CNA FINANCIAL CORPORATION


1996 ANNUAL REPORT








                                                                  CNA
<PAGE>

                                     PROFILE
--------------------------------------------------------------------------------
                         CNA Financial Corporation (CNA)
        is the largest writer of commercial property/casualty insurance
         and is ranked as one of the ten largest insurance organizations
                              in the United States.
--------------------------------------------------------------------------------

CNA serves  businesses and individuals  with a broad range of insurance and 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,  with 1996 assets of $60.7 billion and stockholder's
equity of $7.1 billion, is the holding company of Continental  Casualty Company,
which was incorporated in 1897,  Continental Assurance Company,  incorporated in
1911,  and The  Continental  Corporation,  incorporated  in  1968,  which is the
holding company of The Continental Insurance Company, incorporated in 1853.

In 1997,  CNA observes 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, 1996,  was  approximately  84 percent owned by
Loews Corporation.

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






CNA
<PAGE>

                                TABLE OF CONTENTS
--------------------------------------------------------------------------------
                                      1996





                                        2
                              FINANCIAL HIGHLIGHTS

                                        4
                      LETTER FROM CNA FINANCIAL CORPORATION
                             CHAIRMAN EDWARD J. NOHA

                                        5
                       LETTER FROM CNA INSURANCE COMPANIES
                     CHAIRMAN AND CEO DENNIS H. CHOOKASZIAN

                                       11
                           FINANCIAL SECTION CONTENTS

                                       12
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                       30
                              FINANCIAL STATEMENTS

                                       81
                          INDEPENDENT AUDITORS' REPORT

                                       82
                            COMMON STOCK INFORMATION

                                       83
                               CORPORATE DIRECTORY










                           CNA FINANCIAL CORPORATION
                           -------------------------
<PAGE>
                              FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
                  Results of Operations and Financial Condition


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Year Ended December 31                           1996          1995*      1994       1993        1992
-----------------------------------------------------------------------------------------------------------
(In millions of dollars,
except per share data)
<S>                                           <C>            <C>        <C>         <C>         <C>

RESULTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------
Revenues                                       $16,987.8     $14,699.7   $10,999.5  $11,010.8    $10,793.4
-----------------------------------------------------------------------------------------------------------
Income (loss) before income tax                  1,345.0       1,042.4      (134.0)      93.4     (1,375.0)
-----------------------------------------------------------------------------------------------------------
Net income (loss) excluding
  net realized investment
  gains/losses and accounting
  changes:
  Property/Casualty                                575.8         457.0       147.9     (266.6)      (928.4)
  Life                                             109.9         103.8        87.0       43.5         52.0
  Other                                           (108.0)        (98.2)      (47.9)     (28.6)       (21.4)
-----------------------------------------------------------------------------------------------------------
          Net operating income (loss)              577.7         462.6       187.0     (251.7)      (897.8)
Net realized investment gains (losses)             387.1         294.4      (150.5)     519.2        235.3
Accounting changes                                    --            --          --         --        331.9
-----------------------------------------------------------------------------------------------------------
        Net income (loss)                      $   964.8     $   757.0   $    36.5  $   267.5    $  (330.6)
============================================================================================================

EARNINGS PER SHARE
------------------------------------------------------------------------------------------------------------

Net operating income (loss)                    $    9.25     $    7.37   $    2.94  $    (4.14)  $   (14.60)
Net realized investment gains (losses)              6.26          4.77       (2.43)       8.40         3.81
Accounting changes                                    --            --          --          --         5.37
------------------------------------------------------------------------------------------------------------
        Net income (loss)                      $   15.51     $   12.14   $    0.51  $     4.26   $    (5.42)
============================================================================================================

FINANCIAL POSITION
------------------------------------------------------------------------------------------------------------
Assets                                         $60,734.7     $60,360.4   $44,320.4  $41,912.3    $39,743.9
Debt                                             2,764.9       3,025.5       913.8      915.3        415.0
Stockholders' equity                             7,059.8       6,735.5     4,545.9    5,381.1      4,789.2
Book value per common share                       111.81        106.56       71.13      84.65        75.07
============================================================================================================

