  Underwriters,  Inc., to
develop business in commercial equipment maintenance programs.

In the international insurance arena, CNA continued to make progress in building
a strong,  flexible franchise. We acquired majority control of Omega Aseguradora
de Riesgo de Trabajo (ART), one of the largest


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       8

<PAGE>
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                                      1997

workers' compensation  carriers in Argentina.  CNA takes a conservative approach
to international investment opportunities, and we focus our efforts on countries
and markets  where CNA's  expertise  responds to growing  insurance  needs.  Our
investment in Omega ART exemplifies this approach.  CNA's leadership in workers'
compensation  insurance  can add real  value in  Argentina's  emerging  workers'
compensation system.

CNA plans to introduce  specialty  products  throughout  the European  Community
through its London-based  subsidiary,  CNA Insurance Europe Ltd. In addition, we
launched a global  service  facility to serve CNA's  U.S.-based  customers  with
international insurance needs.

In reinsurance,  CNA continued to grow its operations and add  capabilities.  A
major area of progress was in facultative  reinsurance,  which provides  clients
with coverage for  individual  risks,  rather than for entire  classes of risks.
After launching a facultative operation last year, we formed a global management
structure in 1997 that will allow CNA to unify worldwide  operations,  increase
communication and take advantage of the  globalization  trends of our customers.
Facultative  branches were  established  in seven U.S.  locations,  and property
facultative capabilities were added in the United States and Latin America.

Internationally,  the reinsurance operations established offices in Toronto and
Singapore.  In the London market,  we launched the Lloyd's Syndicate 1229, which
will write short-tail direct insurance and facultative  reinsurance.

In addition,  we continued to develop  capabilities  for providing more value to
our reinsurance clients and business partners  worldwide.  A new client services
unit in the United States will deliver these  services,  and we are moving ahead
with plans to develop similar consulting capabilities in Europe.

CNA's  property/casualty  operations  also  include  individual  long-term  care
insurance and personal lines, such as automobile and homeowners insurance. More
than one million  customers  count on CNA for  protection of their  automobiles,
homes and valuable personal possessions.

In 1997,  CNA had one of its best years  ever in  personal  lines.  Contributing
factors included favorable loss reserve development, improvement in the area of
expense management,  greater ease of doing business for our agents and customers
and  lower  than  historical  catastrophe  losses.  We  continued  to focus on a
long-term  strategy of building a major  presence  in  personal  insurance.  Key
elements of the strategy  include  internal  growth,  acquisitions and strategic
partnerships to expand distribution channels and achieve economies of scale.

Sales of  long-term  care  insurance  climbed  38  percent  with $63  million of
first-year paid premium.  CNA introduced  long-term care plans that meet the new
federal definitions for tax-qualified  long-term care insurance. In addition, we
entered  into an  agreement  with  Vencor,  the  nation's  largest  full-service
long-term  care provider,  which will maximize the value of insurance  benefits
for policyholders who select network facilities or services.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       9

<PAGE>
                          A LETTER TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------
                                      1997

INDIVIDUAL LIFE

In 1997, CNA restructured its individual life business around core product areas
in life insurance and retirement services.

CNA's track record of growth in individual life continued for the fourth year in
a row,  as life  applications  rose to  295,000  in 1997 from  235,000  in 1996.
First-year  premiums of $150 million for term insurance  products were among the
highest  achieved by any insurer in the term  marketplace.  New products in 1997
included a unique series of term life  products.  We also enhanced our universal
life products.

These  positive  results  reflect CNA's continued focus on product leadership,
strong distribution relationships, expert underwriting approaches and the
support of our reinsurers.

Sales of individual annuities dropped off slightly in 1997. We are strengthening
this  business  by  revamping  products  and  building  distribution  outlets to
wholesale in the variable annuity markets.

Our life  reinsurance  business  had a good year,  with sales up by more than 50
percent and solid profits.  We capitalized on our expertise in group reinsurance
as we shifted our focus to serving managed care and health care providers, while
still being a major force in stop-loss coverage for self-insured employers.

CNA's  individual  life  businesses  also  include  Viaticus,  the leading  U.S.
viatical settlement company,  and Convida, a Chilean life and annuity operation.
CNA's viatical  settlement  business enables  individuals with  life-threatening
diseases to tap the value of their life insurance  benefits.  Viaticus  expanded
its market outreach by contracting  with employers,  unions,  and  associations.
Through  the new  contracts,  Viaticus  now has  marketing  access to 10 million
lives.  Meanwhile,  Convida,  the fourth largest annuity  company in Chile,  has
built its asset base to more than $200 million.

GROUP LIFE AND HEALTH

CNA  customers  in the group  life and  health  marketplace  include  employers,
associations and other group purchasers of medical benefits, life and accident &
disability  insurance.  We  offer  life  and  health  reinsurance  to  insurance
companies  writing group  coverages.  In addition,  CNA is active in the pension
marketplace  with guaranteed  investment  contracts,  annuities and other wealth
accumulation products.

In 1997, we reorganized the group  businesses to make it easier for customers to
do  business  with  CNA and to  improve  our  ability  to  respond  quickly  and
profitably  to changing  customer  needs.  A combined  sales  organization  will
maximize opportunities for cross-selling of CNA products.

New sales of our  non-medical  products  increased  by more than 25 percent  and
profits  continued to improve.  In addition,  CNA  continued to build its market
leadership  position in insurance  programs for  associations and other affinity
groups.

                           CNA FINANCIAL CORPORATION
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<PAGE>
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                                      1997

The $2 billion Federal  Employees Health Benefits Program moved ahead with plans
to  regionalize  its operations  for more  responsive and efficient  services to
government  employees and their  dependents.  In addition,  our  investments  in
technology are streamlining customer service and enabling us to guide customers
in using medical services more effectively.

In private  medical  benefits,  a new claim  system has  enhanced our ability to
implement  managed care  features.  We also  implemented a data  ware-house,  an
important tool for analyzing claims costs and identifying opportunities for cost
saving.  While operating results were  disappointing in 1997, the new tools have
sharpened our focus on strategies for improvement.

CNA  Health  Partners  took  advantage  of  CNA's   multiline   capabilities  by
collaborating with our commercial insurance operations,  to launch a product for
employers   who  want   combined   coverage   for  workers'   compensation   and
nonoccupational medical benefits.

We  sharpened  our focus on pensions and other  investment-oriented  products by
consolidating  the  management  of CNA's group  pension and  individual  annuity
businesses.  This  reorganization  concentrates  our  expertise in this class of
products  into a single  management  structure.  In addition,  CNA Trust,  which
provides pension services to small and medium-sized  employers,  is capitalizing
on  opportunities  in  one of  the  fastest  growing  segments  of  the  pension
marketplace.

In summary,  CNA  performed  well in its  Centennial  year.  We  produced  solid
earnings  and  positioned  the Company for the  future.  Thanks to our  business
partners and the dedication of our employees,  CNA continued its 100-year record
of strength, stability and commitment.

Looking ahead, 1998 will be a year of continued  competitive  pressure and rapid
change  in the  insurance  marketplace.  CNA  will  intensify  its  emphasis  on
excellence in the operating performance of all its businesses. Taking advantage
of our  multiline  capabilities  will be another  key  priority.  As we build an
insurance  organization  for the future,  1998 will be the start of an even more
successful second century.

Sincerely,

S/DENNIS H. CHOOKASZIAN

Dennis H. Chookaszian
Chairman and Chief Executive Officer
CNA

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       11


<PAGE>

                                      CNA


<PAGE>
                           FINANCIAL SECTION CONTENTS
--------------------------------------------------------------------------------
                                      1997




                                       14
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                       40
                           CONSOLIDATED BALANCE SHEET

                                       42
                      STATEMENT OF CONSOLIDATED OPERATIONS

                                       43
                 STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY

                                       44
                      STATEMENT OF CONSOLIDATED CASH FLOWS

                                       46
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       90
                          INDEPENDENT AUDITORS' REPORT

                                       91
                            COMMON STOCK INFORMATION

                                       92
                              CORPORATE DIRECTORY




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       13


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                              Consolidated Results

Consolidated Results

CNA is one of the  largest  insurers  in the United  States;  the third  largest
property/casualty  company and the twenty-second  largest life insurance company
in the country, based on 1996 net written premium.

Based on 1996 market share estimates, CNA ranks first among domestic insurers in
commercial  affiliation  marketing,  commercial auto, commercial multiple peril,
ocean  marine,  personal  packages,  and  surety;  second in general  liability,
medical   malpractice,   federal  employees  health  benefit  plans,   term-life
insurance;  third in  automobile  warranty,  directors  &  officers,  individual
long-term care and workers'  compensation and fifth in reinsurance in the United
States.  In addition,  CNA ranks first or second for various  errors & omissions
coverages  for  architects  and  engineers,   accountants,   lawyers  and  other
professionals.

CNA's focus is to create  long-term  enterprise  value by pursuing a strategy of
growth in market segments which will enhance that value.

CNA will concentrate resources on businesses in which it has a proven expertise,
providing insurance and risk management  services.  The Company will continue to
enhance its leadership position by focusing on market segments and businesses in
which CNA is the market leader or where it believes it can effectively compete.

CNA  actively  manages  its  investment  portfolios  on  a  total  return  basis
(investment  income and  capital  gains)  while  maintaining  the quality of its
investment portfolio.

In 1997,  CNA's focus  enabled the Company to produce solid results and maintain
its leadership  position in one of the most competitive  market  environments in
recent history.  CNA's results, as discussed in the following pages, reflect the
effects of the current market environment.

Total revenues,  which consist of premium, net investment income, realized gains
and other  revenues,  were  $17.1  billion,  up 0.5% from 1996 and up 16.1% from
1995.  For 1997,  revenues  reflect a decrease of $117 million  (0.9%) in earned
premium  resulting  from  reductions  in  involuntary  markets  premium and very
competitive  conditions in the commercial  lines  marketplace.  Revenues in 1997
also reflect an increase in realized  investment  gains of $134 million (21.7%),
which was the result of CNA taking  advantage of favorable  market  conditions.
Also  impacting  revenue was a decline of $67 million  (2.9%) in net  investment
income as a result of lower  yields  compared to last year and  reduction in the
investment base  reflecting  signifi-cant  claim payments  related to Fibreboard
(see Note F of the Consolidated Financial Statements).  Other revenues increased
by  $134  million   (21.8%)  due  primarily  to  growth  in  insurance   related
operations.  Insurance  related  operations  include claim adjusting  services,
auto-warranty  sales,  insurance  agency  software and the  viatical  settlement
business.

For 1997,  CNA  reported  net  operating  income  (which  excludes  net realized
investment  gains/losses) of $488 million, or $7.78 per share,  compared to $578
million,  or $9.25 per share, for 1996 and $463 million, or $7.37 per share, for
1995.

Realized  investment gains, net of tax,  amounted to $478 million,  or $7.74 per
share in 1997  compared  to $387  million,  or $6.26  per share in 1996 and $294
million,  or $4.77 per share, in 1995. These net realized gains represent 49.5%,
40.1% and 38.8% of net income for the last three years and, based on CNA's total
return investment philosophy, are an integral part of CNA's investment results.


<PAGE>

Net income for 1997 was $966  million,  or $15.52  per share,  compared  to $965
million,  or $15.51 per share, for 1996 and $757 million, or $12.14 per share in
1995.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       14

<PAGE>
--------------------------------------------------------------------------------
                              Results of Operations

Results of Operations:
----------------------

The following chart summarizes key components of consolidated  operating results
for each of the last three years.
<TABLE>
<CAPTION>
CONSOLIDATED OPERATIONS
------------------------------------------------------------------------------
Year Ended December 31                             1997     1996      1995*
------------------------------------------------------------------------------
(In millions of dollars)
<S>                                             <C>      <C>        <C>
OPERATING REVENUE (excluding realized investment
gains/losses)
   Premiums                                     $13,362  $13,479    $11,735
   Net investment income                          2,209    2,276      2,077
   Other                                            748      614        424
------------------------------------------------------------------------------
   Total operating revenue
   (excluding realized investment gains/losses)  16,319   16,369     14,236
Benefits and expenses                            15,699   15,628     13,650
------------------------------------------------------------------------------
   Operating income before income tax               620      741        586
Income tax expense                                  132      163        123
------------------------------------------------------------------------------
   Net operating income
   (excluding realized investment gains/losses)     488      578        463
Realized investment gains, net of tax               478      387        294
------------------------------------------------------------------------------
   Net income                                   $   966  $   965    $   757
==============================================================================
SUPPLEMENTAL FINANCIAL DATA:
Net operating income (loss) by group:
   Property/Casualty                            $   501  $   576    $   457
   Life                                             100      110        104
   Other, primarily interest expense               (113)    (108)       (98)
-------------------------------------------------------------------------------
   Net operating income                             488      578        463
-------------------------------------------------------------------------------
Net realized investment gains (losses) by group:
   Property/Casualty                                384      303        208
   Life                                              96       96         85
   Other                                             (2)     (12)         1
------------------------------------------------------------------------------
   Realized investment gains, net of tax            478      387        294
------------------------------------------------------------------------------
Net income (loss) by group:
   Property/Casualty                                885      879        665
   Life                                             196      206        189
   Other, primarily interest expense               (115)    (120)       (97)
==============================================================================
Net income                                      $   966  $   965    $   757
==============================================================================
*Includes the results of The Continental Corporation since the acquistion date.
</TABLE>

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       15


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
                          Property/Casualty Operations

Property/Casualty Operations
<TABLE>
<CAPTION>
PROPERTY/CASUALTY GROUP
------------------------------------------------------------------------------
Year Ended December 31                           1997        1996        1995*
------------------------------------------------------------------------------
(In millions of dollars)
<S>                                           <C>        <C>          <C>
Operating Revenue (excluding realized
investment gains/losses)
   Premiums                                   $ 9,927     $10,127      $ 8,724
   Net investment income                        1,790       1,881        1,699
   Other                                          634         509          348
------------------------------------------------------------------------------
                                               12,351      12,517       10,771
Benefits and expenses                          11,723      11,779       10,193
------------------------------------------------------------------------------
   Operating income before income tax             628         738          578
Income tax expense                                127         162          121
------------------------------------------------------------------------------
   Net operating income
  (excluding realized investment gains/losses)    501         576          457
Realized investment gains, net of tax             384         303          208
-------------------------------------------------------------------------------
   Net income                                 $   885     $   879      $   665
===============================================================================
*Includes the results of The Continental Corporation since the acquisition date.
</TABLE>
The property/casualty group is comprised of commercial business,  personal lines
of insurance, involuntary risk and other related business.

Customers of the commercial business include large national corporations,  small
and  medium-sized  businesses,  groups  and  associations,   and  professionals.
Coverages are written primarily through traditional  insurance contracts,  under
which risk is transferred to the insurer. Many large commercial account policies
are written under  retrospectively-rated  contracts, which are experience-rated.
Premiums for such  contracts  may be  adjusted,  subject to  limitations  set by
contract,  based on the loss experience of the insureds.  Other experience-rated
policies   include   provisions   for  dividends   based  on  loss   experience.
Experience-rated  contracts  reduce but do not  eliminate  risk to the  insurer.
Commercial  lines  also  includes  reinsurance  assumed  from  other  insurance
companies and certain group accident and health insurance coverages.

The  property/casualty  group markets  personal  lines of  insurance,  primarily
automobile  and  homeowners  coverages  sold to  individuals  under monoline and
package policies.

Involuntary risks include mandatory participation in residual markets, statutory
assessments for insolvencies of other insurers, and other similar charges.

The property/casualty  group also provides other related services including loss
control,  policy admin-istration and claim administration services under service
contracts  for fees.  Such  services  are  provided  primarily  in the  workers'
compensation market.


<PAGE>

Property/casualty revenues,  excluding net realized investment gains/losses were
$12.4 billion,  down  approximately  1.3% from $12.5 billion in 1996 and up from
$10.8  billion  in  1995.  Revenues  include  the  results  of  The  Continental
Corporation subsequent to May 10, 1995 (see Note N to the Consolidated Financial
Statements).

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       16



<PAGE>
--------------------------------------------------------------------------------
                      Property/Casualty Operations (cont.)

Property/casualty  earned premiums were $9.9 billion in 1997, down approximately
2.0% from the $10.1 billion earned in 1996 and up from $8.7 billion in 1995.

Pre-tax operating income for property/casualty was $628 million in 1997 compared
to $738  million and $579 million in 1996 and 1995,  respectively.  Underwriting
results, which include insurance and insurance-related operations,  deteriorated
by 1.7%,  primarily the result of an extremely  competitive  commercial  market
place exerting  pressure on pricing.  The underwriting  loss for 1997 was $1,162
million,  compared  to  $1,143  million  and  $1,122  million  in 1996 and 1995,
respectively.

Catastrophe  losses for 1997 on a pretax basis were  approximately  $92 million,
compared with $315 million in 1996 and $149 million in 1995. CNA's 1997 and 1996
catastrophe  losses were primarily  weather  related,  including  winter storms,
tornadoes and  flooding.  CNA's 1995  catastrophe  losses  related  primarily to
tropical storms and hail storms in Texas.

Property/casualty   investment   income   for  1997  was  $1.8   billion,   down
approximately  4.8% from the $1.9  billion  in 1996 and up from $1.7  billion in
1995.  Investment  income was down from 1996  levels  reflecting  overall  lower
yields in the bond market and a lower  investment base due to reduced  operating
cashflows.  The bond segment of the  investment  portfolio  yielded 6.5% in 1997
compared with 6.8% and 6.9% in 1996 and 1995, respectively.

Net operating  income  excluding net realized  investment  gains/losses was $501
million  for 1997  compared to $576  million and $457  million in 1996 and 1995,
respectively.

Net  realized  investment  gains  for 1997 were $384  million  compared  to $303
million and $208  million in 1996 and 1995,  respectively.  The  increase in net
realized  investment  gains in 1997 largely offset the decline in net investment
income  and  reflects  CNA's  continued  practice  of  managing  its  investment
portfolio to maximize total after-tax return.


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       17

<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------
                      Property/Casualty Operations (cont.)

The following table shows the underwriting results for commercial lines:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - COMMERCIAL
-----------------------------------------------------------------------------
Year Ended December 31                                 1997     1996    1995*
-----------------------------------------------------------------------------
(In millions of dollars)
<S>                                                   <C>      <C>     <C>
 Premiums Earned:
     Professional and specialty                       $1,688   $1,845  $1,558
     General liability and commercial automobile       1,682    1,754   1,649
     Workers' compensation                             1,845    1,543   1,476
     Multiple peril                                    1,058    1,047     870
     Accident and health                               1,062      919     699
     Reinsurance and other                             1,083    1,189     974
------------------------------------------------------------------------------
                                                       8,418    8,297   7,226
Losses and expenses                                    9,839    9,150   8,147
------------------------------------------------------------------------------
   Net underwriting losses before investment income  $(1,421)  $ (853) $ (921)
==============================================================================
*Includes the results of The Continental Corporation since the acquisition date.
</TABLE>
Premiums for the  property/casualty  commercial  segment  increased 1.5% to $8.4
billion in 1997, up from $8.3 billion in 1996 and up from $7.2 billion in 1995.

Professional and specialty earned premium decreased  approximately  8.5% to $1.7
billion  in 1997,  down from $1.8  billion  in 1996 and up from $1.6  billion in
1995.  The 1997  premium  decrease  was  attributable  to a decline in financial
insurance  premium  of  approximately  $90  million,  as well as a  decrease  in
agricultural insurance of approximately $85 million offset by small increases in
various other lines.

General  liability and commercial  automobile  earned premium was  approximately
$1.7 billion in 1997,  down  approximately  4.1% from the $1.8 billion earned in
1996 and up from the $1.6  billion in 1995.  The decrease in 1997 was the result
of the soft market which made  profitable  premium growth  difficult to achieve.

Earned premium from workers' compensation increased  approximately 19.6% to $1.8
billion  in 1997,  up from  $1.5  billion  in 1996 and 1995,  respectively.  The
increase in workers' compensation earned premium resulted from a willingness on
the part of the Company to write, in its voluntary  book of business,  business
that  would  have  otherwise  been  written  by  the  involuntary  market.  This
willingness  was  precipitated  by  improved  loss  experience   trends  in  the
involuntary market.

Multiple peril earned premium was essentially  level,  increasing  approximately
$11 million to $1.1 billion in 1997,  from $1.0 billion in 1996 and $0.9 billion
in 1995.

Accident  and health  earned  premium was  approximately  $1.1  billion in 1997,
increasing  approximately 15.6% from the $0.9 billion earned in 1996 and up from
the $0.7 billion in 1995. Accident and health premium increased primarily due to
increases in mass market association premium.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       18


<PAGE>
-------------------------------------------------------------------------------
                      Property/Casualty Operations (cont.)

Earned premium from reinsurance and other decreased  approximately  8.9% at $1.1
billion in 1997 from $1.2 billion in 1996,  and up from the $1.0 billion  earned
in 1995. The decline in 1997 is  attributable to lower premium from CNA's London
business.

Underwriting  results in commercial lines in 1997 were a loss of $1.4 billion, a
decline of approximately 66.6% from the $853 million loss in 1996 and 54.4% from
the $921 million in 1995.  This  deterioration  is  primarily  the result of the
highly  competitive  commercial  insurance market exerting  pressure on pricing,
unfavorable loss reserve development and increased operating expenses, partially
offset  by  improved   catastrophe   loss   experience  and  favorable   premium
development.  Increased  operating  expenses  stemmed from technology and system
upgrades and consulting costs.

The following table shows the underwriting results for personal lines:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - PERSONAL
-----------------------------------------------------------------------
Year Ended December 31                            1997    1996     1995*
-----------------------------------------------------------------------
(In millions of dollars)
<S>                                             <C>     <C>      <C>
 Premiums Earned:
     Personal lines packages                    $1,085  $1,063   $  782
     Monoline automobile and property coverages    440     367      325
     Accident and health                           126     106      108
-----------------------------------------------------------------------
                                                 1,651   1,536    1,215
Losses and expenses                              1,527   1,720    1,317
------------------------------------------------------------------------
   Net underwriting income (loss)
     before investment income                   $  124  $ (184)  $ (102)
=========================================================================
*Includes the results of The Continental Corporation since the acquisition date.
</TABLE>

Personal  lines  earned  premium  increased  7.5% to $1.7  billion from the $1.5
billion earned in 1996 and up from the $1.2 billion earned in 1995. The increase
in  personal  lines  premium  resulted  primarily  from an  increase  in private
passenger automobile business and individual long-term care.

Personal lines posted net  underwriting  income of $124 million in 1997 compared
to  underwriting  losses  of $184  million  and $102  million  in 1996 and 1995,
respectively.  The change from 1996 to 1997 was primarily due to favorable  loss
reserve  development of  approximately  $200 million  primarily in personal auto
coverages,  as well as improved catastrophe loss experience of $79 million. Also
contributing to the improvement were reduced claim adjustment expenses.




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       19


<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
                      Property/Casualty Operations (cont.)

The following table shows the underwriting results for involuntary risks:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - INVOLUNTARY RISKS
-----------------------------------------------------------------
Year Ended December 31               1997      1996        1995*
-----------------------------------------------------------------
(In millions of dollars)
<S>                                <C>        <C>        <C>
 Premiums Earned:
     Workers' compensation         $(249)    $ 198       $ 178
     Private passenger automobile     66        58          80
     Commercial automobile            25        36          20
     Property and multiple peril      16         2           6
-----------------------------------------------------------------
                                    (142)      294         284
Losses and expenses                 (277)      400         383
-----------------------------------------------------------------
   Net underwriting income (loss)
     before investment income      $ 135     $(106)      $ (99)
=================================================================
*Includes the results of The Continental Corporation since the acquisition date.
</TABLE>

CNA's share of  involuntary  risks is mandatory  and generally a function of its
share of the  voluntary  market by line of insurance in each state.  CNA records
the estimated  effects of its mandatory  participation in residual markets on an
accrual basis.

Involuntary risk earned premium  decreased  substantially in 1997,  primarily in
the workers'  compensation line of business,  as estimates of premiums for prior
years were reduced by  approximately  $340 million.  The decrease in involuntary
risk  premium  stems  from a greater  willingness  on the part of the  voluntary
market, including CNA, to write these types of risks.

Involuntary risk underwriting income reflects favorable loss reserve development
of  approximately  $540 million,  which was partially offset by $340 million of
premium development,  as noted above. This favorable loss reserve development is
attributable  to improved  claim  experience  in the workers'  compensation  and
private passenger automobile lines.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       20


<PAGE>
--------------------------------------------------------------------------------
                      Property/Casualty Operations (cont.)

Reserves

CNA's  property/casualty  results of operations  are  significantly  impacted by
actuarial  estimates  of  claim  and  claim  expense  reserves.  These  reserves
represent an accumulation  of the amounts the Company  believes are necessary to
settle all outstanding claims, including incurred but not reported claims.

CNA, consistent with sound insurance reserving practices,  regularly adjusts its
reserve estimates in subsequent reporting periods as new facts and circumstances
emerge  that  indicate  the  previous  estimates  need  to  be  modified.  These
adjustments,  referred to as "reserve  development",  are  inevitable  given the
complexities  of the  reserving  process and are  recorded in the  statement  of
operations in the period the need for the adjust-ments becomes apparent.

Management believes its reserves for environmental pollution and asbestos claims
are  appropriately  established  based upon known  facts and  current  case law.
However, due to the inconsistencies of court coverage decisions,  the number of
waste sites subject to clean-up,  the standards for clean-up and liability,  and
other factors, the ultimate exposure to CNA for these claims may vary materially
from the amounts currently  recorded,  resulting in a potential  increase in the
claim reserves recorded.

In addition,  issues related to, among other things,  specific policy provisions
and  allocation  of liability  among  insurers,  consequences  of conduct of the
insured,   missing  policies  and  proof  of  coverage  make  quantification  of
liabilities  exceptionally  difficult and subject to adjustment based upon newly
available data.

Due to the  uncertainties  and factors described above, the ultimate exposure to
CNA for environmental  pollution claims may vary  substantially from the amounts
currently recorded.

The following  table  reflects the  component  effects of  management's  ongoing
evaluation of reserve levels:

RESERVE DEVELOPMENT - (adverse)/favorable)
-------------------------------------------------------
Year Ended            1997       1996          1995
December 31
-------------------------------------------------------
(In millions of dollars)
Asbestos            $(105)      $(51)        $(274)
Environmental
  Pollution            --        (65)         (226)
Other lines           361        207           378
-------------------------------------------------------

Total               $ 256       $ 91         $(122)
=======================================================

The 1997 favorable  loss reserve  development of $256 million noted in the table
above was offset in part by unfavorable premium development of $170 million.

Unfavorable 1997 asbestos reserve development of $105 million results from CNA's
on-going monitoring of current payment and settlement patterns,  current pending
cases and potential future claims.


<PAGE>

Other lines' favorable loss and loss adjustment expense reserve  development for
1997 of $361 million was due to favorable loss  development  of $540 million in
involuntary  risks,  primarily  in workers'  compensation,  and $200  million of
favorable loss development in personal lines. These favorable  developments were
offset in part by unfavorable development in commercial lines of $379 million.

The favorable  loss  development in involuntary  risks is  attributable  to
better than expected results in workers'

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       21


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                      Property/Casualty Operations (cont.)

compensation  and private  passenger  automobile  lines  stemming from improved
frequency and severity in these lines.  This  favorable loss development was
offset in part by unfavorable  premium  development of $340 million as estimates
of premiums for prior years were  similarly reduced.

The favorable loss  development in personal lines was  attributable  to improved
trends particularly in personal auto lines.

The   unfavorable   development  in  commercial   lines  was   attributable   to
approximately   $240  million  in  general  liability  lines,  $130  million  in
commercial  multiperil,  and $215 million in loss adjustment  expense  reserves,
offset in part by favorable  development  of $206 million  primarily in workers'
compensation  and  reinsurance  lines.  This  unfavorable  loss  development  in
commercial  lines was offset in part by favorable  premium  development  of $170
million related to experience-rated contracts.

Other lines' 1996 and 1995 favorable  reserve  development which aggregated $207
million and $378 million,  respectively,  was principally due to favorable claim
frequency  (rate of claim  occurrence)  and severity  (average  cost per claim)
experience in the workers'  compensation line of business.  These trends reflect
the positive  effects of changes in workers'  compensation  laws,  more moderate
increases in medical costs, and a generally strong economy in which individuals
return to the workplace more quickly.

CNA utilizes reinsurance  arrangements to limit its maximum loss while providing
greater  diversification of risks and minimizing exposures on larger risks. The
types  of  reinsurance  coverages  are  tailored  to the  specific  type of risk
underwritten with the amount retained by CNA varying by type of coverage.  These
reinsurance  arrangements do not discharge the primary  liability of the Company
to the original insureds.

To  minimize  the  Company's  exposure  that a  reinsurer  may  not be  able to
reimburse the Company under the terms of the reinsurance  agreement,  CNA places
reinsurance  with other insurance  companies after a thorough  assessment of the
reinsurer's credit quality and claim settlement performance.  Additionally,  for
reinsurers that are not authorized reinsurers, CNA receives collateral primarily
in the form of bank letters of credit.

CNA's  reinsurance  recoverable  on paid and unpaid claim and claim expenses was
approximately  $5.4 billion at December 31, 1997 and approximately $6.3 billion
at December 31, 1996.




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       22


<PAGE>
------------------------------------------------------------------------------
                             Life Operations (cont.)

Life Operations
<TABLE>
<CAPTION>
LIFE GROUP
---------------------------------------------------------------------
Year Ended December 31                    1997       1996     1995
---------------------------------------------------------------------
(In millions of dollars)
<S>                                       <C>        <C>       <C>
Operating Revenue (excluding realized
 investment gains/losses)
 Group Premium
   Accident and health                    $2,527     $2,548    $2,190
   Life and annuity                          263        195       313
----------------------------------------------------------------------
      Total group                          2,790      2,743     2,503
----------------------------------------------------------------------
Individual Premium
   Life and annuity                          642        629       497
   Accident and health                         3          2        33
----------------------------------------------------------------------
      Total individual                       645        631       530
----------------------------------------------------------------------
      Total premiums                       3,435      3,374     3,033
Net investment income                        419        400       369
Other                                        114        106        76
----------------------------------------------------------------------
       Total operating revenues            3,968      3,880     3,478
  Total benefits and expenses              3,815      3,709     3,318
----------------------------------------------------------------------
      Operating income before income tax     153        171       160
Income tax expense                            53         61        56
----------------------------------------------------------------------
  Net operating income (excluding realized
      investment gains/losses)               100        110       104
Realized investment gains, net of tax         96         96        85
=======================================================================
      Net income                          $  196     $  206    $  189
========================================================================
</TABLE>
During 1997, CNA's life operations experienced continued growth, building on the
momentum from the past two years.

CNA sells a variety of individual and group insurance products.  The individual
insurance  products  consist  primarily of term,  universal  life, and fixed and
variable annuity products.  Group insurance products include life,  accident and
health consisting primarily of major medical and  hospitalization,  and pension
products,  such as guaranteed investment contracts and annuities.

Life insurance revenues, excluding net realized investment gains, were up 2.3%
to $4.0  billion for 1997 as compared to $3.9 billion for 1996 and up from $3.5
billion for 1995.

Life  premium for 1997 was up 1.8% or $61 million  from $3.4 billion in 1996 and
up from 1995 premiums of $3.0 billion.


<PAGE>

CNA has  undertaken a number of initiatives  to enhance  service,  manage health
care  utilization   demand  and  quality,   and  strengthen  CNA's  networks  of
physicians, hospitals and other providers. In group accident and health, CNA
                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       23


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
                            Life Operations (cont.)

underwrites  the Federal  Employees  Health  Benefits  Program  FEHBP) which had
revenues of $2.1 billion,  $2.1 billion and $1.9 billion in 1997, 1996 and 1995,
respectively.

Group life and annuity business  increased $68 million,  or approximately 35% to
$263 million in 1997.  This increase is primarily due to a $45 million  increase
in single premium guaranteed annuity business.

Traditional guaranteed investment contract sales were lower by approximately 41%
due to the strong  performance  of the equity  market which caused  customers to
transfer 401(k) investments to stock mutual funds and away from the stable value
of guaranteed funds.

Individual  life  premium  continues  to  increase  as demand for CNA's  Viaterm
product remains strong,  with premium increasing  approximately $55 million over
1996's level.  This increase was tempered by a drop in CNA's foreign  operations
of approximately $41 million due to an increasingly  competitive market.  Total
individual premium increased  approximately $14 million, or 2.2%, over 1996, and
$115 million, or 21.7%, over 1995.

Individual  policies in-force  increased 26% in 1997 to 1,010,000  policies from
799,000  policies in 1996.  Individual  accident and health premium remained low
due to CNA selling its individual disability income business in late 1995.

Life investment  income  increased by  approximately  4.8% due to a larger asset
base generated from the increased  cashflows  resulting from premium growth. The
bond segment of the life investment portfolio yielded 6.4% in 1997 compared with
6.5% and 6.9% in 1996 and 1995, respectively.

CNA's life  insurance net operating  income,  excluding net realized  investment
gains, was $100 million for 1997,  compared to $110 million and $104 million for
1996 and 1995,  respectively.  The decline in net operating  income is primarily
due to poor  experience  in certain  group  accident  and health  contracts  and
increased expenses related to new business initiatives.



                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       24


<PAGE>
-------------------------------------------------------------------------------
                                   Investments

Investments:

The following  table  summarizes  CNA's general  account  investments at cost or
amortized cost for each of the last five years.
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS - GENERAL ACCOUNT
--------------------------------------------------------------------------------------
December 31              1997  %    1996   %     1995    %    1994    %    1993    %
--------------------------------------------------------------------------------------
(In millions of dollars)
<S>             <C>     <C>  <C>     <C> <C>      <C> <C>     <C>   <C>     <C>
Fixed maturities:
   Bonds:
     Taxable          $24,419  69% $22,631  65% $25,832  75% $17,484  63% $11,933  48%
     Tax-exempt         4,534  13    4,860  14    3,453  10    3,717  13    4,725  19
   Redeemable
 preferred stocks          67  --       49  --      100  --      423   2      445   2

Equity securities:
   Common stocks          567   2      478   1      734   2      729   3      433   2
   Non-redeemable
   preferred stocks       128  --      224   1        3  --        8  --       --  --
Mortgage loans and
   real estate             85  --      123  --      122  --       47  --       62  --
Policy loans              177  --      174  --      177   1      176   1      174   1
Other invested
   assets                 544   2      617   2      483   1      103  --       69  --
Short-term
   investments          4,884  14    5,854  17    3,725  11    5,036  18    6,944  28
--------------------------------------------------------------------------------------
Investments           $35,405 100% $35,010 100% $34,629 100% $27,723 100% $24,785 100%
======================================================================================
Investments at
 Carrying Value*      $36,203      $35,412      $35,886      $26,943      $25,363
======================================================================================
*As reported in the Consolidated Balance Sheet
</TABLE>


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       25


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                              Investments (cont.)

The following table summarizes CNA's general and separate account investments at
carrying value, by group, as of December 31, 1997.
<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS
-------------------------------------------------------------------------------
                            Property/      Life         Other     Separate
                         Casualty Group  % Group   %    Group  %  Accounts   %
-------------------------------------------------------------------------------
(In millions of dollars)
<S>                         <C>        <C> <C>     <C> <C>    <C> <C>      <C>
  Fixed maturities:
    Bonds:
    Taxable                 $19,015    65% $ 5,712  89% $ --   --  $4,769  83%
    Tax-exempt                4,724    16       --  --    --   --      --  --
    Redeemable
      preferred stocks           97    --       --  --    --   --      --  --
 Equity securities:                                       --   --
    Common stocks               657     2       22  --     1    1     181   3
    Non-redeemable preferred    134     1       --  --    --   --      25   1
     stocks
   Mortgage loans and
    real estate                  60    --       25  --    --   --      --  --
   Policy loans                  --    --      177   3    --   --      --  --
   Other invested assets        687     2        6  --     2    1     117   2
   Short-term investments     4,224    14      478   8   182   98     629  11
-------------------------------------------------------------------------------
Investments at
Carrying Value              $29,598   100% $ 6,420 100% $185  100% $5,721 100%
================================================================================
</TABLE>
CNA's  general  account  investment  portfolio is managed to maximize  after-tax
investment return while minimizing credit risk with investments  concentrated in
high quality securities to support its insurance underwriting operations.

The  Company's  general  account  investment  portfolio  consists  primarily  of
publicly  traded  government  bonds,  asset backed  securities,  mortgage backed
securities, municipal bonds, and corporate bonds.

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

At December 31, 1997,  total Separate  Account cash and investments  amounted to
$5.7 billion with taxable fixed maturities  representing  approximately 83.4% of
the total.  Approximately  73.8%of Separate Account investments are used to fund
guaranteed   investment  contracts  for  which  Continental   Assurance  Company
guarantees principal and a specified return to the contractholders. The duration
of fixed  maturity  securities  included in the guaranteed  investment  contract
portfolio are matched  approximately with the  corresponding  payout pattern of
the liabilities of the guaranteed investment contracts.

<PAGE>

One Separate  Account product is an indexed group annuity contract for
institutional  investors which guarantees the Standard and Poor's (S&P) 500 rate
of return  plus 25 basis  points  annually.  Deposits  are taken for a three
year period with no payout until the end of the period. CNA mitigates the risk
associated  with  the  contract  liability  by a  combination  of purchasing S&P
500 futures  contracts  in a notional  amount  equal to the original  customer
deposit and investing the remaining  cash  primarily in high quality
investments.

                           CNA FINANCIAL CORPORATION
                         -----------------------------
                                       26


<PAGE>
--------------------------------------------------------------------------------
                              Investments (cont.)

The  number of  contracts  is  adjusted  regularly  to  approximate  the  future
liability to the contractholder. The gross notional amounts of these instruments
totaled   $860  million  and  $394  million  at  December  31,  1997  and  1996,
respectively.CNA  has the  capacity  to hold its  fixed  maturity  portfolio  to
maturity.  However,  securities  may be sold as  part of  CNA's  asset/liability
strategies  or to  take  advantage  of  investment  opportunities  generated  by
changing  interest  rates,  tax and  credit  considerations,  or  other  similar
factors.   Accordingly,   the  fixed  maturity   securities  are  classified  as
available-for-sale.  In addition,  CNA's  investment in mortgage  loans and real
estate as a percentage  of total  assets,  is  substantially  below the industry
average.

The general account portfolio consists primarily of high quality (BBB or higher)
marketable  fixed  maturities,  95.0% and 94.2% of which are rated as investment
grade at December 31, 1997 and 1996, respectively.

The  following  table  summarizes  the ratings of CNA's  general  account  fixed
maturity bond portfolio at carrying value (market):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
December 31                       1997   %       1996   %        1995    %
-------------------------------------------------------------------------------
(In millions of dollars)
<S>                            <C>    <C>     <C>     <C>
U.S. government and affiliated
  securities                   $13,679 46.4%  $11,623 42.0%   $18,905 62.3%
Other AAA rated                  8,801 29.9     9,277 33.5      4,625 15.3
AA and A rated                   3,796 12.9     3,786 13.7      3,512 11.6
BBB rated                        1,695  5.8     1,387  5.0      1,424  4.7
Below investment grade           1,480  5.0     1,582  5.8      1,862  6.1
-------------------------------------------------------------------------------
          Total                $29,451  100%  $27,655 100%    $30,328 100%
-------------------------------------------------------------------------------
</TABLE>
The  following  table  summarizes  the  ratings of CNA's  guaranteed  investment
contract  separate  account  fixed  maturity  bond  portfolio at carrying  value
(market):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
December 31                       1997     %     1996   %        1995    %
-------------------------------------------------------------------------------
(In millions of dollars)
<S>                           <C>      <C>     <C>      <C>  <C>
U.S. government and affiliated
  securities                   $   148  3.9%   $  192  5.0%   $ 1,743 36.4%
Other AAA rated                  2,401 62.6     2,279 59.0        828 17.3
AA and A rated                     569 14.8       723 18.7        914 19.1
BBB rated                          406 10.6       345  8.9        361  7.5
Below investment grade             310  8.1       324  8.4        944 19.7
-------------------------------------------------------------------------------
          Total                $ 3,834 100%    $3,863 100%    $ 4,790 100%
-------------------------------------------------------------------------------
</TABLE>
<PAGE>

At year end 1997, 1996 and 1995,  respectively,  89.8%,  92.0% and 93.0% of
the general account portfolio and 82.1%,  85.7% and 95.0% of the guaranteed
investment  contract  portfolio,  in the table  above,  were rated by major
independent rating agencies. High yield securities are bonds rated as below
investment  grade by bond  rating  agencies  and other  unrated  securities
which,  in the opinion of  management,  are below  investment  grade (below
BBB). High yield securities generally involve a


                               CNA FINANCIAL CORPORATION
                           -------------------------
                                       27


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                              Investments (cont.)

greater degree of risk than that of investment grade  securities.  Expected
returns  should,  however,  compensate for the added risk. The risk is also
considered in the interest rate  assumptions  in the  underlying  insurance
products.  CNA's  concentration  in high  yield  bonds  including  Separate
Account business was approximately  3.2% of total assets as of December 31,
1997 and 1996, respectively.

Included in CNA's fixed  maturity  securities  at December 31, 1997 (general and
guaranteed  investment  contract  portfolios)  are $7.2 billion of  asset-backed
securities,  consisting of approximately 11.2% in U.S. government agency issued
pass-through certificates,  40.0% in collateralized mortgage obligations (CMOs),
29.8%  in   corporate   asset-backed   obligations   and   19.0%  in   corporate
mortgage-backed  pass-through  certificates.  The  majority  of  CMOs  held  are
actively traded in liquid markets and are priced by broker-dealers.

CMOs are subject to prepayment  risks that tend to vary with changes in interest
rates.  During periods of declining interest rates, CMOs generally prepay faster
as the underlying mortgages are prepaid and refinanced by the borrowers in order
to take  advantage  of the lower  rates.  Conversely,  during  periods of rising
interest  rates,  prepayments  generally  slow which may result in a decrease in
yield or a loss as a result of the  slower  prepayments.  CNA  limits the risks
associated with interest rate  fluctuations and prepayments by concentrating its
CMO investments in planned  amortization classes with relatively short principal
repayment  windows.  CNA  avoids  investments  in complex  mortgage  derivatives
without  readily  ascertainable  market  prices.  At December 31, 1997, the fair
value  of  asset-backed  securities  was  greater  than  the  amortized  cost by
approximately  $114 million,  compared to net unrealized losses of approximately
$5 million at December 31, 1996.

At December 31, 1997 and 1996,  short-term  investments  primarily  consisted of
U.S.  Treasury  bills and  commercial  paper.  The  components of the short-term
investment portfolio were as follows:

SHORT-TERM INVESTMENTS
-----------------------------------------------
December 31                      1997      1996
-----------------------------------------------
(In millions of dollars)
Commercial paper                $1,850   $3,207
U.S. Treasuries in escrow*       1,065    1,062
Money markets                      624      746
U.S. Treasuries                    558       56
Security repurchase collateral     154      101
Other                              633      682
-----------------------------------------------
Total short-term investments    $4,884   $5,854
===============================================
*See Note A to the Consolidated Financial Statements

CNA  invests  from  time to time in  certain  derivative  financial  instruments
primarily  to reduce its  exposure to market risk  (principally  interest  rate,
equity price and foreign  currency risk).  CNA also uses derivatives to mitigate
the risk  associated  with its indexed group annuity  contract by purchasing S&P
500  futures  contracts  in a notional  amount  equal to the  original  customer
deposit.