STATUTORY SURPLUS
------------------------------------------------------------------------------------------------------------
Property/Casualty                              $ 6,348.8     $ 5,695.9   $ 3,367.3  $ 3,598.4    $  3,136.8
Life                                             1,163.4       1,127.6     1,055.6    1,022.0       1,003.0
============================================================================================================
* Includes The Continental Corporation since May 10, 1995.
</TABLE>



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

This page of CNA Financial Corporation's annual report has four bar graphs which
illustrate  the trend in  revenues,  assets and  stockholders'  equity from 1986
through 1996.


CNA FINANCIAL CORPORATION (1986-1996)
($ in billions except per share data)

|---------------------|-----------|--------|---------------|----------------|
|Measurement Period   |           |        | Stockholders' |  Book Value Per|
|(Fiscal Year Covered)|  Revenues | Assets |  Equity       |   Common Share |
|---------------------|-----------|--------|---------------|----------------|
|                     |           |        |               |                |
|FYE 12/31/86.........|     6.5   |  18.2  |      2.7      |      40.37     |
|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   |  60.7  |      7.1      |     111.81     |
|---------------------|-----------|--------|---------------|----------------|

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       3
<PAGE>
                          A LETTER TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------
                                      1996





FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOHA

CNA  Financial  Corporation  reported  strong  earnings in 1996.  Net income was
$964.8 million, or $15.51 per share, compared with net income of $757.0 million,
or $12.14 per share, in 1995.

Exclusive of  securities  transactions,  net income for 1996  amounted to $577.7
million,  or $9.25 per share,  compared with $462.6 million, or $7.37 per share,
in 1995.

Consolidated  revenues for 1996 were approximately $17.0 billion,  compared with
approximately $14.7 billion in 1995.

Continuation of an upward trend in earnings,  the substantial  completion of the
merger  with  The  Continental  Corporation,   and  several  business  expansion
initiatives were highlights of a successful year. Thanks to the contributions of
employees and business  partners,  CNA continued to strengthen its leadership in
the insurance marketplace.

Taking a broader  perspective,  the decade of the `90s is a time of rapid change
for  the  insurance  industry.   Consolidation,   intensifying  competition  and
globalization  are transforming the market for insurance  products and services.
In this  environment of challenge and  opportunity,  CNA is well  positioned for
continued success.

Across  the  broad  range of its  businesses,  CNA  builds  on a  foundation  of
financial   strength.   At  year-end   1996,   the  statutory   surplus  of  our
property/casualty  companies was approximately $6.3 billion,  one of the largest
in the industry.  The statutory surplus of CNA's life insurance subsidiaries was
approximately   $1.2  billion.   In  addition,   CNA  continues  to  maintain  a
high-quality investment portfolio heavily weighted toward U.S. government bonds.

In addition to its financial foundation, CNA builds on a heritage of service and
commitment.  Continental  Casualty  Company,  the  founding  company of CNA, was
founded in 1897. Since then, CNA has kept its promises to its customers.  It has
grown by staying  focused on a set of fundamental  strengths:  a solid financial
base, lasting business  relationships and a strong will to stay in the forefront
of its chosen  markets.  This  tradition  gives CNA a running start toward a new
century of even greater achievement.

In 1996, CNA served its customers,  grew  profitably and set a course for future
success.  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
                           -------------------------
                                       4
<PAGE>
                          A LETTER TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------
                                      1996





FROM CNA INSURANCE COMPANIES
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DENNIS H. CHOOKASZIAN

In 1996, CNA had another successful year, serving its customers well,  achieving
solid profits and moving ahead on several opportunities for business expansion.

Several  factors  contributed to the strong  earnings,  including  improved loss
experience in  property/casualty  businesses,  efficiencies from the 1995 merger
with The  Continental  Corporation,  and  continuing  growth  and  profit in the
individual life business. In addition,  1996 earnings were bolstered by gains on
CNA's investment portfolio.