<PAGE>

CNA considers  its  derivatives  as being held for purposes  other than trading.
Derivative  securities,  except for interest rate swaps  associated with certain
corporate  borrowings,  are  recorded at fair value at the  reporting  date with
changes in market value reflected in realized gains and losses. The interest
rate swaps on corporate  borrowings are accounted for using accrual  accounting
with the related income or expense  recorded as an  adjustment to interest
expense; the  changes  in fair  value are not  recorded.  See Note C of the
Consolidated Financial Statements for further information regarding derivatives.

                           CNA FINANCIAL CORPORATION
                          -------------------------
                                       28


<PAGE>
--------------------------------------------------------------------------------
                              Investments (cont.)

CNA's general account investments in bonds and redeemable  preferred stocks were
carried at their fair value of $29.5 billion at December 31, 1997, compared with
$27.7  billion  at  December  31,  1996.  At  December  31,  1997 and 1996,  net
unrealized gains on fixed maturity  securities  amounted to  approximately  $528
million and $181 million,  respectively.  The gross  unrealized gains and losses
for the fixed  maturity  securities  portfolio  at  December  31, 1997 were $644
million  and $116  million,  respectively,  compared  to $444  million  and $263
million, respectively, at December 31, 1996.

Net unrealized  gains on general account bonds include net unrealized  losses on
high yield  securities of $2 million and gains of $34 million,  at December 31,
1997 and 1996,  respectively.  Carrying  values of high yield  securities in the
general  account  were $1.5  billion and $1.6  billion at December  31, 1997 and
1996,  respectively.

At  December  31, 1997,  fixed  maturity  securities  in the guaranteed
investment contract portfolio are carried at fair value and amounted to $3.8
billion.  At December 31, 1997, net  unrealized  gains on fixed maturity
securities in these Separate  Accounts  amounted to  approximately  $71 million.
This compares to $1 million in net  unrealized  losses at December 31, 1996. The
gross unrealized gains and losses for the fixed maturity securities portfolio at
December 31, 1997, were $87 million and $16 million,  respectively,  compared to
$55 million and $56 million, respectively, at December 31, 1996.

At  December  31,  1997,  high yield  securities  in the  guaranteed  investment
contract  portfolio  which are carried at fair value  amounted to $310  million,
compared to $324  million at December 31, 1996.  Net  unrealized  losses on high
yield  securities held in such Separate  Accounts were $1 million and $8 million
at December 31, 1997 and 1996, respectively.


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       29

<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
                               Market Risk

Market Risk:
------------

The Securities and Exchange Commission (SEC) issued new disclosure rules related
to economic exposure to market risk from financial instruments.

Market risk is a broad term related to economic losses due to adverse changes in
the  fair  value of a  financial  instrument.  Market  risk is  inherent  to all
financial instruments,  and accordingly,  the Company's risk management policies
and procedures include all market risk sensitive financial instruments.

The SEC's  market risk rule  focuses on only one  element of market  risk--price
risk.  Price  risk  relates  to changes in the level of prices due to changes in
interest  rates,  equity  prices,  foreign  exchange rates or other factors that
relate to  market  volatility  of the  rate,  index,  or price  underlying  the
financial instrument. The Company's primary market risk exposures are to changes
in interest  rates,  although  the Company has certain  exposures  to changes in
equity prices and foreign currency exchange rates.

Active management of market risk is integral to the Company's operations. The
Company may use the following tools to manage its exposure to market risk within
defined tolerance ranges: 1) change the character of future investments
purchased or sold, 2) use derivatives to offset the market behavior of existing
assets and liabilities or assets expected to be purchased and liabilities to be
incurred, or 3) rebalance its existing asset and liability portfolios.

For purposes of this disclosure  market risk sensitive  instruments are divided
into  two  categories:   instruments  entered  into  for  trading  purposes  and
instruments  entered into for purposes other than trading.  The Company's market
risk  sensitive  instruments  presented  in the  tables  on  pages 32 and 33 are
classified  as held for  purposes  other  than  trading.  The  Company  does not
generally hold or issue derivatives for trading purposes.

Interest Rate Risk

The Company has  exposure to economic  losses due to interest  rate risk arising
from changes in the level or volatility of interest rates.  The Company attempts
to  mitigate  its  exposure  to  interest  rate risk  through  active  portfolio
management. The Company may also reduce this risk by utilizing instruments such
as interest rate swaps, interest rate caps,  commitments to purchase securities,
options,  futures and forwards. This exposure is also mitigated by the Company's
asset/liability matching strategy.

Equity Price Risk

The  Company is exposed to equity  price risk as a result of its  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  which  derive their value from such  securities  or
indexes.  CNA  attempts to mitigate  its  exposure to such risks by limiting its
investment in any one security or index.


<PAGE>

Foreign Exchange Risk

Foreign  exchange  risk  arises  from the  possibility  that  changes in foreign
currency  exchange  rates will impact the value of  financial  instruments.  The
Company has foreign exchange  exposure when it buys or sells foreign  currencies
or financial  instruments  denominated  in a foreign  currency.  The  Company's
foreign  transactions  are primarily  denominated in Canadian  Dollars,  British
Pounds,  Deutsche  Marks,  and Japanese  Yen.  This exposure is mitigated by the
Company's  asset/liability  matching strategy and through the use of fowards for
those instruments which are not matched.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       30

<PAGE>
--------------------------------------------------------------------------------
                              Market Risk (cont.)

Sensitivity Analysis

CNA monitors its  sensitivity  to interest rate risk by evaluating the change in
its financial assets and liabilities relative to fluctuations in interest rates.
The  evaluation  is made  using an  instantaneous  change in  interest  rates of
varying  magnitudes  on a static  balance  sheet to determine  the effect such a
change  in  rates  would  have on the  Company's  market  value  at risk and the
resulting effect on stockholders'  equity. The analysis presents the sensitivity
of the market value of the Company's  financial  instruments to selected changes
in market rates and prices.  The range of changes chosen  reflects the Company's
view of  changes  which are  reasonably  possible  over a one-year  period.  The
selection of the range of values chosen to represent  changes in interest  rates
should not be construed as the Company's  prediction  of future market  events,
but rather an illustration of the impact of such events.

The  analysis  assumes  that the  composition  of the  Company's  interest  rate
sensitive assets and liabilities existing at the beginning of the period remains
constant  over the period  being  measured  and also  assumes  that a particular
change  in  interest  rates  is  reflected  uniformly  across  the  yield  curve
regardless of the time to maturity. Also, 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 the Company's income or stockholders' equity.  Further,
the  computations do not contemplate any actions CNA would undertake in response
to changes in interest rates.

The  sensitivity  analysis  assumes an  instantaneous  shift in market  interest
rates,  with scenarios of interest  rates  increasing and decreasing 100 and 150
basis  points from their  levels at December  31, 1997 with all other  variables
held constant. A 100 and 150 basis point increase in market interest rates would
result in a pre-tax  decrease in the net financial  instrument  position of $1.6
billion and $2.4  billion,  respectively.  Similarly,  a 100 and 150 basis point
decrease in market interest rates would result in a pre-tax  increase in the net
financial instrument position of $1.6 billion and $2.4 billion, respectively.

The Company's  long-term  debt,  including  certain  related  interest rate swap
agreements,   as  of  December  31,  1997,  is  denominated  in  U.S.   dollars.
Approximately  91% of  the  Company's  long-term  debt  has  been  issued  at or
effectively converted to fixed rates, and as such, interest expense would not be
impacted  by  interest  rate  shifts.  The  impact of a 100 and 150 basis  point
increase in interest  rates on the fixed rate debt would result in a decrease in
the market  value of the debt by $117 million and $176  million,  respectively.
The  impact of a 100 and 150  basis  point  increase  in  interest  rates on the
variable  rate debt would  result in an  additional  $3 million  and $4 million,
respectively,  in interest  expense per year. A 100 and 150 basis point decrease
in interest  rates would  lower  interest  expense by $3 million and $4 million,
respectively, per year.

Equity price risk was measured  assuming an instantaneous  10% and 25% change in
the Standard & Poor's 500 Index (the Index) from its level of December 31, 1997,
with all other  variables  held constant.  The Company's  equity  holdings were
assumed to be perfectly  correlated  with this Index.  A 10% and 25% decrease in
the Index would result in a $179 million and $448 million decrease,
respectively, in the net financial instrument position. Of these amounts, $66
million and $166 million,  respectively  would be offset by decreases in
liabilities to customers under variable annuity contracts. Similarly, increases


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       31
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                              Market Risk (cont.)

in the Index would result in like  increases in the net  financial  instrument
position and  increases in liabilities to customers variable annuity contracts.

The sensitivity  analysis also assumes an  instantaneous  10% and 20% change in
the foreign currency  exchange rates versus the U.S. dollar from their levels at
December  31,  1997,  with all  other  variables  held  constant.  A 10% and 20%
strengthening  of the U.S.  dollar  versus  other  currencies  would  result  in
decreases  of $48  million  and  $96 million, respectively, in the net financial
instrument position.  Weakening of the U.S. dollar versus all other currencies
would result in like increases in the net financial instrument position.

The following  table  reflects the estimated  effects on the market value of the
Company's  financial  instruments  due to an increase in interest  rates of 100
basis  points,  a 10%  decline  in the S&P 500  index,  and a decline  of 10% in
foreign currency exchange rates.

HELD FOR OTHER THAN TRADING PURPOSES
-------------------------------------------------------------------------------
December 31, 1997             Market      Interest      Currency     Equity
                               Value     Rate Risk        Risk        Risk
-------------------------------------------------------------------------------
(In millions of dollars)

General Account:
  Fixed maturity securities  $29,548      $(1,409)       $(20)       $(10)
  Equity securities              814            -          (7)        (81)
  Short term investments       4,884          (11)        (21)          -
  Interest rate swaps             (4)          20           -           -
------------------------------------------------------------------------------
    Total general account     35,242       (1,400)        (48)        (91)
------------------------------------------------------------------------------

Separate Accounts
  Fixed maturity securities    4,769         (190)          -          (1)
  Equity securities              206            -           -         (21)
  Short term investments         629           (1)          -           -
   Equity index futures            -            1           -         (66)
   Other derivative securities     -           (3)          -           -
------------------------------------------------------------------------------
     Total separate accounts   5,604         (193)          -         (88)
==============================================================================
     Total all securities    $40,846      $(1,593)       $(48)       $(179)
==============================================================================
Long term debt               $(2,897)     $   117        $  -        $   -
==============================================================================


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       32

<PAGE>

-------------------------------------------------------------------------------
                              Market Risk (cont.)

The following  table  reflects the estimated  effects on the market value of the
Company's  financial  instruments  due to an increase  in interest  rates of 150
basis  points,  a 25%  decline  in the S&P 500  index,  and a decline  of 20% in
foreign currency exchange rates.


HELD FOR OTHER THAN TRADING PURPOSES
------------------------------------------------------------------------------
                              Market      Interest    Currency     Equity
                               Value     Rate Risk      Risk        Risk
------------------------------------------------------------------------------
(In millions of dollars)

General Account
  Fixed maturity securities   $29,548    $(2,113)     $  (39)    $   (24)
  Equity securities               814          -         (14)       (204)
  Short term investments        4,884        (17)        (43)          -
  Interest rate swaps              (4)        30           -           -
------------------------------------------------------------------------------
     Total general account     35,242     (2,100)        (96)       (228)
------------------------------------------------------------------------------

Separate Accounts
  Fixed maturity securities     4,769       (285)          -          (3)
  Equity securities               206          -           -         (51)
  Short term investments          629         (1)          -           -
   Equity index futures             -          2           -        (166)
   Other derivative securities      -         (5)          -           -
-----------------------------------------------------------------------------
    Total separate accounts     5,604       (289)          -        (220)
==============================================================================
    Total all securities      $40,846    $(2,389)     $  (96)    $  (448)
==============================================================================

Long term debt                $(2,897)   $   176      $    -     $     -
==============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       33
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
                            Risks and Uncertainties

Risks and Uncertainties:
------------------------
The  following  section  discusses  other risks and  uncertainties  to which the
Company is subject.

Credit Risk

Credit risk arises from the potential  inability of counterparties to perform on
an  obligation  in  accordance  with the terms of a contract.  CNA is exposed to
credit risk in its  capacity  as a  counterparty  in  financial  and  insurance
contracts,  reinsurance arrangements, and as a holder of securities. The company
accepts risk whenever a  counterparty  is obligated to perform under a contract.
As a holder of  securities,  CNA is  exposed  to default by the issuer or to the
possibility of market price deterioration.  As a purchaser of reinsurance,  CNA
has exposure that a reinsurer may not be able to reimburse the Company under the
terms of a reinsurance  agreement.  CNA has established policies and procedures
to manage credit risk,  including collateral  requirements,  and master "netting
arrangements".

Legal/Regulatory Risk

Legal/regulatory  risk is the risk  that  changes  in the  legal  or  regulatory
environment in which the Company  operates will create  additional  expenses not
anticipated by the Company in pricing its products.  Regulatory initiatives, tax
law changes,  new legal  theories or insurance  company  insolvencies,  through
guaranty  fund  assessments,  may  create  costs for the  insurer  beyond  those
currently recorded in the consolidated financial statements.  CNA mitigates this
risk by offering a wide range of products and by operating throughout the United
States,  thus reducing its exposure to any single product or region, and also by
employing  underwriting practices which identify and minimize the adverse impact
of this risk.

Impact of Year 2000

The  widespread  use of  computer  programs,  both  in  the  United  States  and
internationally,  that rely on two digit date fields to perform computations and
decision  making  functions  may cause  computer  systems  to  malfunction  when
processing  information involving dates after 1999. Such malfunctions could lead
to business delays and  disruptions.  The Company is in the process of replacing
many of its legacy systems and is upgrading its systems to accommodate  business
for the year 2000 and beyond. The Company believes that it is on plan to resolve
the year 2000 issue in a timely manner.  Based upon its current assessment,  the
Company  estimates that the incremental cost to replace and upgrade its systems
to accommodate year 2000 processing will be approximately $50 million.  However,
due to the  interdependent  nature  of  computer  systems,  the  Company  may be
adversely  impacted  depending  upon whether it or other entities not affiliated
with  the  Company   (vendors   and  business   partners)   address  this  issue
successfully.  To mitigate this impact,  the Company is communicating  with its
vendors and business partners to coordinate the year 2000 conversion.

In addition,  property/casualty  insurance  companies may have an  underwriting
exposure related to year 2000.  Although the Company has not received any claims
for coverage from its  policyholders  based on losses  resulting from year 2000
issues,  there can be no assurance that policyholders will not suffer losses of
this type and seek compensation under the Company's insurance  policies.  If any
claims are made, coverage, if any, will depend on the facts and circumstances of
the claim and the provisions of the policy.  At this time, the Company is unable
to  determine  whether  the  adverse  impact,  if any,  in  connection  with the
foregoing circumstances would be material to the Company.
                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       34
<PAGE>
-------------------------------------------------------------------------------
                         LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources:
-------------------------------
The  liquidity  requirements  of CNA  have  been  met by  funds  generated  from
operating,  investing and financing  activities.  In early 1998, CNA was able to
take  advantage of favorable  market  conditions to  refinance,  on a fixed rate
basis,  a portion of its  existing  debt under the  Company's  revolving  credit
facility.  Additionally,  CNA  expects  to take  advantage  of the  current  low
interest rate  environment to raise additional  capital to support new business
initiatives in 1998.

The principal  cash flow sources of CNA's  property/casualty  and life insurance
subsidiaries  are  premiums,  investment  income,  and sales and  maturities  of
investments.  The  primary  operating  cash flow uses are  payments  for claims,
policy benefits and operating expenses.

Net cash flows from operations are primarily invested in marketable  securities.
Investment strategies employed by CNA's insurance subsidiaries consider the cash
flow requirements of the insurance  products sold and the tax attributes of the
various types of marketable investments.

For the year ended December 31, 1997, CNA's operating cash flows were a negative
$193 million, compared to positive $620 million in 1996, and $875 million in
1995.

As discussed  previously,  the Company had  substantially  lower  operating cash
flow,  primarily due to claim payments made resulting from the settlement of the
Fibreboard  litigation.  The  cash  flow  impact  of  such  claim  payments  was
approximately  $1  billion  in 1997 (see Note F of the  Consolidated  Financial
Statements).

To  finance  the  acquisition  of  The  Continental  Corporation  (Continental),
including the refinancing of $205 million of Continental debt, CNA entered into
a $1.325  billion  revolving  credit  facility  which expires in May 2001. The
interest  rate for the facility is based on the one,  two,  three,  or six month
London Interbank Offered Rate (LIBOR), plus 16 basis points. Additionally, there
is a facility fee of 9 basis points  annually.  The average interest rate on the
borrowings under the revolver was 6.16% and 5.72% at December 31, 1997 and 1996,
respectively.  Under the terms of the facility,  CNA may prepay the debt without
penalty,  giving  CNA  flexibility  to  arrange  longer-term  financing  on more
favorable terms.

In 1997, CNA filed a Registration  Statement on Form S-3 with the Securities and
Exchange  Commission  relating to $1 billion in senior and subordinated debt and
preferred  stock that  became  effective  on October  22,  1997.  This new shelf
registration  incorporated  $250 million of securities  remaining  available for
issuance from a prior shelf registration. On January 8, 1998, the Company issued
$150  million  principal  amount of 6.45%  senior notes due January 15, 2008 and
$150 million  principal  amount of 6.95% senior notes due January 15, 2018.  The
net  proceeds  were  used to pay down  bank  loans  drawn  under  the  Company's
revolving  credit  facility.  Concurrent  with the  reduction in bank debt,  the
Company  terminated  $300 million  notional  amount of interest rate swaps. As a
result of this  additional  debt  issuance,  the  borrowing  capacity  under the
revolving credit facility was reduced.

On March 2, 1998 CNA paid at the due date $150  million of 8 7/8%  senior  notes
with funds drawn against the revolving credit facility. On November 15, 1996,
CNA issued $250 million,  6.75% Senior Notes, due November 15, 2006. The net
proceeds from this issuance of approximately $248 million were used  to pay down
a  portion  of the  borrowings  under  the  revolving  credit facility.
                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       35
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
                    Liquidity and Capital Resources (cont.)

As a result of this debt  issuance,  the borrowing  capacity under the revolving
credit facility was reduced by $250 million to $1.075 billion.

On March 1, 1996, CNA paid at the due date $250 million of 8 5/8% senior notes.

In 1995, CNA entered into five year interest rate swap  agreements  with several
banks.  These  agreements  convert  variable  rate  debt  into  fixed  rate debt
resulting in fixed rates on notional  amounts of $1.2 billion as of December 31,
1995. In conjunction  with the pay down of $250 million of the revolving  credit
facility,  the  Company  terminated  swaps  with a like  notional  amount.  The
weighted-average fixed swap rate was 6.20% at December 31, 1997 and 1996.

The effect of these  interest  rate swaps was to  increase  interest  expense by
approximately $4 million, $7 million and $2 million for the years ended December
31, 1997, 1996 and 1995, respectively.

During 1995, to take advantage of favorable  interest  rates,  CNA established a
commercial  paper program,  borrowing from investors and replacing a like amount
of bank  financing.  As of December  31,  1997 and 1996,  the  commercial  paper
program borrowing totaled $675 million.  The  weighted-average  interest rate on
commercial   paper  was  6.05%  and  5.67%  at  December   31,  1997  and  1996,
respectively.  The commercial paper  borrowings are classified as long-term,  as
borrowing  capacity  under  the  revolving  credit  facility  will  support  the
commercial  paper  program  (at  an  undrawn  cost  of  9  basis  points).   The
weighted-average  interest rate  (interest  and facility  fees) on the revolving
credit facility, commercial paper and the effect of the interest rate swaps, was
6.35% and 6.28% at December 31, 1997 and 1996, respectively.

As of December  31,  1997,  the  outstanding  loans under the  revolving  credit
facility were $400 million.  There was no unused  borrowing  capacity  under the
facility after the effects of the commercial paper program as described above.

The table below  reflects  ratings  issued by A.M.  Best,  Standard  and Poor's,
Moody's  and  Duff  &  Phelps  for  CNA's  Continental  Casualty  Company  (CCC)
Intercompany  Pool,  Continental  Insurance Company (CIC)  Intercompany Pool and
Continental  Assurance  Company  (CAC)  Intercompany  Pool.  Also rated were the
senior debt of CNA and Continental and CNA's preferred stock.
<TABLE>
<CAPTION>
|-----------------|=====================||---------------------------------------|
|                 |  INSURANCE RATINGS  ||         DEBT AND STOCK RATINGS        |
|                 |=====================||---------------------------------------|
|                 |   Financial Strength||      | CNA      |         |Continental|
                  ---------------------------------------------------------------
|                 | CAC |   CAC  | CIC  ||Senior|Commercial|Preferred| Senior    |
|                 |     |        |      || Debt | Paper    |  Stock  |  Debt     |
|                 |-----|--------|------||------|----------|---------|-----------|
<S>               <C>   <C>     <C>     <C>    <C>        <C>       <C>
|A.M. Best        | A   |    A   |  A-  ||  -   |   -      |    -    |   -       |
|Moody's          | A1  |    A1* |  A2  ||  A3  |   P2     |    a3   |   Baa1    |
|                 |-----|--------|------||      |          |         |           |
|                 |Claims Paying Ability||      |          |         |           |
|                 |=====================||      |          |         |           |
|Standard & Poor's| A+  |    AA- |  A-  ||  A-  |   A2     |    A-   |   BBB-    |
|Duff & Phelps    | AA- |    AA  |  -   ||  A-  |   -      |    A-   |    -      |
|-----------------|=====================||------|----------|---------|-----------|
*Applies to Continental Assurance Company only.
</TABLE>

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       36

<PAGE>
-------------------------------------------------------------------------------
                              Accounting Standards

Accounting Standards:
--------------------

Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities

In June 1996, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing  of  Financial  Assets  and  Extinguishments  of  Liabilities".   This
Statement provides  standards for  distinguishing  transfers of financial assets
that are sales from  transfers that are secured  borrowings.  This Statement has
been  amended and is now  effective  for  transfers  and  servicing of financial
assets and  extinguishment  of liabilities  occurring after December 31, 1996 or
1997, depending on the type of transaction.  This Statement has not and will not
have a significant impact on CNA.

Reporting Comprehensive Income

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income",
which establishes  accounting   standards   for  reporting  and  display  of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose  financial statements.  This Statement requires
that an enterprise  (a) classify  items of other  comprehensive  income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive  income separately from retained  earnings and additional  paid-in
capital in the  equity  section  of a  statement  of  financial  position.  This
Statement is effective for fiscal years beginning after December 15, 1997. This
Statement  is  not  expected  to  result  in  a  significant   change  in  CNA's
disclosures.

Disclosures About Segments of An Enterprise and Related Information

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information",  which  establishes  standards for the way
that public business  enterprises report information about operating segments in
interim and annual  financial  statements.  It requires  that those  enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items, and segment assets, and that the enterprises reconcile the total of those
amounts  to  the  general-purpose  financial  statements.  It  also  establishes
standards for related disclosures about products and services,  geographic areas
and major  customers.  This Statement is effective for financial  statements for
periods  beginning  after  December 15, 1997.  CNA is currently  evaluating  the
effect of this statement on its business segment disclosure.

Accounting by Insurance and Other Enterprises for Insurance-Related Assessments

In December  1997,  the  American  Institute of  Certified  Public  Accountants'
Accounting  Standards  Executive  Committee  issued  Statement of Position (SOP)
97-3,  "Accounting  by Insurance  and Other  Enterprises  for  Insurance-Related
Assessments", which provides guidance on accounting by entities that are subject
to  insurance-related  assessments.   It  requires  that  entities  recognize
liabilities  for  insurance-related  assessments  when  all  of  the  following
criteria have been met: an assessment has been imposed or a probable  assessment
will be imposed;  the event  obligating  an entity to pay an imposed or probable
assessment has occurred on or before the date of the financial  statements;  and
the amount of the assessment can be reasonably estimated. This SOP is effective

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       37
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                          Accounting Standards (cont.)


for financial statements for fiscal years beginning after December 15, 1998. CNA
is  currently  evaluating  the  effects  of  this  SOP  on  its  accounting  for
insurance-related assessments.

Employers' Disclosures about Pensions and Other Postretirement Benefits

In February 1998, the FASB issued SFAS No. 132,  "Employers'  Disclosures  about
Pensions  and Other  Postretirement  Benefits",  which  standardizes  disclosure
requirements  for  pension  and  other  postretirement  benefits  to the  extent
practicable  and  requires  additional  information  on changes  in the  benefit
obligations  and fair  values  of plan  assets  that will  facilitate  financial
analysis.  The Statement  also suggests  combined  formats for  presentation  of
pension and other  postretirement  benefit  disclosures.  The Statement  changes
disclosure  only  and  does  not  address  measurement  or  recognition.  It is
effective for fiscal years  beginning after December 15, 1997. CNA is currently
evaluating the effects of this Statement on its benefit plan disclosures.


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       38

<PAGE>
-------------------------------------------------------------------------------
                           Forward-Looking Statements




Forward-Looking Statements:
---------------------------

When included in  management's  discussion and analysis,  the words  "believes",
"expects", "intends", "anticipates",  "estimates", and analogous expressions are
intended to identify forward-looking  statements. Such statements inherently are
subject to a variety of risks and uncertainties  that could cause actual results
to differ materially from those projected. Such risks and uncertainties include,
among others, general economic and business conditions,  competition, changes in
financial markets  (interest rate,  credit,  currency,  commodities and stocks),
changes in  foreign,  political,  social and  economic  conditions,  regulatory
initiatives and compliance with governmental regulations, judicial decisions and
rulings,  and  various  other  matters,  many of which are beyond the  Company's
control.  See the Company's  discussions  elsewhere in this report on how these
various risks may affect CNA. These forward-looking  statements speak only as of
the date of this Report.  The Company  expressly  disclaims  any  obligation  or
undertaking to release publicly any updates or revisions to any  forward-looking
state-ment contained herein to reflect any change in the Company's  expectations
with regard  thereto or any change in events,  conditions or  circumstances  on
which any statement is based.




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       39

<PAGE>
                       CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

ASSETS
--------------------------------------------------------------------------------------------------
December 31                                                        1997               1996
--------------------------------------------------------------------------------------------------
(In millions of dollars)
Investments:
<S>                                                             <C>                <C>
   Fixed maturities available for sale
      (cost: $29,020 and $27,540)                                $29,548            $27,721
   Equity securities available for sale
     (cost: $695 and $702)                                           814                859
   Mortgage loans and real estate (less accumulated
     depreciation: $1 and $4)                                         85                123
   Policy loans                                                      177                174
   Other invested assets                                             695                681
   Short-term investments                                          4,884              5,854
--------------------------------------------------------------------------------------------------
         TOTAL INVESTMENTS                                        36,203             35,412
--------------------------------------------------------------------------------------------------
Cash                                                                 383                257
Receivables:
   Reinsurance                                                     5,726              6,530
   Insurance                                                       6,086              5,888
   Other trade                                                       248                192
   Less allowance for doubtful accounts                             (303)              (277)
Deferred acquisition costs                                         2,142              1,854
Accrued investment income                                            389                508
Receivables for securities sold                                      744                264
Federal income taxes recoverable (includes $26
  and $151 due from Loews)                                            18                134
Deferred income taxes                                              1,070              1,347
Property and equipment at cost
   (less accumulated depreciation: $553 and $436)                    747                645
Prepaid reinsurance premiums                                         202                295
Intangibles                                                          620                418
Other assets                                                       1,182                867
Separate Account business                                          5,812              6,121
--------------------------------------------------------------------------------------------------
         TOTAL ASSETS                                            $61,269            $60,455
==================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>


                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       40
<PAGE>

--------------------------------------------------------------------------------
                       CONSOLIDATED BALANCE SHEET (cont.)



<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------
December 31                                                        1997               1996
--------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                              <C>               <C>
Liabilities:
   Insurance reserves:
      Claim and claim expense                                    $29,227            $30,395
      Unearned premiums                                            4,700              4,659
      Future policy benefits                                       4,829              4,181
      Policyholders' funds                                           742                746
      Securities sold under repurchase agreements                    153                100
      Payables for securities purchased                              648                405
      Participating policyholders' equity                            132                119
      Long-term debt                                               2,897              2,765
      Other liabilities                                            3,820              3,904
      Separate Account business                                    5,812              6,121
--------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                          52,960             53,395
--------------------------------------------------------------------------------------------------
Commitments and contingent liabilities-Notes E, F and G

Stockholders'equity:
   Common stock $2.50 par value;
     Authorized - 200,000,000 shares;
     Issued - 61,841,969 shares;
     Outstanding - 61,798,262 shares;                                 155               155
   Money market cumulative preferred stock                            150               150
   Additional paid-in capital                                         435               435
   Retained earnings                                                6,983             6,024
   Net unrealized investment gains                                    589               299
   Treasury stock, at cost                                             (3)               (3)
--------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                   8,309             7,060
--------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $61,269           $60,455
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>



                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       41
<PAGE>

                        CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                      STATEMENT OF CONSOLIDATED OPERATIONS





<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Year Ended December  31                                   1997           199+           1995
--------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
<S>                                                   <C>           <C>              <C>
Revenues:
  Premiums                                             $13,362       $13,479          $11,735
  Net investment income                                  2,209         2,276            2,077
  Realized investment gains                                753           619              464
  Other                                                    748           614              424
--------------------------------------------------------------------------------------------------
                                                        17,072        16,988           14,700
--------------------------------------------------------------------------------------------------
Benefits and expenses:
  Insurance claims and
    policyholders' benefits                             11,268        11,371            9,952
  Amortization of deferred acquisition costs             2,383         2,192            1,844
  Other operating expenses                               1,865         1,880            1,680
  Interest expense                                         198           200              182
--------------------------------------------------------------------------------------------------
                                                        15,714        15,643           13,658
--------------------------------------------------------------------------------------------------
      Income before income tax                           1,358         1,345            1,042
Income tax expense                                         392           380              285
--------------------------------------------------------------------------------------------------
      NET INCOME                                       $   966       $   965          $   757
--------------------------------------------------------------------------------------------------
EARNINGS PER SHARE                                     $ 15.52       $ 15.51          $ 12.14
==================================================================================================
WEIGHTED AVERAGE OUTSTANDING SHARES
   OF COMMON STOCK                                        61.8          61.8             61.8
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>

                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       42
<PAGE>

--------------------------------------------------------------------------------
                 STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------
                                                                                           Net
                                                                                        Unrealized
                                                            Additional                  Investment
                            Common      Preferred  Treasury  Paid-In      Retained        Gains
                             Stock        Stock      Stock   Captital     Earnings       (Losses)  Total
------------------------------------------------------------------------------------------------------------
In millions of dollars)
<S>                         <C>         <C>       <C>        <C>          <C>          <C>       <C>
Balance,
January 1, 1995              $155        $150     $(3)        $435         $4,316       $ (507)   $4,546
  Net income                   -           -        -           -             757           -        757
  Change in net unrealized
    gains/(losses)             -           -        -           -              -         1,440     1,440
  Preferred dividends          -           -        -           -              (7)          -         (7)
----------------------------------------------------------------------------------------------------------
Balance
December 31, 1995            $155        $150     $(3)        $435         $5,066       $  933    $6,736
  Net income                   -           -        -           -             965           -        965
  Change in net unrealized
     gains/(losses)            -           -        -           -              -          (634)     (634)
  Preferred dividends          -           -        -           -              (7)          -         (7)
----------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996            $155        $150     $(3)        $435         $6,024       $  299    $7,060
  Net income                   -           -        -           -             966           -        966
  Change in net unrealized
    gains/(losses)             -           -        -           -              -           290       290
  Preferred dividends          -           -        -           -              (7)          -         (7)
----------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1997            $155        $150     $(3)        $435         $6,983       $  589    $8,309
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>


                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       43
<PAGE>

                        CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                      STATEMENT OF CONSOLIDATED CASH FLOWS



<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended December 31                                         1997           1996        1995
------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                          <C>            <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
Net income                                                   $  966          $ 965       $ 757
                                                              ----------------------------------
Adjustments to reconcile net income to
 net cash flows from operating activities:
  Net realized investment gains, pre-tax                       (753)          (619)       (464)
  Amortization of intangibles                                    30             25          19
  Amortization of bond discount                                (100)          (178)       (143)
  Depreciation                                                  158            138         101
  Changes in:
    Receivables, net                                            576             84        (803)
    Deferred acquisition costs                                 (288)          (361)       (161)
    Accrued investment income                                   119             38         (30)
    Federal income taxes                                        116             (1)        (39)
    Deferred income taxes                                       146            353         221
    Prepaid reinsurance premiums                                 93            200         130
    Insurance reserves                                         (464)          (358)        427
    Other liabilites                                           (566)           790         974
    Other, net                                                 (226)          (456)       (114)
------------------------------------------------------------------------------------------------
      Total adjustments                                      (1,159)          (345)        118
------------------------------------------------------------------------------------------------
      NET CASH FLOWS FROM
        OPERATING ACTIVITIES                                 $ (193)         $ 620       $ 875
------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>



                            CNA FINANCIAL CORPORATION
                            ------------------------
                                       44
<PAGE>
--------------------------------------------------------------------------------
                     Statement of Consolidated Cash Flows (Cont.)




<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended December 31                                        1997          1996         1995
------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                         <C>          <C>         <C>

CASH FLOWS FROM INVESTING ACTIVITIES:
--------------------------------------

Purchases of fixed maturities                                $(42,492)    $(34,312)   $(29,255)
Proceeds from fixed maturities:
   Sales                                                       38,429       34,864      24,065
   Maturities, calls and redemptions                            2,997        1,796       2,855
Purchases of equity securities                                 (1,319)        (972)     (1,094)
Proceeds from sale of equity securities                         1,406        1,077       1,317
Change in short-term investments                                1,112       (2,029)      2,942
Purchases of property and equipment                              (280)        (205)       (126)
Change in securities sold under repurchase agreements              53         (674)     (1,705)
Change in other investments                                       421          146         158
Purchase of The Continental Corporation, net of cash acquired      -            -         (961)
Other acquisitions, net                                          (108)          -          (72)
Other, net                                                         (7)          21         (39)
------------------------------------------------------------------------------------------------
         NET CASH FLOWS FROM INVESTING ACTIVITIES                 212         (288)     (1,915)
------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------

Dividends paid to preferred shareholders                           (6)          (6)         (7)
Receipts from investment contracts credited
  to policyholder account balances                                  7           11          23
Return of policyholder account
  balances on investment contracts                                (26)         (41)        (34)
Change in short-term debt                                          -          (257)          3
Principal payments on long-term debt                               (5)        (254)       (208)
Proceeds from issuance of long-term debt                          137          250       1,337
------------------------------------------------------------------------------------------------
        NET CASH FLOWS FROM FINANCING ACTIVITIES                  107         (297)      1,114
------------------------------------------------------------------------------------------------
        NET CASH FLOWS                                            126           35          74
Cash at beginning of period                                       257          222         148
------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                        $    383     $    257    $    222
================================================================================================
</TABLE>
<PAGE>

                        CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                  Statement of Consolidated Cash Flows (cont.)



<TABLE>
<CAPTION>
Noncash  investing  activities  that are not  reflected in the Statement of Cash
Flows are listed below.

-------------------------------------------------------------------------------------------------
                                                      The Continental
Year Ended  December 31, 1995                           Corporation         Other
-------------------------------------------------------------------------------------------------
(In millions of dollars)

<S>                                                        <C>              <C>
Fair value of assets acquired, excluding cash acquired     $ 15,094         $  231
Liabilities assumed                                         (14,133)          (159)
-------------------------------------------------------------------------------------------------

       Cash paid, net of cash acquired                     $    961         $   72
=================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>

                             CNA FINANCIAL CORPORATION
                            -------------------------
                                       45
<PAGE>
                   NOTES CONSOLIDATED FINANCIAL STATEMENTS
 ------------------------------------------------------------------------------
                Note A -- Significant Accounting Policies (cont.)


Note A -- Significant Accounting Policies
-----------------------------------------

BASIS OF PRESENTATION
-------------------------------------------------------------------------------

The Consolidated  Financial Statements include CNA Financial Corporation and its
subsidiaries  (CNA or the Company)  which  include  property/casualty  insurance
companies  (principally   Continental  Casualty  Company  and  The  Continental
Insurance  Company)  and  life  insurance  companies  (principally  Continental
Assurance  Company and Valley Forge Life Insurance  Company).  Loews Corporation
(Loews) owns approximately 84% of the outstanding common stock of CNA.

The  accompanying  Consolidated  Financial  Statements  have  been  prepared  in
conformity  with  generally  accepted  accounting  principles.  Certain  amounts
applicable to prior years have been  reclassified to conform to  classifications
followed in 1997. All intercompany amounts have been eliminated.

The preparation of financial  statements in conformity with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

BUSINESS
------------------------------------------------------------------------------


CNA is a multiple-line  insurer  underwriting  property and casualty  coverages;
life,  accident  and health  insurance;  and pension and annuity  business.  CNA
serves  a  wide  spectrum  of  customers,  including  small,  medium  and  large
businesses;  associations;  professionals;  groups and individuals  with a broad
range of insurance and other risk management products and services.


Insurance products include property and casualty  coverages;  life, accident and
health insurance;  and pension products and annuities. CNA services include risk
management,   information   services,   health   care   management   and  claims
administration.  CNA products and services are marketed through agents, brokers,
general agents and direct sales.

INSURANCE
-------------------------------------------------------------------------------

Premium Revenue

Insurance premiums on property/casualty  and accident and health insurance
contracts  are earned  ratably over the terms of the  policies  after provision
for  estimated  adjustments  on  retrospectively  rated  policies and
deductions for ceded insurance.  Revenues on universal  life-type  contracts are
comprised of contract  charges and fees which are  recognized  over the coverage
period.  Other life insurance  premiums and annu-ities are recognized as revenue
when due after deductions for ceded insurance.


<PAGE>

Claim and claim  expense  reserves

Claim and claim expense reserves, except reserves for structured settlements,
workers' compensation lifetime claims and disability claims, are not discounted
and are based on (a) case basis estimates for losses reported on direct
business,  adjusted in the aggregate for ultimate loss  expectations,(b)
estimates of unreported losses, (c) estimates of losses on assumed  insurance,
and (d)

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       46
<PAGE>
------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)

estimates of future  expenses to be incurred in settlement of claims. In
establishing these estimates, consideration is given to current  conditions and
trends as well as past Company and industry  experience. The effects of
inflation, which can be significant, are implicitly considered in the reserving
process and are part of the recorded reserve balance.

Claim and claim expense reserves  represent  management's  estimates of ultimate
liabilities  based on  currently  available  facts and case law and the ultimate
liability may vary significantly from such estimates.  CNA regularly reviews its
reserves,  and  any  adjustments  to the  previously  established  reserves  are
reflected  in  operating  income in the  period  the need for such  adjustments
becomes apparent.

Structured   settlements   have  been   negotiated   for   claims   on   certain
property/casualty  insurance policies.  Structured settlements are agreements to
provide periodic  payments to claimants,  which are fixed and determinable as to
the amount and time of payment.  Certain  structured  settlements  are funded by
annuities  purchased from  Continental  Assurance  Company for which the related
annuity  obligations are reflected as part of future policy  benefits  reserves.
Obligations for structured  settlements not funded by annuities are included in
claim and claim expense  reserves and carried at the present  values  determined
using interest rates ranging from 6.25% to 7.50%. At December 31, 1997 and 1996,
the total of these  unfunded  structured  settlements  was $913 million and $924
million,  respectively  (reflecting  a  discount  of $1,527  million  and $1,556
million, respectively).

Workers'  compensation lifetime claim reserves and disability claim reserves are
discounted  at interest  rates allowed by insurance  regulators  that range from
3.5% to 6.0% with mortality and morbidity  assumptions  reflecting the Company's
and current  industry  experience.  At December 31, 1997 and 1996, such reserves
totaled $2,196 million and $2,165 million,  respectively  (reflecting a discount
of $882 million and $903 million, respectively).

Future policy benefits reserves

Reserves for traditional life insurance products (whole and term life  products)
are computed  based upon the net level  premium method using actuarial
assumptions as to interest rates,  mortality,  morbidity, withdrawals and
expenses.  Actuarial  assumptions  include a margin for adverse deviation and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3% to 11% and mortality,  morbidity and withdrawal  assumptions reflect CNA
and industry  experience  prevailing  at the time of issue.  Expense assumptions
include the estimated  effects of inflation and expenses beyond the premium
paying period.  Reserves for universal  life-type contracts are equal to the
account balances that accrue to the benefit of the  policyholders.  Interest
crediting  rates  ranged from 6.78% to 7.45% for the three years ended  December
31, 1997.

Involuntary  risks

CNA's share of involuntary risks is mandatory and generally a function  of its
share of the  voluntary  market by line of  insurance  in each state. CNA
records the  estimated  effects of its  mandatory  participation  in residual
markets on an accrual basis.  CNA records  assessments for insolvencies as they
are paid.  Accruals for such  assessments have not been practical as the
availability  of  information,   in  sufficient   detail,   regarding   industry
insolvences and related assessments has been limited.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       47

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)

Reinsurance

CNA assumes and cedes  insurance with other insurers and reinsurers and members
of  various  reinsurance  pools  and  associations.  CNA  utilizes reinsurance
arrangements   to  limit  its  maximum   loss,   provide   greater
diversification of risk and minimize exposures on larger risks. The reinsurance
coverages are tailored to the specific risk characteristics of each product line
with CNA's retained amount varying by type of coverage.  Generally,  reinsurance
coverage for property risks is on an excess of loss,  per risk basis.  Liability
coverages  are  generally  reinsured  on a quota  share basis in excess of CNA's
retained risk. CNA's life reinsurance  includes quota share,  yearly  renewable
term and facultative programs. Amounts recoverable from reinsurers are estimated
in a manner consistent with the claim liability.

Deferred  acquisition  costs

Costs  of  acquiring  property/casualty  insurance business  which vary with and
are  primarily  related to the  production of such business are deferred and
amortized ratably over the period the related premiums are  recognized. Such
costs  include  commissions,  premium  taxes and  certain underwriting  and
policy  issuance  costs.  Anticipated  investment  income  is considered in the
determination of the  recoverability  of deferred  acquisition costs.

Life  acquisition  costs are  capitalized  and  amortized  based on assumptions
consistent with those used for computing  policy benefit  reserves.  Acquisition
costs on traditional life business are amortized over the assumed premium paying
periods.   Universal  life  and  annuity  acquisition  costs  are  amortized  in
proportion  to the present  value of estimated  gross profits over the products'
assumed durations,  which are regularly  evaluated and cumulatively  adjusted as
appropriate.


Participating business

Participating  business  represented 0.7%, 0.5% and 0.6% of gross life insurance
in force and 0.7%,  0.7% and 0.8% of life  insurance  premium  income  for 1997,
1996, and 1995, respectively.  Participating policyholders' equity is determined
by allocating 90% of the net income or loss and unrealized  investment  gains or
losses  related to such business as allowed by applicable  laws,  less dividends
determined by the Board of Directors. Revenues and benefits and expenses include
amounts related to participating  policies;  the net income or loss allocated to
participating  policyholders'  equity is a component  of  insurance  claims and
policyholders' benefits.