CNA achieved its goal of substantially  completing the merger with  Continental.
The final  stage of the  merger,  including  integration  of  computer  systems,
remains on course.

Building on the momentum of the Continental  merger,  CNA focused on a number of
business expansion activities. In the accident and health business, CNA acquired
the  managed  care  division  of  CoreSource,  Inc.,  a leader  in the  field of
developing  and  managing  health care  networks for large  corporate  customers
outside major metropolitan areas. The acquired organization,  which now operates
independently  as CNA  Health  Partners,  supports  our  long-term  strategy  of
profitable growth in the managed health care environment.

In  reinsurance,  CNA  launched a  facultative  reinsurance  operation,  a major
strategic  addition to our  capabilities in the U.S.  market.  The new operation
expands the range of CNA services and presents  opportunities to expand existing
relationships with treaty reinsurance customers.

In specialty insurance,  CNA and Capsure Holdings Corp. (Capsure) agreed to form
a new  stock  company,  CNA  Surety  Corporation,  subject  to the  approval  of
Capsure's shareholders.  Combining the surety businesses of CNA and Capsure, CNA
Surety  Corporation  will  be  the  largest  U.S.  surety  organization  with  a
substantial  leadership position in all segments of the surety marketplace.  The
transaction is expected to be finalized in the second quarter of 1997.

In addition,  during the first quarter of 1997, CNA announced the formation of a
new  company,  Hedge  Financial  Products,  which will pursue  opportunities  to
securitize  insurance  risks.  The formation of Hedge  Financial puts CNA at the
forefront of the emerging  securitization  business,  in which insurance risk is
converted into monetized instruments that can be traded among investors.

Also in 1997,  CNA entered  into an agreement by which it will become a co-owner
of RVI Guaranty Co., Ltd., the largest monoline residual value insurance company
in the world.  This type of  insurance  protects  the  residual  value of assets
financed  by  banks  and  other   financial   institutions,   including   leased
automobiles,  commercial  equipment and real estate.  This agreement will enable
CNA to participate  in a largely  untapped  segment of the commercial  insurance
market  and  to  broaden  its   long-standing   relationships   with
financial institutions.

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

<PAGE>
                          A LETTER TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------
                                      1996

Along  with  business  expansion,  CNA  advanced  on many  fronts in the area of
technology in 1996.  We improved  service and reduced costs of the basic systems
and structures that form the technology infrastructure of CNA. During the fourth
quarter,  CNA entered into an agreement with Computer Sciences Corporation (CSC)
to set up the CSC  Advanced  Technology  Center in  Chicago  that  will  further
improve our technology processes.

In addition to the  Technology  Center,  CNA and CSC agreed to launch a new life
insurance  outsourcing  business.  The  new  service  will  handle  many  of the
administrative  processes  involved  in life  insurance,  for  example,  issuing
policies  and  managing   recordkeeping   functions.   Outsourcing   has  become
increasingly   attractive  to  life  insurance   companies  because  of  intense
competitive  pressures and the  complexity of  automating  their  administrative
functions.

CNA also invested in InsWeb, the first interactive  insurance marketplace on the
Internet.  The  investment  positions  CNA to sell  insurance  products over the
Internet in conjunction with its agents.

Along with efforts to advance its technological  capabilities,  CNA strengthened
its marketing  focus through the  development  of a corporate  positioning  and
branding strategy. Based on the key CNA values of financial strength,  stability
and commitment,  the strategy entails a concerted effort to present the CNA name
in a consistent, compelling fashion.

The branding and positioning  strategy  coincides well with a milestone in CNA's
history.  In  1997,  CNA's  founding  company,   Continental  Casualty  Company,
celebrates its 100th anniversary.  The centennial  presents a unique opportunity
to link the revitalized  marketing strategy to CNA's legacy of strong values and
dedicated employees.

In addition to these corporate activities, 1996 was a year of accomplishment for
CNA's various businesses.