Separate Account business

Continental  Assurance  Company and Valley Forge Life  Insurance  Company  write
certain investment and annuity contracts.  The supporting assets and liabilities
of  these  contracts  are  legally   segregated  and  reflected  as  assets  and
liabilities  of  Separate  Account  business.   Continental   Assurance  Company
guarantees  principal  and  a  specified  return  to  the  contract  holders  on
approximately 74% of the Separate Account business.  Substantially all assets of
the  Separate  Account  business  are  carried at fair value.  Separate  account
liabilities are carried at contract values.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       48
<PAGE>
-------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)
INVESTMENTS
-------------------------------------------------------------------------------
Valuation of investments

CNA  classifies its fixed maturity  securities  (bonds and redeemable  preferred
stocks) and its equity securities as  available-for-sale,  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.
Such amortization and accretion are included in investment income.

CNA accounts for its derivative  securities under the fair value method,  except
for interest rate swaps  associated with certain  corporate  borrowings.  Under
this  method  the  derivative  securities  are  recorded  at fair  value  at the
reporting date with changes in fair value reflected in realized investment gains
and  losses.   For  interest  rate  swaps  associated  with  certain   corporate
borrowings,  amounts due to or payable  under  these  swaps are  recorded as an
adjustment  to  interest  expense and changes in the fair value of the swaps are
not reflected in the Company's financial statements.

Mortgage loans are carried at unpaid principal balances,  including  unamortized
premium or discount.  Real estate is carried at depreciated  cost.  Policy loans
are carried at unpaid balances.  Short-term investments are carried at amortized
cost which approximates fair value.


Other invested assets include joint ventures,  limited  partnerships,  and other
investments.  The joint  ventures and limited  partnerships  are carried at cost
plus CNA's equity interest in changes in the investee's net assets. CNA's equity
interest in such changes are reflected in investment income, realized investment
gains/losses and unrealized investment gains/losses, as appropriate.

Investment gains and losses

All securities  transactions are recorded on the trade date. Realized investment
gains  and  losses  are  determined  on the basis of the  amortized  cost of the
specific securities sold.  Investments are written down to estimated fair values
and losses are  charged to income  when a decline in value is  considered  to be
other than temporary.

Unrealized  investment gains and losses on fixed maturity  securities and equity
securities  are  reflected as part of  stockholders'  equity,  net of applicable
deferred income taxes and participating policyholders' interest.

Equity  affiliates

CNA uses the equity method of accounting  for  investments in companies in which
its  ownership  interest is as least  twenty  percent but not greater than fifty
percent and upon which it cannot assert significant  control.  Equity in
operating  income of these  affiliates  is reflected in other  income. Equity in
investment   gains/losses   is  included  in  realized   investment gains/losses
or unrealized investment gains/losses as appropriate.

Securities sold under repurchase agreements

CNA has a securities lending program where securities are loaned to third
parties,  primarily major brokerage firms. Borrowers  of these  securities  must
deposit  100% of the  fair  value of the securities if the collateral is cash,
or 102%, if the collateral is securities. Cash deposits  from these transactions
are invested in short-term  investments (primarily  commercial  paper).  CNA


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       49
<PAGE>
continues to receive the interest on loaned debt securities, as beneficial
owner, and accordingly,  loaned debt securities are included within fixed
maturity  securities.  The liabilities for securities sold  subject to
repurchase  agreements are  recorded  at  their  contractual repurchase amounts.

Restricted  investments

On December 30, 1993,  CNA deposited $987 million in an escrow  account,
pursuant to the Fiberboard  Global  Settlement  Agreement,  as discussed in Note
F. The  majority  of the funds  are  included  in  short-term investments and
are invested primarily in U.S. Treasury  securities.  The escrow account
amounted to $1,098  million and $1,071 million at December 31, 1997 and 1996,
respectively.

ADDITIONAL CASH FLOW STATEMENT INFORMATION
--------------------------------------------------------------------------------
The Company's supplemental disclosure of cash
flow information:
-----------------------------------------------------
Year Ended
December 31                1997      1996      1995
-----------------------------------------------------
(In millions of dollars)

Cash (paid) received:
  Interest                 $(201)    $(211)    $(170)
  Federal income
    taxes                    (95)       16      (103)
======================================================

INCOME TAXES
--------------------------------------------------------------------------------
The provision for income taxes includes deferred taxes, resulting from temporary
differences  between the financial  statement and tax return bases of assets and
liabilities under the liability method.  Temporary  differences primarily relate
to insurance reserves (principally claim reserve discounting),  unearned premium
reserves, net unrealized investment gains/losses, deferred acquisition costs and
net operating loss carry forwards, net of valuation allowances.

PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------
Property  and  equipment  are  carried  at cost less  accumulated  depreciation.
Depreciation  is based on the estimated  useful lives of the various  classes of
property and equipment and determined  principally on accelerated  methods. The
cost of  maintenance  and  repairs  is  charged  to  income as  incurred;  major
improvements are capitalized.

MANAGEMENT SERVICES
--------------------------------------------------------------------------------
CNA reimburses Loews for management services,  travel and similar expenses,  and
expenses of investment  facilities  and services  provided to CNA. Such expenses
amounted to approximately $11 million, $15 million and $11 million in 1997, 1996
and 1995, respectively.

EARNINGS PER SHARE
--------------------------------------------------------------------------------
Earnings  per share  applicable  to common  stock is based on  weighted  average
outstanding  shares  of  common  stock of  61,798,000  in 1997,  1996 and  1995,
respectively.  The Company has no stock options or warrants,  as such, basic and
diluted earnings per share are the same.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       50

<PAGE>
-----------------------------------------------------------------------------
                              Note B -- Investments
Note B -- Investments:
----------------------

NET INVESTMENT INCOME
------------------------------------------------------------------------------
Year Ended December 31                             1997         1996      1995
-------------------------------------------------------------------------------
(In millions of dollars)
Fixed maturities:
  Bonds:
   Taxable                                       $1,522      $1,716     $1,512
   Tax-exempt                                       288         273        263
  Redeemable preferred stocks                         7           2          4
Equity securities                                    37          25         47
Mortgage loans and Real estate                       10          11         14
Policy loans                                          6          12         12
Short-term investments                              321         231        215
Security repurchase transactions-income              90          77        167
Other                                                56          45         46
------------------------------------------------------------------------------
                                                  2,337       2,392      2,280
Investment expense                                  (47)        (43)       (46)
Security repurchase transactions-expenses and fees  (81)        (73)      (157)
-------------------------------------------------------------------------------
         NET INVESTMENT INCOME                   $2,209      $2,276     $2,077
===============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       51

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                          Note B -- Investments (cont.)


ANALYSIS OF INVESTMENT GAINS (LOSSES)
----------------------------------------------------------------------------
Year Ended December 31                                  1997   1996    1995
----------------------------------------------------------------------------
(In millions of dollars)
Realized investment gains and (losses):

  Fixed maturities                                     $ 452  $ 293   $ 222
  Equity securities                                      103    216     140
  Derivative securities                                   (7)    18      19
  Other, including Separate Account business             205*    92      83
----------------------------------------------------------------------------
                                                         753    619     464
Allocated to participating policyholders                 (15)   (14)     (8)
Income tax expense                                      (260)  (218)   (162)
----------------------------------------------------------------------------
     Net realized investment gains                       478    387     294
----------------------------------------------------------------------------
Change in net unrealized investment gains and (losses):
  Fixed maturities                                       347   (875)  1,855
  Equity securities                                      (38)   (26)    163
  Other, including Separate Account business             122    (45)    323
----------------------------------------------------------------------------
                                                         431   (946)  2,341
Allocated to participating policyholders                  (4)    18     (44)
Income tax (expense) benefit                            (137)   294    (857)
----------------------------------------------------------------------------
   Change in net unrealized investment gains (losses)    290   (634)  1,440
----------------------------------------------------------------------------
     NET REALIZED AND UNREALIZED
      INVESTMENT GAINS (LOSSES)                        $ 768  $(247) $1,734
============================================================================
*(Includes $95 million related to CNA surety transaction)
<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
-----------------------------------------------------------------------------------------------------------------
                                     1997                          1996                          1995
                           ---------------------------   --------------------------    --------------------------
                             Fixed          Equity         Fixed          Equity         Fixed          Equity
Year Ended December 31     Maturities     Securities     Maturities     Securities     Maturities     Securities
-----------------------------------------------------------------------------------------------------------------
(In millions of dollars)

<S>                        <C>             <C>           <C>             <C>           <C>              <C>
Proceeds from sales        $  38,429       $ 1,406       $ 34,864        $ 1,077       $ 24,065         $ 1,317
=================================================================================================================

Gross realized gains       $     651       $   137       $    412        $   241       $    412         $   199
Gross realized losses      $    (199)          (34)          (119)           (25)          (190)            (59)
-----------------------------------------------------------------------------------------------------------------
     Net realized gains
          on sales         $     452       $   103       $    293        $   216       $    222         $   140
=================================================================================================================
</TABLE>

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       52

<PAGE>
 ------------------------------------------------------------------------------
                              Note B - Investments


ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------
                                1997                            1996
                         ----------------------         -----------------------
December 31              GAINS    LOSSES   NET         Gains    Losses    Net
-------------------------------------------------------------------------------
(In millions of dollars)
Fixed maturities         $ 644   $ (116)  $ 528        $ 444   $(263)   $ 181
Equity securities          190      (71)    119          254     (97)     157
Other, including Separate
 Account business          334     (110)    224          171     (69)     102
                        ------------------------------------------------------
                         $1,168  $ (297)    871        $ 869   $(429)     440
                         ======= ========              ======  =======
Allocated to participating
policyholders                                (4)                           --
Deferred income tax
 expense                                   (278)                         (141)
-------------------------------------------------------------------------------
     NET UNREALIZED
     INVESTMENT GAINS                     $ 589                         $ 299
===============================================================================

SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
-------------------------------------------------------------------------------
                                                  GROSS      GROSS
                                     AMORTIZED  UNREALIZED UNREALIZED   MARKET
December 31, 1997                      COST        GAINS     LOSSES      VALUE
------------------------------------------------------------------------------
(In millions of dollars)

United States Treasury securities and
   obligations of government agencies $12,883    $119      $ 22       $12,980
Asset-backed securities                 4,716      98        10         4,804
States, municipalities and political
   subdivisions - tax-exempt            4,534     194         4         4,724
Corporate securities                    5,253     142        49         5,346
Other debt securities                   1,567      61        31         1,597
Redeemable preferred stocks                67      30         -            97
-------------------------------------------------------------------------------
   Total fixed maturities              29,020     644       116        29,548
Equity securities                         695     190        71           814
-------------------------------------------------------------------------------
         TOTAL                        $29,715    $834      $187       $30,362
===============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       53

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                          Note B - Investments (cont.)


SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
------------------------------------------------------------------------------
                                                    Gross      Gross
                                      Amortized  Unrealized  Unrealized  Market
December 31, 1996                       Cost        Gains      Losses    Value
-------------------------------------------------------------------------------
(In millions of dollars)

United States Treasury securities and
   obligations of government agencies $ 9,855      $  72      $  92   $ 9,835
Asset-backed securities                 6,298         53         59     6,292
States, municipalities and political
   subdivisions - tax-exempt            4,860        121         30     4,951
Corporate securities                    4,730        121         63     4,788
Other debt securities                   1,748         60         19     1,789
Redeemable preferred stocks                49         17          -        66
-------------------------------------------------------------------------------
      Total fixed maturities           27,540        444        263    27,721
Equity securities                         702        254         97       859
-------------------------------------------------------------------------------
        Total                         $28,242      $ 698      $ 360  $ 28,580
===============================================================================

SUMMARY OF INVESTMENTS IN FIXED MATURITIES
BY CONTRACTUAL MATURITY
-------------------------------------------------------------------------------
                                            1997                  1996
                                      -------------------  --------------------
                                      AMORTIZED    MARKET  Amortized  Market
December 31                              COST      VALUE      Cost    Value
-------------------------------------------------------------------------------
(In millions of dollars)

Due in one year or less               $ 2,058    $ 2,077   $ 2,494    $ 2,506
Due after one year through five years  11,520     11,525     8,377      8,295
Due after five years through ten years  3,323      3,373     4,811      4,829
Due after ten years                     7,403      7,769     5,560      5,799
Asset-backed securities not due
  at a single maturity date             4,716      4,804     6,298      6,292
-------------------------------------------------------------------------------
       TOTAL                          $29,020    $29,548   $27,540    $27,721
===============================================================================

Actual maturities may differ form contractual maturities because securities may
be called or prepaid with our without call or prepayment penalties.

The carrying value of investments (other than equity securities) that have not
produced income for last twelve months is $35 million at December 31, 1997.  At
December 31, 1997, there were no investments in a single issuer, other than the
U.S. government, that when aggregated, exceeded 10% of stockholders' equity.



                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       54
<PAGE>
-------------------------------------------------------------------------------
                         Note C -- Financial Instruments


Note C -- Financial Instruments:
--------------------------------

In the normal  course of  business,  CNA  invests in various  financial  assets,
incurs  various  financial  liabilities,  and enters into  agreements  involving
derivative securities, including off-balance sheet financial instruments.

Fair values are required to be disclosed for all financial instruments,  whether
or not recognized in the balance sheet,  for which it is practicable to estimate
that value.  In cases where quoted market prices are not available,  fair values
may be based on estimates  using present value or other  valuation  techniques.
These techniques are significantly  affected by the assumptions used,  including
the discount rates and estimates of future cash flows. Potential taxes and other
transaction  costs  have not been  considered  in  estimating  fair  value.  The
estimates  presented  herein are  subjective  in nature and are not  necessarily
indicative of the amounts that CNA could realize in a current  market  exchange.
Any difference would not be expected to be material.

All nonfinancial instruments such as deferred  acquisition  costs,  property and
equipment,  deferred  income taxes,   intangibles  and  insurance  reserves  are
excluded  from  fair  value disclosure. Thus, the total fair value amounts
cannot be aggregated to determine the underlying economic value of CNA.

The carrying amounts  reported in the consolidated  balance sheet  approximate
fair value for cash, short-term investments,  other trade receivables,  accrued
investment  income,  receivables  for  securities  sold,  securities  sold under
repurchase  agreements,  payables for  securities  purchased,  and certain other
assets and other liabilities  because of their short-term  nature.  Accordingly,
these assets and liabilities are not listed in the tables below.

The  carrying  amounts  and  estimated  fair  values  of CNA's  other  financial
instrument assets and liabilities are listed below.  Derivative instruments are
shown in a separate table.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       55
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
                     Note C - Financial Statements (cont.)


FINANCIAL ASSETS
---------------------------------------------------------------------------
                                       1997                      1996
                               -----------------------   -------------------
                               CARRYING    ESTIMATED     Carrying  Estimated
December 31                     AMOUNT     FAIR VALUE    Amount    Fair Value
----------------------------------------------------------------------------
(In millions of dollars)

Investments:
   Fixed maturities            $29,548      $29,548       $27,721    $27,721
   Equity securities               814          814           859        859
   Mortgage loans                   80           83           113        115
   Policy loans                    177          172           174        163
   Other invested assets           695          695           681        681
Separate Account business:
   Fixed maturities              4,769        4,769         4,608      4,608
   Equity securities               206          206           169        169
   Other                           117          117           437        437
------------------------------------------------------------------------------

The following  methods and  assumptions  were used by CNA in estimating the fair
value for the above financial instruments.

Fixed  maturity  securities  and equity  securities  are based on quoted  market
prices,  where available.  For securities not actively  traded,  fair values are
estimated  using values obtained from  independent  pricing  services,  costs to
settle, or quoted market prices of comparable instruments.

The fair  values  for  mortgage  loans  and  policy  loans are  estimated  using
discounted  cash flow analysis at interest rates  currently  offered for similar
loans  to  borrowers  with  comparable   credit  ratings.   Loans  with  similar
characteristics are aggregated for purposes of the calculations.

Valuation  techniques to determine fair value of other invested assets and other
Separate  Account  business  assets consist of discounted  cash flows and quoted
market  prices  of (a)  the  investments,  (b)  comparable  instruments,  or (c)
underlying assets of the investments.


                           CNA FINANCIAL CORPORAITON
                           -------------------------
                                       56

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                     Note C -- Financial Instruments (cont.)

FINANCIAL LIABILITIES
-------------------------------------------------------------------------------
                                               1997                1996
                                -----------------------------------------------
                                        CARRYING  ESTIMATED  Carrying Estimated
December 31                             AMOUNT    FAIR VALUE Amount   Fair Value
--------------------------------------------------------------------------------
(In millions of dollars)

Premium deposits and annuity contracts  $1,194     $1,145     $1,065    $1,018
Long-term debt                           2,897      2,928      2,765     2,762
Financial guarantee contracts              382        373        382       378
Separate Account business:
   Guaranteed investment contracts       3,414      3,448      3,990     4,012
   Deferred annuities                       73         90         73        84
   Variable separate accounts              997        997        569       569
   Other                                   614        614        896       896
------------------------------------------------------------------------------

Premium deposits and annuity contracts are valued based on cash surrender values
and the outstanding fund balances.

CNA's Senior Notes and debentures are valued based on quoted market prices.  The
fair value for other  long-term  debt is estimated  using  discounted  cash flow
analysis,  based on current  incremental  borrowing  rates for similar  types of
borrowing arrangements.

The fair value of the liability for financial  guarantee  contracts is based on
discounted  cash flows  utilizing  interest  rates  currently  being offered for
similar contracts.

The fair values of guaranteed investment contracts and deferred annuities of the
Separate Account business are estimated using discounted cash flow calculations,
based on interest  rates  currently  being  offered for similar  contracts  with
similar  maturities.  The fair values of the liabilities  for variable  Separate
Account business are based on the quoted market values of the underlying  assets
of each variable  Separate  Account.  The fair value of other  Separate  Account
business liabilities approximates their carrying value.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       57

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)


DERIVATIVE FINANCIAL INSTRUMENTS
------------------------------------------------------------------------------

CNA  invests  from  time to time in  certain  derivative  financial  instruments
primarily  to reduce its  exposure to market risk  (principally  interest  rate,
equity stock price and foreign  currency risk).  Financial  instruments used for
such  purposes  include  interest rate swaps,  interest rate caps,  put and call
options, commitments to purchase securities,  futures and forwards. The Company
generally does not hold or issue these  instruments  for trading  purposes.  CNA
also uses  derivatives  to mitigate the risk  associated  with its indexed group
annuity  contracts by purchasing S&P 500 futures  contracts in a notional amount
equal to the original customer deposit.

The gross  notional  principal or  contractual  amounts of derivative  financial
instruments in the general account at December 31, 1997 and 1996, totaled $1,567
million and $1,730  million,  respectively.  The gross  notional  principal  or
contractual amounts of derivative financial instruments in the Separate Accounts
totaled   $860  million  and  $394  million  at  December  31,  1997  and  1996,
respectively.  The  contract  or  notional  amounts  are used to  calculate  the
exchange of contractual payments under the agreements and are not representative
of the potential for gain or loss on these agreements.

The fair values associated with derivative  financial  instruments are generally
affected by interest rates, equity prices and foreign exchange rates. The credit
exposure  associated  with  these  instruments  is  generally  limited  to  the
unrealized   fair  value  of  the   instruments  and  will  vary  based  on  the
creditworthiness of the  counterparties.  Although the Company is exposed to the
aforementioned  credit  risk,  it does not expect any  counterparty  to fail to
perform as contracted based on the creditworthiness of the counterparties.  Due
to the  nature  of the  derivative  securities,  the  Company  does not  require
collateral.

The fair value of derivatives  generally reflects the estimated amounts that CNA
would receive or pay upon  termination  of the contracts at the reporting  date.
Dealer quotes are  available for  substantially  all of CNA's  derivatives.  For
securities not actively traded,  fair values are estimated using values obtained
from independent  pricing services,  costs to settle, or quoted market prices of
comparable instruments.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       58
<PAGE>
 ------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)

A summary of the aggregate  notional or  contractual  amounts and estimated fair
values of these instruments at December 31, 1997 and 1996, are presented below.

--------------------------------------------------------------------------------
                                       CONTRACTUAL/   ASSET/(LIABILITY)
                                     NOTIONAL AMOUNT   FAIR VALUE     GAIN(LOSS)
December 31, 1997
--------------------------------------------------------------------------------
(In millions of dollars)

General Account
Interest rate swaps-corporate borrowings $  950       $   (4)         $   --
  Futures                                   (21)          --              (1)
  Forwards                                   11           --               7
   Interest rate swaps                       59           (8)             (8)
  Commitments to
   purchase government
   and municipal securities                  --           --               1
Options purchased                            51            2              (5)
Options written                               1           --              --
Other options                                16           --              --
Interest rate caps                          500            4              (1)
-------------------------------------------------------------------------------
        TOTAL                            $1,567       $   (6)         $   (7)
===============================================================================
Separate Accounts
   Futures                               $  615       $   --          $  112*
   Forwards                                   1           --              --
   Commitments to purchase government
     and municipal securities                80           --               1
   Options purchased                         91           --              (1)
   Options written                           73           --               2
-------------------------------------------------------------------------------
        TOTAL                            $  860       $   --          $  114
===============================================================================
* This amount is offset by an increase in the liability to participants.

                          CNA FINANANCIAL CORPORATION
                          ---------------------------
                                       59
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)


-------------------------------------------------------------------------------
                                    Contractual/  Asset/(Liability) Recognized
                                 Notional Amount   Fair Value       Gain (Loss)
December 31, 1996
-------------------------------------------------------------------------------
(In millions of dollars)

General Account
   Interest rate swaps-corporate      $   950      $   3             $  (5)
   borrowings
  Futures                                  38          1                (1)
   Forwards                               194         (2)              (13)
   Interest rate swaps                     85         --                29
   Commitments to purchase government
     and municipal securities             406         (1)               --
   Options purchased                       57          2                 7
   Options written                         --         --                 1
-------------------------------------------------------------------------------
        Total                         $ 1,730      $   3            $   18
===============================================================================
Separate Accounts
  Futures                             $   319      $  (6)           $   29*
   Forwards                                 7          --               --
   Commitments to purchase government
     and municipal securities              17          --               --
   Options purchased                       26          --               --
   Options written                         25          --                1
-------------------------------------------------------------------------------
        Total                         $   394      $   (6)          $   30
================================================================================
* This amount is offset by an increase in the liability to participants.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       60

<PAGE>
 ------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)

An interest rate swap is an agreement in which two parties agree to exchange, at
specified  intervals,  interest  payment  streams  calculated on an agreed-upon
notional  principal  amount  with at least one  stream  based  upon a  specified
floating  rate index.  CNA has entered into  interest  rate swap  agreements  to
convert the variable rate of the borrowing  under the revolving  credit facility
and the commercial  paper program to a fixed rate. At December 31, 1997, CNA had
outstanding  interest  rate swap  agreements  with several  banks having a total
notional  principal amount of $950 million.  Those  agreements,  which terminate
from May 2000 to December  2000,  effectively  fix the  Company's  interest rate
exposure on $950 million of variable rate debt.

CNA also has outstanding  trading interest rate swaps which primarily  represent
an exchange of the 90-day treasury bill rate for the total change in the Goldman
Sachs Commodities Index.

Futures  are  contracts  to buy or sell a  standard  quantity  and  quality of a
commodity,  financial  instrument,  or  index  at a  specified  future  date and
price.

Forwards are contracts between two parties to purchase and sell a specific
quantity  of a  commodity,  government  security,  foreign  currency,  or  other
financial  instrument at a price specified at contact  inception,  with delivery
and settlement at a specified future date.

Commitments to purchase government and municipal  securities are a commitment to
purchase securities in the future at a predetermined price.

Options are  contracts  that grant the  purchaser,  for a premium  payment,  the
right,  but  not  the  obligation,  to  either  purchase  or  sell a  financial
instrument at a specified price within a specified period of time.

An  interest  rate  cap  consists  of a  guarantee  given by the  issuer  to the
purchaser in exchange for the payment of a premium.  This guarantee  states that
if  interest  rates  rise above a  specified  rate,  the issuer  will pay to the
purchaser the difference  between the then current market rate and the specified
rate on the notional  principal  amount.  The notional  principal  amount is not
actually borrowed or repaid.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       61
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                             Note D - Income Taxes

Note D -- Income Taxes:
-----------------------

CNA  and  its  eligible  subsidiaries  (CNA  Tax  Group)  are  included  in  the
consolidated  Federal income tax return of Loews and its eligible  subsidiaries.
Loews and CNA have agreed that for each  taxable  year,  CNA will (i) be paid by
Loews the amount,  if any, by which the Loews  consolidated  Federal  income tax
liability  is  reduced  by virtue of the  inclusion  of the CNA Tax Group in the
Loews consolidated Federal income tax return, or (ii) pay to Loews an amount, if
any,  equal to the Federal  income tax which would have been  payable by the CNA
Tax Group filing a separate  consolidated return. In the event that Loews should
have a net  operating  loss in the  future  computed  on the  basis of  filing a
separate  consolidated tax return without the CNA Tax Group, CNA may be required
to repay tax recoveries  previously  received from Loews. This agreement between
Loews and CNA may be canceled by either party upon thirty days written notice.

For  1997 and  1996,  the  inclusion  of the CNA Tax  Group in the  consolidated
Federal  income tax return of Loews has resulted in an increased  Federal income
tax  liability  for  Loews.  Accordingly,  CNA has  paid or  will  pay to  Loews
approximately  $210 million for 1997 and has paid $99 million for 1996. In 1995,
the inclusion of the CNA Tax Group reduced the Federal  income tax liability for
Loews. Accordingly, CNA received from Loews approximately $78 million for 1995.

At December 31, 1997, CNA had net operating loss  carryforwards of approximately
$870 million for income tax purposes that expire in years 2000 through 2017. The
loss carryforwards are related to acquisitions.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       62

<PAGE>
------------------------------------------------------------------------------
                         Note D -- Income Taxes (cont.)

Significant  components  of CNA's  deferred  tax  assets and  liabilities  as of
December 31, 1997 and 1996 are shown in the table below.


COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
-----------------------------------------------------------------------
December 31                                    1997          1996
-----------------------------------------------------------------------
(In millions of dollars)
Insurance reserves:
   Property/casualty claim reserves          $1,101        $1,145
  Unearned premium reserves                     283           268
   Life reserves                                157           141
   Other insurance reserves                      22            31
Deferred acquisition costs                     (667)         (570)
Investment valuation                             30            32
Postretirement benefits other than pensions     149           143
Net unrealized gains                           (278)         (141)
Net operating loss carryforwards                305           280
Other, net                                      226           268
----------------------------------------------------------------------
   Total deferred tax assets and liabilities  1,328         1,597
Valuation allowance                            (258)         (250)
----------------------------------------------------------------------
    NET DEFERRED TAX ASSETS                  $1,070        $1,347
======================================================================

At December 31, 1997,  gross  deferred  tax assets and  liabilities  amounted to
approximately $2.7 billion and $1.6 billion, respectively. At December 31, 1996,
gross deferred tax assets and liabilities amounted to approximately $2.6 billion
and $1.3 billion, respectively.

Based upon anticipated future taxable income, Company management believes it is
more  likely  than not that the net  deferred tax  asset  will be  realized.  A
valuation  allowance  is  maintained  due  to the  uncertainty   regarding  the
realizability of certain deferred tax assets.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       63

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ------------------------------------------------------------------------------
                         Note D - Income Taxes (cont.)

The components of income tax expense are as follows:


--------------------------------------------------------------------------
Year Ended December 31                     1997       1996      1995
--------------------------------------------------------------------------
(In millions of dollars)
Current tax expense                       $248       $ 28        $ 64
Deferred tax expense                       144        352         221
--------------------------------------------------------------------------
     TOTAL INCOME TAX EXPENSE             $392       $380        $285
==========================================================================

The  components  of total  income tax expense are  allocated  between  operating
income and realized capital gains and losses in the following table.

---------------------------------------------------------------------------
Year Ended December 31                     1997       1996      1995
---------------------------------------------------------------------------
(In millions of dollars)
 Income tax expense on:
Operating income                          $132       $163        $123
Realized capital gains and losses          260        217         162
===========================================================================
     TOTAL INCOME TAX EXPENSE             $392       $380        $285
===========================================================================

A  reconciliation  of the  statutory  federal  income  tax rate on  income is as
follows:

------------------------------------------------------------------------------
                                      % of              % of          % of
                                      Pretax            Pretax        Pretax
Year Ended December 31          1997  Income     1996   Income  1995  Income
------------------------------------------------------------------------------
(In millions of dollars)

Income taxes at statutory rate  $475   35.0%    $471    35.0%  $365   35.0%
Tax exempt income and dividend
     received deduction          (91)  (6.7)     (86)   (6.4)   (79)  (7.6)
Other                              8     .6       (5)    (.3)     -      -
-------------------------------------------------------------------------------
INCOME TAXES AT EFFECTIVE RATE  $392   28.9%    $380    28.3%  $286   27.4%
===============================================================================


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       64

<PAGE>
--------------------------------------------------------------------------------
       NOTE E - Liability for Unpaid Claims and Claim Adjustment Expenses




Note E - Liability  for Unpaid  Claims and Claim  Adjustment Expenses (cont.)
-------------------------------------------------------------------------------

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

Establishing loss reserves is an estimation process. Many factors can ultimately
affect the final  settlement  of a claim and,  therefore,  the reserve  that is
needed.  Changes in the law,  results of litigation,  medical costs, the cost of
repair  materials  and labor  rates can all  impact  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  predictable  than long-tail  claims,  such as general  liability and
professional liability claims.


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       65

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)

The table below provides a reconciliation between beginning and ending claim and
claim expense reserve balances for 1997, 1996 and 1995.

CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIMS AND CLAIM EXPENSES
-----------------------------------------------------------------------------
Year Ended December 31                           1997       1996       1995
-----------------------------------------------------------------------------
(In millions of dollars)
Reserves at beginning of year:
   Gross                                        $29,395    $31,044    $21,639
   Ceded reinsurance                              5,660      6,089      2,705
-----------------------------------------------------------------------------
       Net reserves at beginning of year         23,735     24,955     18,934
Reserves of acquired insurance company               57        ---      6,063
-----------------------------------------------------------------------------
       Total net reserves                        23,792     24,955     24,997
-----------------------------------------------------------------------------

Net incurred claims and claim expenses:
   Provision for insured events of current year   7,942      7,922      6,787
   Increase (decrease) in provision
     for insured events of prior years             (256)       (91)       122
   Amortization of discount                         143        149        106
-----------------------------------------------------------------------------
       Total net incurred                         7,829      7,980      7,015
-----------------------------------------------------------------------------

Net payments attributable to:
   Current year events                            2,514      2,676      2,000
   Prior year events                              5,862      6,524      5,057
-----------------------------------------------------------------------------
       Total net payments                         8,376      9,200      7,057
-----------------------------------------------------------------------------
Net reserves at end of year                      23,245     23,735     24,955
Ceded reinsurance at end of year                  4,995      5,660      6,089
-----------------------------------------------------------------------------
GROSS RESERVES AT END OF YEAR*                  $28,240    $29,395    $31,044
=============================================================================
* Excludes life claim and claim expense reserves and  intercompany  eliminations
of $987 million,  $1 billion and $988 million as of December 31, 1997,  1996 and
1995, respectively, included in the Consolidated Balance Sheet.

<PAGE>

Reserve development is comprised of the following components:

RESERVE DEVELOPMENT - (adverse)/favorable)
--------------------------------------------------------------
Year Ended December 31      1997         1996         1995
--------------------------------------------------------------
(In millions of dollars)
Asbestos                    $(105)       $ (51)       $(274)
Environmental pollution        --          (65)        (226)
Other                         361          207          378
---------------------------------------------------------------
         TOTAL              $ 256        $  91        $(122)
===============================================================



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       66

<PAGE>
-------------------------------------------------------------------------------
Note E --  Liability  for Unpaid  Claims and Claim  Adjustment Expenses (cont.)


ENVIRONMENTAL AND ASBESTOS RESERVES
--------------------------------------------------------------------------------

Environmental  pollution  clean-up  is the  subject  of both  federal  and state
regulation.  By some  estimates,  there are thousands of potential  waste sites
subject to clean-up.  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-Superfund)  govern the clean-up
and  restoration  of abandoned  toxic waste sites and  formalize  the concept of
legal liability for clean-up and restoration by Potentially  Responsible Parties
(PRPs).  Superfund  and  the  mini-Superfunds  establish  mechanisms  to pay for
clean-up of waste sites if PRPs fail to do so, and to assign  liability to PRPs.
The extent of  liability  to be  allocated to a PRP is dependent on a variety of
factors.  Further,  the number of waste sites subject to clean-up is unknown. To
date,   approximately   1,300  clean-up  sites  have  been   identified  by  the
Environmental  Protection  Agency on its  National  Priorities  List (NPL).  The
addition of new clean-up sites to the NPL has slowed in recent years.
Many clean-up sites have been designated by state authorities as well.

Many policyholders  have made claims against various CNA insurance  subsidiaries
for  defense  costs  and   indemnification  in  connection  with  environmental
pollution  matters.  CNA and the insurance  industry are disputing  coverage for
many such  claims.  Key  coverage  issues  include  whether  clean-up  costs are
considered  damages under the policies,  trigger of coverage,  applicability of
pollution exclusions and owned property exclusions,  the potential for joint and
several  liability and  definition of an occurrence.  To date,  courts have been
inconsistent in their rulings on these issues.

A number of proposals  to reform  Superfund  have been made by various  parties.
However,  no reforms  were  enacted by  Congress in 1997 and it is unclear as to
what  positions  the  Congress  or  the   Administration   will  take  and  what
legislation,  if  any,  will  result.  If  there  is  legislation,  and in  some
circumstances even if there is no legislation, the federal role in environmental
clean-up may be materially reduced in favor of state action. Substantial changes
in the federal statute or the activity of the EPA may cause states to reconsider
their  environmental  clean  up  statutes  and  regulations.  There  can  be no
meaningful prediction of the regulation that would result.

Due to the inherent  uncertainties  described above, including the inconsistency
of court  decisions,  the number of waste sites  subject to  clean-up,  and the
standards  for  clean-up  and  liability,  the  ultimate  liability  of CNA  for
environmental pollution claims may vary substantially from the amount currently
recorded.

As of December  31, 1997 and 1996,  CNA carried  approximately  $773 million and
$908  million,  respectively,  of  claim  and  claim  expense  reserves,  net of
reinsurance  recoverables,  for reported and unreported  environmental pollution
claims.  The reserves relate to claims for accident years 1988 and prior,  which
coincides  with CNA's adoption of the Simplified  Commercial  General  Liability
coverage form which included an absolute pollution exclusion.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       67

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)

CNA's insurance  subsidiaries have exposure to asbestos claims,  including those
attributable  to  CNA's  litigation  with  Fibreboard  Corporation.  A  detailed
discussion  of  CNA's   litigation   with   Fibreboard   Corporation   regarding
asbestos-related  bodily  injury  claims can be found in Note F.  Estimation  of
asbestos claim reserves  involves many of the same  limitations  discussed above
for  environmental  pollution claims such as  inconsistency of court decisions,
specific policy  provisions,  allocation of liability  among  insurers,  missing
policies  and proof of coverage.  As of December 31, 1997 and 1996,  CNA carried
approximately  $1,400  million and $1,506  million,  respectively,  of claim and
claim  expense  reserves,  net of  reinsurance  recoverables,  for  reported and
unreported asbestos-related claims.

The results of operations in future years may continue to be adversely  affected
by  environmental  pollution and asbestos claims and claim expenses.  Management
will  continue to monitor these  liabilities  and make further  adjustments  as
warranted.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       68

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)


The following  tables  provide  additional  data related to CNA's  environmental
pollution and asbestos-related claims activity.

RESERVE SUMMARY
-------------------------------------------------------------------------------
December 31                              1997                    1996
                               ------------------------  ----------------------
                                ENVIRONMENTAL             Environmental
                                POLLUTION     ASBESTOS    Pollution    Asbestos
----------------------------------------- ------------------ ------------------
(In millions of dollars)

Reported claims:
     Gross reserves               $  279     $ 1,384        $  289    $ 1,551
    Less reinsurance recoverable     (36)       (117)          (95)      (139)
                                  ---------------------------------------------
     Net reported claims             243       1,267           194      1,412
Net unreported claims                530         133           714         94
-------------------------------------------------------------------------------
NET RESERVES                      $  773     $ 1,400        $  908    $ 1,506
===============================================================================

ENVIRONMENTAL POLLUTION CHANGES IN RESERVES
------------------------------------------------------------------------
                                      1997        1996      1995
Year Ended December 31
------------------------------------------------------------------------
(In millions of dollars)

Net reserves at beginning of year   $  908      $1,063     $ 949*

Reserve strengthening                  --           65       226

Less:  Gross payments                  258         304       183
       Reinsurance recoveries         (123)        (84)      (71)
                                    ------------------------------------
       Net payments                    135         220       112
------------------------------------------------------------------------
         NET RESERVES AT END OF YEAR $ 773      $  908     $1,063
========================================================================
* Includes Continental net reserves of $443  million at acquisition date.
<PAGE>
ASBESTOS CHANGES IN RESERVES
------------------------------------------------------------------------------
Year Ended December 31               1997       1996         1995
------------------------------------------------------------------------------
(In millions of dollars)

Net reserves at beginning of year  $1,506     $2,191       $2,109**

Reserve strengthening                 105         50          274

Less:  Gross payments                 268        787          268
       Reinsurance recoveries         (57)       (52)         (76)
                                   -------------------------------------------
       Net payments                   211        735          192
------------------------------------------------------------------------------
NET RESERVES AT END OF YEAR        $1,400     $1,506       $2,191
==============================================================================
** Includes Continental net reserves of $170 million at acquisition date.

                            CNA FINANCIAL CORPORATION
                                       69

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
   Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)

OTHER PROPERTY AND CASUALTY RESERVES
--------------------------------------------------------------------------------
Other lines favorable loss and loss adjustment  expense reserve  development for
1997 of $361 million was due to favorable loss  develop-ment  of $540 million in
involuntary  risks,  primarily  in  workers' compensation,  and $200  million of
favorable  loss  development  in personal  lines,  offset in part by unfavorable
devel-opment in commercial lines of $379 million.

The favorable loss  development in involuntary  risks is  attributable to better
than expected results in workers'  compensation and private passenger automobile
lines  stemming  from  improved  frequency  and  severity in these  lines.  This
favor-able  loss   development  was  offset  in  part  by  unfavorable   premium
development  of $340  million as  estimates  of  premiums  for prior  years were
similarly reduced.

The favorable loss  development in personal lines was  attributable  to improved
trends particularly in personal auto lines.

The   unfavorable   development  in  commercial   lines  was   attributable   to
approximately   $240  million  in  general  liability  lines,  $130  million  in
commercial  multiperil,  and $215 million in loss  adjustment  expense  reserves
offset in part by favorable  development  of $206 million  primarily in workers'
compensation  and  reinsurance  lines.  This  unfavorable  loss  development  in
commercial  lines was offset in part by favorable  premium  development  of $170
million related to experi-ence- rated contracts.

The other lines favorable  development  during 1996 and 1995 of $207 million and
$378 million,  respectively,  was principally due to favorable experience in the
workers' compensation line of business.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       70

<PAGE>
  ----------------------------------------------------------------------------
             Note F -- Legal Proceedings and Contingent Liabilities


Note F -- Legal Proceedings and Contingent Liabilities
------------------------------------------------------

FIBREBOARD LITIGATION
-------------------------------------------------------------------------------
CNA's  primary  property/casualty   subsidiary,   Continental  Casualty  Company
(Casualty),   has  been  party  to  litigation   with   Fibreboard   Corporation
(Fibreboard) involving coverage for certain  asbestos-related claims and defense
costs (San Francisco Superior Court,  Judicial Council  Coordination  Proceeding
1072).  As described  below,  Casualty,  Fibreboard,  another  insurer  (Pacific
Indemnity,  a subsidiary of the Chubb Corporation),  and a negotiating committee
of asbestos claimant attorneys  (collectively referred to as "Settling Parties")
have reached a Global Settlement (the "Global  Settlement")  which is subject to
court  approval,  to resolve all future  asbestos-related  bodily  injury claims
involving Fibreboard.

Casualty,  Fibreboard and Pacific  Indemnity have also reached an agreement (the
"Trilateral Agreement"),  on a settlement to resolve the coverage litigation and
provide  funding  for  Fibreboard's  asbestos  claims in the  event  the  Global
Settlement does not obtain final court approval.

On July 27, 1995, the United States  District Court for the Eastern  District of
Texas  entered  judgment  approving  the  Global  Settlement  Agreement  and the
Trilateral Agreement. As expected,  appeals were filed as respects both of these
decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of
Appeals in New Orleans  affirmed the judgment  approving  the Global  Settlement
Agreement by a 2 to 1 vote and affirmed the judgment  approving  the  Trilateral
Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and Suggestions
for  Rehearing  by the entire  Fifth  Circuit  Court of Appeals as respects  the
decision on the Global  Settlement  Agreement  were denied.  Two  Petitions  for
Certiorari  were filed in the Supreme  Court as respects  the Global  Settlement
Agreement. On June 27, 1997, the Supreme Court granted these petitions,  vacated
the Fifth Circuit's  judgment as respects the Global Settlement  Agreement,  and
remanded the matter to the Fifth  Circuit for  reconsideration  in light of the
Supreme Court's decision in Amchem Products Co. v. Windsor.

On January 27, 1998, a panel of the United States Fifth Circuit Court of Appeals
again  approved the Global  Settlement  Agreement by a 2-1 vote.  Objectors have
ninety  days  after the  judgment  is  entered  by the Fifth  Circuit  to file a
Petition for Certiorari to the Supreme Court.

No further appeal was filed with respect to the Trilateral Agreement; therefore,
court approval of the Trilateral Agreement has become final.

Global Settlement Agreement

On April 9, 1993,  Casualty and Fibreboard entered into an agreement pursuant to
which,  among  other  things,  the parties  agreed to use their best  efforts to
negotiate and finalize a global class action  settlement  with  asbestos-related
bodily injury and death claimants.

On August 27, 1993, the Settling  Parties  reached an agreement in principle for
an omnibus  settlement  to resolve all future  asbestos-related  bodily  injury
claims involving  Fibreboard.  The Global  Settlement  Agreement was executed on
December 23, 1993. The agreement calls for  contribution by Casualty and Pacific
Indemnity  of an  aggregate  of $1.5  billion to a trust fund for a class of all
future  asbestos  claimants,  defined  generally as those

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       71
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
         Note F - Legal Proceedings and Contingent Liabilities (cont.)

persons  whose claims against  Fibreboard  were neither  filed nor settled
before August 27, 1993. An additional  $10  million is to be  contributed to the
fund by  Fibreboard.  As indicated  hereinabove, although the Global Settlement
approval has so far been affirmed on appeal,  further  review may be sought.
There is limited  precedent with settlements which determine the rights of
future claimants to seek relief.

Through  December 31, 1997,  Casualty,  Fibreboard  and plaintiff  attorneys had
reached  settlements  with  respect  to  approximately  135,400  claims,  for an
esti-mated  settlement amount of approximately  $1.6 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under these settlements.  Approximately $1.6 billion (including  interest of
$130  million) was paid through  December 31, 1997.  Such payments are partially
recoverable  from Pacific  Indemnity.  Casualty may negotiate other  agreements
with various  classes of  claimants,  including  groups who may have  previously
reached agreement with Fibreboard.

Final court  approval of the  Trilateral  Agreement and its  implementation  has
resolved  Casualty's  exposure  with  respect  to  Fibreboard  asbestos  claims.
Casualty  does not  anticipate  further  material  exposure  with respect to the
Fibreboard matter, and subsequent adverse reserve adjustments,  if any, are not
expected to materially affect the equity of CNA.