PROPERTY/CASUALTY

CNA is the  largest  U.S.  writer  of  commercial  property/casualty  insurance,
encompassing  such  coverages  as  workers'  compensation,   general  liability,
multiple peril,  marine,  agriculture,  professional  and specialty  lines,  and
reinsurance.

In 1996, CNA continued to build on its proven strategy of industry segmentation.
For the past two  years,  CNA has  capitalized  on  opportunities  to apply this
approach  to the large  book of  general  commercial  business  acquired  in the
Continental  merger.  By aligning the full range of its business  processes with
the industry segmentation  strategy,  CNA is moving toward the goal of being the
low-cost,  high-quality  provider  of  insurance  products  and  services in the
commercial marketplace.

Specifically,  CNA  expanded  its  offering of  simplified  products to increase
convenience and choice for agents and small  commercial  insureds.  In the small
and medium  commercial  segment,  CNA launched seven new Commercial  Affiliation
Marketing  (CAM)  programs for targeted  classes of business.  In addition,  CNA

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       6
<PAGE>
--------------------------------------------------------------------------------
                                      1996

strengthened its commitment to the High Performance  Agency Program, a preferred
agency program based on partnership with independent  agents.  At the same time,
CNA  entered  into  strategic  partnerships  with  brokers  to reach  classes of
customers  who  have  traditionally  worked  with  brokers  to meet  their  risk
management needs.

In the large commercial marketplace, CNA reported strong sales volume, including
several important new accounts. These successes reflect CNA's ability to respond
to large corporate customers with a broad offering of products and services.  In
addition,   CNA  has  built  up  its   specialized   service  units  to  deliver
best-in-market  services in the areas of risk  management  information,  claims,
cost management and consulting.

In agricultural insurance,  CNA continued to build on the business acquired from
the  Continental  merger.  The  purchase of a 40 percent  interest in the voting
common  stock  of North  American  Crop  Underwriters  established  a  strategic
relationship  between  CNA  and a  well-respected  provider  of  farm  and  crop
insurance.

Beyond its strong  presence  in basic  commercial  insurance,  CNA is one of the
largest  underwriters of  professional  and specialty  coverages.  This business
includes liability insurance for healthcare  providers,  architects & engineers,
lawyers, accountants and other professionals; entertainment insurance; liability
coverage for  corporate  directors  and  officers;  and excess and surplus lines
insurance.  In addition,  CNA is a major presence in marine  insurance,  surety,
credit,  aviation  and  warranty.  Several  of  these  businesses  are  built on
long-standing successful partnerships with managing general underwriters such as
Victor O. Schinnerer, Aon Corporation and Poe & Brown.

During 1996,  CNA's  professional and specialty  businesses  performed well. The
Company continued to pursue a strategy of focusing on select customer groups and
developing  exceptional  knowledge  of their  coverage  needs.  Thanks  to a new
structured  process for increasing our understanding of customers in conjunction
with our  distribution  partners,  we are creating  "virtual  teams"  around key
market  segments.  In addition,  CNA  continued to  strengthen  its expertise in
specialty lines by hiring staff who have worked in the professions we serve.

The Marine  Office of America  Corporation  (MOAC),  the  leading  ocean  marine
underwriter in North America,  had one of its most successful  years ever, based
on superior  underwriting  and unmatched  knowledge of the marine  market.  On a
historical note, MOAC insured all the sailing,  rowing and kayaking  events,  as
well as the marinas and service  vessels  associated  with the Olympic  Games in
Atlanta.