TOBACCO LITIGATION
-------------------------------------------------------------------------------
CNA's primary  property/casualty  subsidiaries  have been named as defendants as
part of a direct  action  lawsuit,  Richard P.  Ieyoub v. The  American  Tobacco
Company,  et al., filed by the Attorney  General for the State of Louisiana,  in
state  court,Calcasieu  Parish,  Louisiana.  In that suit, filed against certain
tobacco  manufacturers and distributors (the "Tobacco Defendants") and over 100
insurance  companies,  the State of Louisiana seeks to recover medical  expenses
allegedly incurred by the State as a result of tobacco-related illnesses.

The original  suit was filed on March 13, 1996,  against the Tobacco  Defendants
only.  The  insurance  companies  were  added to the suit in March  1997 under a
direct  action  statute in  Louisiana.  Under the  direct  action  statute,  the
Louisiana  Attorney  General is pursuing  liability  claims  against the Tobacco
Defendants and their insurers in the same suit,  even though none of the Tobacco
Defendants has made a claim for insurance coverage.

Recently,  the  United  States  District  Court  for  the  Western  District  of
Louisiana,  Lake Charles Division,  granted a petition to remove this litigation
to the federal  district court.  The District  Court's  decision is currently on
appeal to the United States Fifth  Circuit Court of Appeals.  During the pending
appeal,  all  proceedings  in state court and in the federal  district court are
stayed. Because of the uncertainties inherent in assessing the risk of liability
at this  very  early  stage of the  litigation,  management  is unable to make a
meaningful estimate of the amount or range of any loss that could result from an
unfavorable  outcome of the pending  litigation.  However,  management believes
that the ultimate outcome of the pending litigation should not materially affect
the results of operations or equity of CNA.

OTHER LITIGATION
-------------------------------------------------------------------------------
CNA 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 results of operations or equity
of CNA.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       72
<PAGE>
-------------------------------------------------------------------------------
                              Note G - Reinsurance

Note G -- Reinsurance:
---------------------

The ceding of insurance does not discharge the primary liability of the original
insurer. CNA places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough  assessment of the reinsurers'  credit
quality and claim  settlement  performance.  Further,  for carriers that are not
authorized  reinsurers  in CNA's  states of domicile,  CNA receives  collateral,
primarily  in the  form of bank  letters  of  credit.  Such  collateral  totaled
approximately  $857  million  and $801  million at  December  31, 1997 and 1996,
respectively.

CNA's largest recoverable from a single reinsurer, including prepaid reinsurance
premiums,  is with  Lloyds of London  and  approximated  $451  million  and $440
million at December 31, 1997 and 1996, respectively.

Insurance claims and policyholder benefits are net of reinsurance  recoveries of
$1,309  million,  $1,220  million  and $935  million  for  1997,  1996 and 1995,
respectively.

In the tables  below,  life  premium  revenue is from long  duration  contracts,
property/casualty   premium  revenue  is  from  short  duration  contracts,  and
approximately  75% of accident and health premium revenue is from short duration
contracts.

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

-------------------------------------------------------------------------------
                                           Earned                      Assumed/
                                           Premiums                      Net
                              -------------------------------------------------
Year Ended December 31        Direct       Assumed     Ceded       Net      %
-------------------------------------------------------------------------------
(In millions of dollars)

1997
 Property/casualty           $ 8,408       $ 1,101   $   612   $ 8,897    12.4%
 Accident and health           3,603           111       154     3,560     3.1
 Life                            908           128       131       905    14.1
-------------------------------------------------------------------------------
    TOTAL PREMIUMS           $12,919       $ 1,340   $   897   $13,362    10.0%
===============================================================================
1996
 Property/casualty           $ 8,957       $ 1,123   $   989   $ 9,091    12.4%
 Accident and health           3,575           187       176     3,586     5.2
 Life                            736           121        55       802    15.1
-------------------------------------------------------------------------------
    Total premiums           $13,268       $ 1,431   $ 1,220   $13,479    10.6%
===============================================================================
1995
 Property/casualty           $ 7,868       $ 1,335   $ 1,293   $ 7,910    16.9%
 Accident and health           3,017           125       106     3,036     4.1
 Life                            701           109        21       789    13.8%
-------------------------------------------------------------------------------
    Total premiums           $11,586       $ 1,569   $ 1,420   $11,735    13.4%
===============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       73

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                          Note G -- Reinsurance (cont.)

The  effects of  reinsurance  on  written  premiums  are shown in the  following
schedules:

------------------------------------------------------------------------------
                                            Written Premiums
                          ----------------------------------------------------
                                                                 Assumed/
Year Ended December 31    Direct   Assumed     Ceded       Net     Net %
------------------------------------------------------------------------------
(In millions of dollars)

1997
 Property/casualty      $ 8,456   $ 1,262    $   693    $ 9,025   14.0%
 Accident and health      3,592       133        155      3,570    3.7
 Life                       908       128        131        905   14.1
------------------------------------------------------------------------------
   TOTAL PREMIUMS       $12,956   $ 1,523    $   979    $13,500   11.3%
==============================================================================
1996
 Property/casualty      $ 9,032   $ 1,197    $   852    $ 9,377   12.8%
 Accident and health      3,708       188        183      3,713    5.1
 Life                       736       121         55        802   15.1
------------------------------------------------------------------------------
   Total premiums       $13,476   $ 1,506    $ 1,090    $13,892   10.8%
==============================================================================
1995
 Property/casualty      $ 9,421   $ 1,408    $ 1,814    $ 9,015   15.6%
 Accident and health      3,159       126        137      3,148    4.0
 Life                       701       109         21        789   13.8
------------------------------------------------------------------------------
   Total premiums       $13,281   $ 1,643    $ 1,972    $12,952   12.7%
==============================================================================

The impact of reinsurance  on life insurance  in-force is shown in the following
schedule:

------------------------------------------------------------------------
                                  Life Insurance In-Force       Assumed/
                          ------------------------------------
(In millions of dollars)  Direct     Assumed    Ceded      Net    Net%

--------------------------------------------------------------------------
December 31, 1997         $235,468  $ 76,130  $ 74,262 $237,336  32.1%
December 31, 1996          171,715    65,294    32,561  204,448  31.9
December 31, 1995          111,917    54,129     8,578  157,468  34.4
===========================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       74
<PAGE>
---------------------------------------------------------------------------
                                 Note H -- Debt


Note H -- Debt:
---------------
Long-term borrowings consisted of the following:

LONG-TERM DEBT
---------------------------------------------------------------------------
December 31                                                  1997    1996
---------------------------------------------------------------------------
(In millions of dollars)
   Variable Rate Debt:
       Credit Facility                                    $   400  $  400
       Commercial Paper                                       675     675
       Credit Facility - CNA Surety                           118       -
   Senior Notes:
       87/8%, due March 1, 1998                               150     150
       81/4%, due April 15, 1999                              102     102
       71/4%, due March 1, 2003                               146     146
       61/4%, due November 15, 2003                           249     248
       63/4%, due November 15, 2006                           248     248
       83/8%, due August 15, 2012                              98      98
  71/4%  Debenture, due November 15, 2023                     247     247
  11% Secured Mortgage Notes, due June 30, 2013               389     387
  6.9% - 16.29% Secured Capital Leases, due through
  December 31, 2011                                            47      47
  Other debt, due 1998 through 2019 (rates of 1% to 12.71%)    28      17
----------------------------------------------------------------------------
     TOTAL LONG-TERM DEBT                                 $ 2,897  $2,765
============================================================================

The Company has in place a revolving  credit  facility  that was used to finance
the  acquisition of  Continental.  The interest rate on the facility is based on
the London Interbank Offered Rate (LIBOR),  plus 16 basis points.  Additionally,
there is a facility fee of 9 basis points annually. The average interest rate on
the  borrowings  under the revolver at December 31, 1997 and 1996,  respectively
was 6.16% and 5.72%.

To take  advantage of favorable  interest  rates,  CNA  established a commercial
paper program to replace  borrowings under the revolving  credit  facility.  The
commercial  paper  borrowings are classified as long-term as $675 million of the
committed bank facility will support the commercial paper program.  The weighted
average  interest  rate on  commercial  paper at  December  31,  1997 was  6.05%
compared to 5.67% at December 31, 1996.

At year end 1997, the outstanding loans under the revolving credit facility were
$400 million.  There was no unused  borrowing  capacity under the facility after
the effects of the commercial paper program.

To offset the variable rate  characteristics  of the facility,  CNA entered into
interest  rate swap  agreements  with  several  banks  having a total  notional
principal  amount of $950  million,  which  terminate  from May 2000 to December
2000. These agreements provide that CNA pay interest at a fixed rate, averaging
6.20% at December 31, 1997 and 1996,  in exchange for the receipt of interest at
the three  month  LIBOR  rate.  The effect of these  interest  rate swaps was to
increase  interest  expense by $4 million  and $7  million  for the years  ended
December 31, 1997 and 1996, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       75
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                             Note H - Debt (cont.)

The weighted  average interest rate (interest and facility fees) on the variable
rate  acquisition  debt,  which  includes  the  revolving  credit  facility  and
commercial   paper  was  6.35%  and  6.28%  at  December   31,  1997  and  1996,
respectively. This rate reflects the effect of the interest rate swaps.

On August 18,  1997,  CNA filed a  Registration  Statement  on form S-3 with the
Securities  and  Exchange  Commission  relating  to $1  billion  of  senior  and
subordinated debt and preferred stock that became effective on October 22, 1997.
This new shelf  registration  incorporated $250 million of securities  remaining
available for issuance from a prior shelf registration.  On January 8, 1998, the
Company issued $150 million  principal  amount of 6.45% senior notes due January
15, 2008 and $150 million principal amount of 6.95% senior notes due January 15,
2018.  The net  proceeds  were  used to pay down  bank  loans  drawn  under  the
Company's revolving credit facility. Concurrent with the reduction in bank debt,
the Company terminated $300 million in notional amount of interest rate swaps.

On September 30, 1997, CNA Surety, a 62% owned subsidiary of CNA, entered into a
$130 million,  5 year revolving credit  facility.  The interest rate on facility
borrowings  is based on LIBOR  plus 20  basis  points.  Additionally  there is a
facility  fee of 10 basis points  annually.  At year end 1997,  the  outstanding
borrowings  under this  facility  were $118  million  and the  weighted  average
interest rate was 6.17%. The following table shows the future aggregate  minimum
principal payments on debt and capitalized lease obligations:

On March 2, 1998 CNA paid at the due date $150  million of 8 7/8%  senior  notes
with funds drawn against the revolving credit facility (unaudited).

------------------------------------------------------
Future Aggregate Minimum Principal Payments
------------------------------------------------------
(In millions of dollars)

1998                                         $   155
1999                                             106
2000                                               6
2001                                           1,083
2002                                             126
Thereafter                                     1,431
Less: discount                                   (10)
------------------------------------------------------
       TOTAL                                 $ 2,897
======================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       76

<PAGE>
-------------------------------------------------------------------------------
                         Note I -- Benefit Plans

Note I -- Benefit Plans:
------------------------

PENSION PLANS
--------------------------------------------------------------------------------
CNA has noncontributory pension plans covering all full-time employees age 21 or
over who have completed at least one year of service. While the benefits for the
plans  vary,  they are  generally  based on years of  credited  service  and the
employee's highest sixty consecutive months of compensation.  Effective December
31, 1997, The Continental  Corporation retirement plans were merged into the CNA
Employees' Retirement Plan.

CNA's funding  policy is to make  contributions  in accordance  with  applicable
governmental  regulatory  requirements.  The  assets of the plans are  invested
primarily  in  U.S.  government   securities  with  the  balance  in  short-term
investments,  common stocks and other fixed income securities.

Effective  January 1, 1996,  the  retirement  plans  redefined  compensation to
include base pay, overtime and bonuses.  This amendment generated an
unrecognized  prior service cost of $20 million.

The  funded  status  is  determined  using  assumptions  at the end of the year.
Underfunded plans are those plans for which the accumulated  benefit  obligation
is in excess of plan  assets.  Overfunded  plans are those  plans for which plan
assets exceed the accumulated benefit  obligations.  Pension cost is determined
using assumptions at the beginning of the year.
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT OBLIGATION
---------------------------------------------------------------------------------------
December 31                     1997             1996*                  1995*
---------------------------------------------------------------------------------------
                             Underfunded Overfunded Underfunded Overfunded Underfunded
                               Plans      Plans      Plans       Plans      Plans
---------------------------------------------------------------------------------------
(In millions of dollars)
<S>                             <C>      <C>        <C>         <C>        <C>
Actuarial present value
of accumulated
plan benefits:
   Vested                       $1,340     $517       $623        $491       $646
   Nonvested                        77       38         32          28         14
---------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION  $1,417     $555       $655        $519       $660
=======================================================================================
</TABLE>
                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       77


<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                         Note I - Benefit Plans (cont.)

NET PENSIONS ASSET (LIABILITY)
--------------------------------------------------------------------------------------------
December 31                       1997            1996                     1995
--------------------------------------------------------------------------------------------
                              Underfunded Overfunded Underfunded  Overfunded  Underfunded
                                 Plans      Plans        Plans    Plans       Plans
--------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                              <C>        <C>          <C>        <C>      <C>
Projected benefit obligation     $1,780      $778      $  788     $  770      $  809
Plan assets at fair value         1,313       702         503        630         496
--------------------------------------------------------------------------------------------
  Plan assets less than
  projected benefit
  obligation                       (467)      (76)       (285)      (140)       (313)
Unrecognized net asset at
January 1, 1986
   being recognized over 12 years    (2)       (7)         --        (12)         --
Unrecognized prior service costs     88        19          78         21         104
Unrecognized net loss/(gain)        218       122         (12)       165          13
--------------------------------------------------------------------------------------------
  NET PENSION ASSET (LIABILITY)  $ (163)     $ 58      $ (219)    $   34      $ (196)
============================================================================================
</TABLE>
<TABLE>
NET PERIODIC PENSION COST
--------------------------------------------------------------------------------------------
 December 31                     1997             1996                   1995*
--------------------------------------------------------------------------------------------
                             Underfunded Overfunded Underfunded Overfunded Underfunded
                                Plans      Plans       Plans       Plans       Plans
--------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                              <C>       <C>        <C>        <C>        <C>
 Net periodic pension cost:
  Service cost - benefits
  attributed to  employee
   service during the year         $54      $36        $19       $32        $12
  Interest cost on projected
  benefit                          119       54         57        51         33
  obligation
  Actual return on plan assets    (103)     (31)       (29)     (115)       (43)
  Net amortization and deferral     17      (16)        (6)       72         19
--------------------------------------------------------------------------------------------
     NET PERIODIC PENSION COST    $ 87      $43        $41       $40        $21
============================================================================================
* The 1995 data  includes  The  Continental  Corporation  Retirement  Plans from
acquisition date.
</TABLE>

<PAGE>
Actuarial assumptions are set forth in the following table.

Assumptions
-------------------------------------------------------------------------------
December 31                                      1997  1996      1995    1994
-------------------------------------------------------------------------------

Discount rate                                   7.25% 7.50%      7.25%     8.50%
Rate of increase in compensation levels*        2.75  2.75       2.75      4.00
Expected long-term rate of return on plan assets7.50  7.75-8.50  7.50-8.50 8.75
-------------------------------------------------------------------------------
*Excludes age/service related merit and productivity increases.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       78

<PAGE>
-------------------------------------------------------------------------------
                         Note I -- Benefit Plans (cont.)


POSTRETIREMENT HEALTH CARE AND LIFE
INSURANCE BENEFITS
-------------------------------------------------------------------------------

CNA provides certain health care benefits for eligible retirees, through age 64,
and provides life  insurance and  reimbursement  of Medicare Part B premiums for
all eligible retired persons.

Additionally, in conjunction with the Continental merger, CNA is administering a
separate plan for the postretirement health care and life insurance benefits for
Continental  employees who retired  prior to January 1, 1996.  CNA funds benefit
costs principally on the basis of current benefit payments.

ACCRUED POSTRETIREMENT BENEFIT COST
------------------------------------------------------------------------------
December 31                                            1997     1996     1995
------------------------------------------------------------------------------
(In millions of dollars)

Accumulated postretirement benefit obligation:
   Retirees                                            $202     $172     $186
   Fully eligible, active plan participants              72       89       59
   Other active plan participants                        87       88       63
------------------------------------------------------------------------------
   Total accumulated postretirement
      benefit obligation                                361      349      308
Unrecognized net (gain) loss                             (8)     (12)       7
-------------------------------------------------------------------------------
   ACCRUED POSTRETIREMENT BENEFIT COST                 $353     $337     $315
===============================================================================

NET PERIODIC POSTRETIREMENT BENEFIT COST
------------------------------------------------------------------------------
Year Ended December 31                                 1997     1996     1995*
------------------------------------------------------------------------------
(In millions of dollars)
Net periodic postretirement benefit cost:
   Service cost - benefits attributed to employee
     service during the year                           $10      $12      $ 6
   Interest cost on accumulated postretirement
     benefit obligation                                 25       24       18
   Amortization                                         --       --       (1)
-------------------------------------------------------------------------------
     NET PERIODIC POSTRETIREMENT BENEFIT COST          $35      $36      $23
===============================================================================
*The 1995 data includes The Continental  Corporation  Retirement  Plans from the
acquisition date.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       79


<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                         Note I - Benefit Plans (cont.)

ASSUMPTIONS
---------------------------------------------------------------------------
December 31                                      1997       1996       1995
----------------------------------------------------------------------------
Discount rate:
   Assumptions used in determining
     net periodic benefit cost:                  7.50%      7.25%     8.50%
   Assumptions used in determining
     projected benefit obligation (liability)    7.25       7.50      7.25
---------------------------------------------------------------------------

The  assumed  health  care cost trend  rate used in  measuring  the  accumulated
postretirement  benefit obligation was 9% in 1997, declining to an ultimate rate
of 5% in 2002.  The health  care cost trend rate  assumption  has a  significant
effect on the amount of the benefit  obligation and periodic cost  reported.  An
increase  in the  assumed  health  care cost trend rate of 1% in each year would
increase the accumulated  postretirement  benefit  obligation as of December 31,
1997 by $24 million and the aggregate net periodic  postretirement  benefit cost
for 1997 by $3 million.

SAVINGS PLANS
-------------------------------------------------------------------------------

The CNA Employees'  Savings Plan is a contributory  plan which allows employees
to make regular  contributions  of up to 6% of their salary.  CNA contributes an
additional amount equal to 70% of the employee's regular contribution. Employees
may also make additional contributions of up to 10% of their salaries for which
there is no additional contribution by CNA.

In 1995, CNA made contributions to the Continental  Incentive Savings Plan using
an  equivalent  formula  to that  used  for the CNA  Employees'  Savings  Plan.
Effective  January 1, 1996, the  Continental  Incentive  Savings Plan was merged
with the CNA Employees' Savings Plan.

Contributions by the Company to the savings plans were $23 million,  $24 million
and $22 million in 1997, 1996 and 1995, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       80


<PAGE>
------------------------------------------------------------------------------
                                Note J -- Leases


Note J -- Leases:
-----------------
CNA occupies  facilities  under lease  agreements  that expire at various  dates
throughout 2013. CNA's home office is partially situated on grounds under leases
expiring  in 2058.  In  addition,  data  processing,  office and  transportation
equipment are leased under agreements that expire at various dates through 2001.

Most leases contain renewal options that may provide for rent increases based on
prevailing market conditions. Some leases contain purchase options based on fair
market values or contractual values, if greater.  Lease expense, net of sublease
income,  for the years ended December 31, 1997,  1996 and 1995 was $100 million,
$85  million  and $92  million,  respectively.

The  table  below shows the future minimum lease  payments to be made under
noncancelable  leases at December 31, 1997.

Future Minimum Lease Payments
--------------------------------------------
(in millions of dollars)

1998                                   $141
1999                                    117
2000                                     95
2001                                     82
2002                                     58
Thereafter                               99
-------------------------------------------
TOTAL                                  $592
===========================================


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       81


<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 -----------------------------------------------------------------------------
       Note K -- Stockholders' Equity and Statutory Financial Information




Note  K - Stockholders' Equity and Statutory  Financial Information:
----------------------------------------------------------------------
SUMMARY OF CAPITAL STOCK
--------------------------------------------------------------------------
                                                      Number of Shares
December 31                                        1997              1996
---------------------------------------------------------------------------

Preferred stock, without par value-non-voting:
   Authorized                                      12,500,000     12,500,000
Money market cumulative preferred stock,
   without par value non-voting:
   Issued and outstanding:
     Series E (stated value $100,000 per share)           750            750
     Series F (stated value $100,000 per share)           750            750
Common stock with par value of $2.50-voting stock:
   Authorized                                      200,000,000   200,000,000
   Issued                                           61,841,969    61,841,969
   Outstanding                                      61,798,262     61,798,262
   Treasury stock                                       43,707         43,707
-------------------------------------------------------------------------------

The dividend rate on money market  preferred  stock is determined  approximately
every 49 days by auction.  The money market  preferred  stock is  redeemable  at
CNA's  option,  as a whole or in part,  at $100,000  per share plus  accrued and
unpaid dividends.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       82



<PAGE>
 ------------------------------------------------------------------------------
   Note K - Stockholders' Equity and Statutory Financial Information (cont.)




STATUTORY ACCOUNTING PRACTICES
-------------------------------------------------------------------------------

CNA  Financial  Corporation's  insurance  affiliates  are  domiciled  in various
jurisdictions.  These  affiliates  prepare  statutory  financial  statements in
accordance with accounting  practices prescribed or otherwise permitted by their
respective jurisdiction's insurance regulator.  Prescribed statutory accounting
practices are set forth in a variety of publications of the National Association
of  Insurance  Commissioners  as well as state  laws,  regulations,  and general
administrative  rules.  The  Company's  insurance  affiliates  have no  material
permitted accounting practices.

CNA Financial  Corporation's  ability to pay dividends to its  stockholders  is
affected,  in part, by receipt of dividends from its affiliates.  The payment of
current year dividends to CNA Financial  Corporation by its insurance affiliates
without  prior  approval  of  the  insurance   department  of  each  affiliate's
domiciliary  jurisdic-tion  is  limited  to prior year  formula  amounts.  As of
December 31, 1997,  approximately  $677  million of dividend  payments  were not
subject to prior insurance department approval for 1998 dividend payments.

Statutory  capital and surplus and net income,  determined  in  accordance  with
accounting  practices  prescribed  by the  regulation  and  statute  of various
insurance regulators,  for property/casualty and life insurance subsidiaries are
as follows:

------------------------------------------------------------------------------
                         Statutory Capital and Surplus   Statutory Net Income
                         -----------------------------  ----------------------
                                  December 31           Year Ended December 31
------------------------------------------------------------------------------
                              1997          1996          1997    1996    1995
------------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty
  Insurance Subsidiaries    $7,123        $6,349         $1,043  $1,208  $1,208
Life Insurance Subsidiaries  1,224         1,163             43      58      30
-------------------------------------------------------------------------------


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       83


<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                        Note L -- Discontinued Operations


Note L -- Discontinued Operations:
----------------------------------

Certain discontinued operations were acquired as part of the Continental merger.
Operating results of the discontinued operations were as follows:

-------------------------------------------------------------------------------
Year Ended December 31                 1997      1996        1995
-------------------------------------------------------------------------------
(In millions of dollars)

Revenues:
   Premiums                             $13      $ 2          $ 5
   Net investment income                 63       47           26
   Realized investment gains              3        6            1
   Other                                  1        4           --
-------------------------------------------------------------------------------
     Total revenues                      80       59           32
Benefits and expenses                    80       59           32
-------------------------------------------------------------------------------
   Income (loss) before income
     taxes                               --       --           --
     Income taxes                        --       --           --
-------------------------------------------------------------------------------
     Income (loss) from
      discontinued operations           $--      $--          $--
===============================================================================

Net assets of  discontinued  operations  are  included in Other  Assets,  net of
intercompany eliminations, and are as follows:

-------------------------------------------------------------------------
December 31                                    1997          1996
-------------------------------------------------------------------------
(In millions of dollars)

Assets:
   Investments                               $  726        $  669
   Cash                                          54            22
   Insurance receivables (net)                  363           408
   Other                                        156           234
-------------------------------------------------------------------------
    Total assets                              1,299         1,333
-------------------------------------------------------------------------
Liabilities:
   Claim and claim expenses                     751           847
   Other                                        325           272
-------------------------------------------------------------------------
    Total liabilities                         1,076         1,119
-------------------------------------------------------------------------
     Net assets                              $  223        $  214
=========================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       84
<PAGE>
 ------------------------------------------------------------------------------
                           Note M -- Business Segments



Note M -- Business Segments:
----------------------------

REVENUES
------------------------------------------------------------------------------
Year Ended December 31                               1997      1996      1995*
------------------------------------------------------------------------------
(In millions of dollars)

Property/Casualty-commercial                      $10,590   $10,371   $ 8,939
Property/Casualty-personal                          1,860     1,758     1,445
Property/Casualty-involuntary risks                   (99)      388       388
Life-individual                                       943       923       777
Life-group                                          3,025     2,957     2,701
                                                 ------------------------------
                                                   16,319    16,397    14,250
   Other and intercompany eliminations                 --       (28)      (14)
-------------------------------------------------------------------------------
       Revenues excluding realized
        investment gains (losses)                  16,319    16,369    14,236
-------------------------------------------------------------------------------
Realized investment gains (losses):
     Property/Casualty                                593       474       321
     Life                                             164       164       139
     Other                                             (4)      (19)        4
-------------------------------------------------------------------------------
       Total realized investment gains (losses)       753       619       464
-------------------------------------------------------------------------------
         TOTAL REVENUES                           $17,072   $16,988   $14,700
===============================================================================
*Includes the results of Continental since the acquisition date.
<PAGE>
INCOME (LOSS) BEFORE INCOME TAX
-----------------------------------------------------------------------------
Year Ended December 31                           1997       1996      1995*
-----------------------------------------------------------------------------
(In millions of dollars)
Property/Casualty-commercial                    $ 180      $ 770    $  556
Property/Casualty-personal                        271        (18)       25
Property/Casualty-involuntary risks               177        (14)       (2)
Life-individual                                    88        101        65
Life-group                                         65         70        95
                                               -----------------------------
       CNA Insurance                              781        909       739
Interest, other and intercompany eliminations    (161)      (168)     (153)
----------------------------------------------------------------------------
       Income excluding realized
         investment gains (losses)                620        741       586
-----------------------------------------------------------------------------
Realized investment gains (losses)
     net of policyholder's interest:
     Property/Casualty                            593        474       321
     Life                                         149        149       131
     Other                                         (4)       (19)        4
------------------------------------------------------------------------------
       Total realized investment gains (losses)
         net of policyholders' interest           738        604       456
------------------------------------------------------------------------------
         TOTAL INCOME BEFORE INCOME TAX        $1,358     $1,345    $1,042
==============================================================================
*Includes the results of Continental since the acquisition date.



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       85

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ------------------------------------------------------------------------------
                       Note M - Business Segments (cont.)


NET INCOME (LOSS)
-------------------------------------------------------------------------------
Year Ended December 31                                 1997      1996     1995*
-------------------------------------------------------------------------------
(In millions of dollars)

Property/Casualty-commercial                          $ 200     $ 586     $ 431
Property/Casualty-personal                              184        (6)       22
Property/Casualty-involuntary risks                     117        (4)        4
Life-individual                                          58        66        43
Life-group                                               42        44        61
                                                     --------------------------
                                                        601       686       561
Interest, other and intercompany eliminations          (113)     (108)      (98)
-------------------------------------------------------------------------------
Net income excluding net realized
   investment gains (losses)                            488       578       463
-------------------------------------------------------------------------------
Net realized investment gains (losses):
    Property/Casualty                                   384       303       208
    Life                                                 96        96        85
    Other                                                (2)      (12)        1
--------------------------------------------------------------------------------
       Total net realized investment gains (losses)     478       387       294
-------------------------------------------------------------------------------
         TOTAL NET INCOME                             $ 966     $ 965     $ 757
===============================================================================
*Includes the results of Continental since acquisition date.



ASSETS
-------------------------------------------------------------------------------
December 31                                         1997      1996     1995
-------------------------------------------------------------------------------
(In millions of dollars)

Property/Casualty-commercial                      $39,952   $40,082  $40,622
Property/Casualty-personal                          4,282     4,230    4,590
Property/Casualty-involuntary risks                 1,955     2,407    2,446
Life-individual                                     5,206     4,740    3,997
Life-group                                          9,534     9,274    9,004
                                                  ---------------------------
                                                   60,929    60,733   60,659
Other and intercompany eliminations                   340      (278)    (299)
-----------------------------------------------------------------------------
        TOTAL ASSETS                              $61,269   $60,455  $60,360
=============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       86


<PAGE>

----------------------------------------------------------------------------
                       Note M -- Business Segments (cont.)

Assets and  investment  income of the  property/casualty  group are allocated to
business  segments  on the basis of  insurance  reserves  after  attribution  of
separately  identifiable  assets.  Life group assets and  investment  income are
allocated  to  business  segments  based  on cash  flows  after  attribution  of
separately identifiable assets. Income taxes have been allocated on the basis of
taxable  income  of  the  respective   insurance   segments.   Property/casualty
involuntary risks include mandatory participation in residual markets, statutory
assessments for  insolvencies of other insurers and other  involuntary  charges.
CNA's  share of  involuntary  risks is  generally a function of its share of the
voluntary market by line of insurance in each state.

Through  August 1, 1989,  CNA's  property/casualty  operations  wrote  financial
guarantee insurance  contracts.  These contracts primarily represent  industrial
development bond guarantees and equity guarantees  typically  extending from ten
to thirteen years. For these  guarantees,  CNA received an advance premium which
is  recognized  over the exposure  period and in  proportion  to the  underlying
exposure insured.

At December 31, 1997 and 1996, gross exposure of financial  guarantee  insurance
contracts amounted to $181 million and $582 million, respectively. The degree of
risk attached to this exposure is  substantially  reduced through  reinsurance,
diversification of exposures and collateral requirements.  In addition, security
interests in the real estate are also obtained. Approximately 54% and 47% of the
risks were ceded to  reinsurers at December 31, 1997 and 1996.  Total  exposure,
net of  reinsurance,  amounted to $83 million and $311  million at December  31,
1997  and  1996,  respectively.  At  December  31,  1997  and  1996,  collateral
consisting  of letters  of credit  and debt  service  reserves  amounted  to $22
million and $28 million, respectively.

Gross  unearned  premium  reserves for  financial  guarantee  contracts  were $5
million and $11 million at December 31, 1997 and 1996, respectively. Gross claim
and claim expense reserves totaled $377 million and $371 million at December 31,
1997 and 1996, respectively.

Life revenues include $2.1 billion,  $2.1 billion and $1.9 billion in 1997, 1996
and 1995,  respectively,  under contracts covering U.S. government employees and
their dependents (FEHBP).

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       87


<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 -----------------------------------------------------------------------------
                             Note N -- Acquisitions


Note N -- Acquisitions:
-----------------------

CONTINENTAL ACQUISITION
-------------------------------------------------------------------------------

On December  6, 1994,  CNA entered  into a merger  agreement  to acquire all the
outstanding  common stock of The  Continental  Corporation  (Continental)  for a
total  purchase  price of $1.1 billion.  The merger was  consummated  on May 10,
1995.  The  acquisition  of  Continental  has been  accounted for as a purchase;
therefore,  Continental's operations were included in the Consolidated Financial
Statements  since May 10, 1995. Based on CNA's final evaluation and appraisal of
the net assets,  goodwill  approximated $316 million before  amortization.  The
goodwill is being  amortized  over twenty years at an annual charge to income of
approximately $16 million.

MERGER WITH CAPSURE HOLDINGS CORP.
-------------------------------------------------------------------------------

In the fourth quarter of 1996, CNA entered into a merger  agreement with Capsure
Holdings  Corp.  (Capsure) to merge CNA's surety  business  with the business of
Capsure and form a new stock company,  CNA Surety Corporation,  in which CNA has
an approximate 62% interest.  The transaction  closed on September 30, 1997. The
transaction was accounted for as a sale of  approximately  38% of CNA's previous
surety  business  and a purchase  of 62% of  Capsure.  In  conjunction  with the
closing  of the surety  transaction,  CNA  realized  an  investment  gain of $95
million.  CNA  Surety's  results  of  operations  have been  included  in CNA's
consolidated  results of  operations,  net of minority  interest  subsequent  to
September 30, 1997. At December 31, 1997, total assets of CNA Surety Corporation
were $727  million.  CNA  Surety's  revenues and net income for the three months
ended  December  31,  1997  were  approximately  $71  million  and $11  million,
respectively.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       88


<PAGE>
-----------------------------------------------------------------------------
                  Note O -- Unaudited Quarterly Financial Data

Note O -- Unaudited Quarterly Financial Data:
---------------------------------------------

-------------------------------------------------------------------------------
                                             First Second  Third  Fourth Year
-------------------------------------------------------------------------------
(In millions of dollars, except per share data)
1997 QUARTERS
Revenues                                    $4,132 $4,243 $4,309 $4,388 $17,072

Net operating income                           136    126    121    105     488
Net realized investment gains                   42    109    153    174     478
                                            ------  ------  ------ ----- ------
Net income                                     178    235    274    279     966
                                            ------  ------  ------ ----- ------
Earnings per share                            2.85   3.78   4.41   4.48   15.52

1996 Quarters
Revenues                                    $4,315 $4,095 $4,256 $4,322 $16,988

Net operating income                           145    152    161    120     578
Net realized investment gains                  184     50     78     75     387
                                             ------  ------ ------ ------ ------
Net income                                     329    202    239    195     965
                                             ------  ------ ------ ------ ------
Earnings per share                            5.30   3.25   3.83   3.13    15.51

1995 Quarters
Revenues                                    $3,053 $3,659 $4,001 $3,987 $14,700

Net operating income                           132    127    103    101     463
Net realized investment gains                   21    130     63     80     294
                                             ------ ------ ------  ------ -----
Net income                                     153    257    166    181     757

Earnings per share                            2.44   4.12   2.66   2.91   12.14
-------------------------------------------------------------------------------




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       89

<PAGE>
                          INDEPENDENT AUDITORS' REPORT
-------------------------------------------------------------------------------


THE BOARD OF DIRECTORS AND STOCKHOLDERS
CNA FINANCIAL CORPORATION

We have audited the consolidated balance sheets of CNA Financial Corporation (an
affiliate of Loews  Corporation)  and  subsidiaries  as of December 31, 1997 and
1996,  and the related  statements of  consolidated  operations,  stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1997. These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing  accounting   principles  used  and  significant   estimates  made  by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial statements present fairly, in all
material  respects,  the  financial  position of CNA Financial  Corporation  and
subsidiaries  as of  December  31,  1997  and  1996,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.


S/DELOITTE & TOUCHE LLP

Chicago, Illinois
February 18, 1998

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       90


<PAGE>
                            COMMON STOCK INFORMATION
----------------------------------------------------------------------------

CNA's  common  stock is  listed  on the New  York,  Chicago  and  Pacific  Stock
Exchanges and is also traded on the Philadelphia  Stock Exchange.  The number of
holders of record of CNA's  common stock as of March 2, 1998,  was 2,816.  As of
March 2,  1998,  Loews  Corporation  owned  approximately  84  percent  of CNA's
outstanding common stock.

The table  below  sets  forth the high and low  closing  sales  prices for CNA's
common stock based on the New York Stock  Exchange  Composite  Transactions.  No
dividends  have been paid on CNA's common stock in order to develop and maintain
a strong surplus position for CNA's insurance  subsidiaries,  which is necessary
to support  business growth in an increasingly  competitive  environment.  CNA's
ability to pay dividends is influenced, in part, by dividend restrictions of its
principal  operating  insurance  subsidiaries  as  described  in  Note  K to the
Consolidated Financial Statements.

COMMON STOCK INFORMATION
-------------------------------------------------------------------
                          1997                           1996
                    -----------------------------------------------
Quarter             HIGH      LOW                  High      Low
-------------------------------------------------------------------
Fourth              131 3/4   119 1/8              108 5/8   95 7/8
Third               130       107 7/8              104 1/2   95 7/8
Second              105 7/16   96 7/8              112       95 3/4
First               114 3/4   103                  117 1/2  109 1/2
---------------------------------------------------------------------

INVITATION TO THE ANNUAL MEETING
-------------------------------------------------------------------------------

Shareholders  are  cordially  invited to attend  the  annual  meeting at 10 a.m.
Wednesday,  May 6, 1998,  in Room  207N,  CNA Plaza,  333 South  Wabash  Avenue,
Chicago.  Shareholders unable to attend are requested to exercise their right to
vote by proxy.  Proxy  material  will be mailed  to  shareholders  prior to the
meeting.

FORM 10-K
-------------------------------------------------------------------------------

A copy of CNA Financial Corporation's annual report on Form 10-K, which is filed
with the Securities and Exchange  Commission,  will be furnished to shareholders
without charge upon written request to:

Jonathan D. Kantor
Senior Vice President,
Secretary and General Counsel
CNA Financial Corporation
CNA Plaza, 43 South
Chicago, Illinois 60685



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       91

<PAGE>
                              CORPORATE DIRECTORY
-------------------------------------------------------------------------------

DIRECTORS
-------------------------------------------------------------------------------

Antoinette Cook Bush
Partner; Skadden, Arps, Slate, Meagher & Flom,
Chairperson, Incentive Compensation Committee

Dennis H. Chookaszian Chairman
and Chief Executive Officer,
CNA

Philip L. Engel
President,
CNA

Robert P. Gwinn
Retired Chairman and Chief Executive Officer,
Encyclopaedia Britannica

Walter F. Mondale
Partner; Dorsey & Whitney, LLP

Edward J. Noha
Chairman of the Board,
CNA Financial Corporation

Joseph Rosenberg
Senior Investment Strategist,
Loews Corporation

Richard L. Thomas
Chairperson, Audit Committee;
Retired Chairman of the Board,
First Chicago NBD Corporation and
The First National Bank of Chicago

James S. Tisch
Chairperson, Finance Committee;
President and Chief Operating Officer,
Loews Corporation

Laurence A. Tisch
Chief Executive Officer of CNA Financial Corporation;
Co-Chairman of the Board and
Co-Chief Executive Officer,
Loews Corporation

Preston R. Tisch
Chairperson, Executive Committee;
Co-Chairman and Co-Chief Executive Officer,
Loews Corporation

Marvin Zonis
Professor of International Political Economy,
Graduate School of Business University of Chicago


<PAGE>

EXECUTIVE COMMITTEE
-------------------------------------------------------------------------------
Preston R. Tisch, Chairperson
Antoinette Cook Bush
Dennis H. Chookaszian
Philip L. Engel
Robert P. Gwinn
Walter F. Mondale
Edward J. Noha
Joseph Rosenberg
Richard L. Thomas
James S. Tisch
Laurence A. Tisch
Marvin Zonis

FINANCE COMMITTEE
-------------------------------------------------------------------------------
James S. Tisch, Chairperson
Antoinette Cook Bush
Dennis H. Chookaszian
Philip L. Engel
Robert P. Gwinn
Walter F. Mondale
Edward J. Noha
Joseph Rosenberg
Richard L. Thomas
Laurence A. Tisch
Preston R. Tisch
Marvin Zonis

AUDIT COMMITTEE
-------------------------------------------------------------------------------
Richard L. Thomas, Chairperson
Antoinette Cook Bush
Robert P. Gwinn
Walter F. Mondale
Marvin Zonis

INCENTIVE COMPENSATION COMMITTEE
-------------------------------------------------------------------------------
Antoinette Cook Bush, Chairperson
Robert P. Gwinn
Richard L. Thomas
Marvin Zonis



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       92
<PAGE>
OFFICERS
-------------------------------------------------------------------------------
Laurence A. Tisch
Chief Executive Officer,
CNA Financial Corporation

Dennis H. Chookaszian
Chairman and Chief Executive Officer,
CNA

Philip L. Engel
President,
CNA

William J. Adamson, Jr.
Senior Vice President,
Reinsurance,
CNA

Peter P. Conway, Jr.
Senior Vice President,
Risk Management,
CNA

James P. Flood
Senior Vice President,
Claims,
CNA

Michael C. Garner
Senior Vice President,
CNA Consulting Group and Human Resources,
CNA

Bernard L. Hengesbaugh
Executive Vice President and
Chief Operating Officer,*
CNA

Peter E. Jokiel
Senior Vice President,
Life Operations,
CNA

Jonathan D. Kantor
Senior Vice President,
Secretary and General Counsel,***
CNA Financial Corporation

Patricia L. Kubera
Group Vice President and Controller,
CNA Financial Corporation

Donald M. Lowry****
Senior Vice President,
Secretary and General Counsel,
CNA Financial Corporation

W. James MacGinnitie
Senior Vice President and
Chief Financial Officer,
CNA Financial Corporation


<PAGE>

Michael McGavick
Senior Vice President,
Commercial Operations,
CNA

Carolyn L. Murphy**
Senior Vice President,
Commercial Operations,
CNA

William H. Sharkey, Jr.
Senior Vice President,
Marketing,
CNA

Thomas F. Taylor
Senior Vice President,*
Specialty Operations,
CNA

Adrian M. Tocklin**
Senior Vice President,
Diversified Operations,
CNA

Robert T. Van Gieson
Senior Vice President,
Global Operations,
CNA

Jae L. Wittlich
Senior Vice President,
Group Operations,
CNA

David W. Wroe
Senior Vice President,
Information Technology,
CNA

---------------------------
*Effective February 4, 1998
**Retires effective April 1, 1998
***Effective March 6, 1998
****Retired effective March 6, 1998


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       93

<PAGE>
                              CORPORATE DIRECTORY
-------------------------------------------------------------------------------





CNA ADMINISTRATIVE OFFICES
----------------------------------------------
CNA Plaza
Chicago, Illinois 60685
312/822-5000

TRANSFER AGENT AND REGISTRAR
-----------------------------------------------
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NY  07303-2500

INDEPENDENT AUDITORS
------------------------------------------------
Deloitte & Touche LLP
180 North Stetson Avenue
Chicago, Illinois 60601


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       94
<PAGE>
                           CNA FINANCIAL CORPORATION
                                    APPENDIX
                        OMITTED GRAPH MATERIAL AND OTHER

Exhibit 13.1 - CNA Financial Corporation Annual Report:
*  Bar graphs of:

     - Revenues for the period 1987 through 1997.
     - Assets for the period 1987 through 1997.
     - Stockholders' equity for the period 1987 through 1997.
     - Book value per common share 1987 through 1997.

(See page 3 of Exhibit 13.1 for a table showing the data points used in the
above graphs.)

* The following are outquotes located in the margins from the "Letters to Our
Shareholders", found on pages 4 through 9 of the annual report.

Page           Outquotes

4              We see an insurance environment of rapid change with major
               opportunities...

5              CNA is on course to build on the opportunities of change and
               increase the value of the enterprise.

6              CNA continued as a profitable market leader under some of the
               most competitive conditions ever seen in the commercial insurance
               marketplace.

7              CNA is the premier provider of commercial insurance for small
               and medium size businesses in the United States.

8              CNA's strength in the commercial insurance marketplace extends to
               professional and speciality coverages.

9              We continued to develop capabilities for providing more value to
               our reinsurance clients and business partners worldwide.

10             CNA's track record of growth in individual life continued for
               the fourth year in a row.

11             As we build an insurance organization for the future, 1998 will
               be the start of an even more successful second century.

               Pages 4 and 5 are quotes from CNA Financial Chairman Edward J.
               Noha, and pages 6 through 11 are quotes from CNA Chairman
               and Chief Executive Officer Dennis H. Chookaszian