In the  international  market for primary  insurance,  CNA is moving  ahead with
plans to  establish  a strong,  flexible  international  franchise.  These plans
encompass  alliances  with  other  international  insurers,   efforts  to  build
indigenous  operations  and selected  acquisitions.  CNA  continues to develop a
strategic  partnership  relationship with Assicurazioni  Generali S.p.A., one of
the largest European insurance organizations.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       7
<PAGE>
                          A LETTER TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------
                                      1996

In reinsurance,  along with the launch of the facultative reinsurance operation,
CNA pursued  several avenues of growth.  In the United States,  CNA enlarged its
treaty  reinsurance line in the alternative risk market, and in such established
markets as professional  liability and financial  reinsurance.  Internationally,
the reinsurance  operations  moved ahead with a strategy of establishing  CNA as
the  market of choice  among key  brokers  and ceding  customers.  In the London
market,  CNA became an investor in four Lloyd's of London  syndicates,  and also
received  approval from Lloyd's for the  establishment  of a CNA  syndicate.  In
Europe, we continued to expand business relationships from offices in Amsterdam,
Milan and Zurich.

In addition to commercial  insurance and  reinsurance,  CNA's  property/casualty
operations  include  personal  automobile  and  homeowners   insurance  sold  to
individuals.

In 1996,  CNA  continued  to build  the  foundation  of a  revitalized  personal
insurance  business.  The company  finalized and began  implementing a long-term
growth  strategy  to  position  CNA as one of the  largest  and most  successful
personal lines  organizations over the next decade. Key elements of the strategy
include substantially  increasing business from existing distribution  channels,
identifying  likely  acquisition  candidates  and  exploring  expanded  modes of
distribution.

INDIVIDUAL LIFE

CNA had its second consecutive year of strong growth and improved service in the
individual life insurance  marketplace.  CNA's products include term,  universal
and participating life policies, long-term care coverage and annuities.

Expanded  marketing effort resulted in increased  applications for life products
by more than 40 percent to over  285,000.  First-year  paid premium for life and
annuity  products  rose to more than $215  million in 1996 from $138  million in
1995,  while annuity  premiums rose to $221 million in 1996 from $174 million in
1995.

Meanwhile,  CNA  continued to  strengthen  its service  capability.  To meet the
continuing  demands  of new  sales,  CNA made  significant  additions  to staff,
completed  a change in  computer  architecture  and  finished  reorganizing  its
service  function  into  producer  teams.  In  addition,  the  business  process
outsourcing  agreement  with CSC will  further  enhance  our  ability to provide
low-cost, quality service to distributors and policyholders.

In addition to providing excellent service,  CNA is building its position in the
individual life business with rapid introduction of new products and an emphasis
on strong  distribution  partnerships.  1996  product  introductions  included a
portfolio of variable products,  new universal life and second-to-die  products,
and a series of products for high-risk individuals.

GROUP LIFE AND HEALTH

In this  marketplace,  CNA focuses on four general product  categories:  medical
benefits; pension products;  reinsurance;  and group life, accident & disability

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       8
<PAGE>
--------------------------------------------------------------------------------
                                      1996

and long-term care insurance. These products are sold to businesses,  groups and
associations.

In the market for  private  medical  benefits,  CNA's  strategy  is based on the
development of very close  partnerships with health care providers.  In 1996, we
advanced this strategy by  developing  and marketing  products and services that
build on the growing presence of Physician Hospital Organizations and Integrated
Delivery  Systems in the managed  care  environment.  We also  strengthened  our
capabilities  in the  areas of  provider  network  development  and  management,
medical  management and health care systems  integration.  These activities were
reinforced by the acquisition of CNA Health Partners.

Meanwhile, CNA's $2 billion in premium Federal Employees Health Benefits Program
benefited from ongoing investments in communications and claims automation.

In pension  products,  CNA is broadening  its product  offerings in the small to
medium-size market through California Central Trust Bank Corporation (CalTrust),
a California  trust and savings  bank, a subsidiary  acquired as a result of the
Continental merger.

In life and  group  reinsurance,  CNA  continued  to  build  on a strong  market
position.  On the life side,  we are  implementing  a growth  strategy  based on
strong service to the facultative and treaty markets.  On the group side, CNA is
moving  forward  with a  strategy  of  being a risk  partner  for  managed  care
organizations.

In group life,  accident & disability and long-term care insurance,  CNA focused
on system  improvements,  claims  process  redesign  and  enhanced  products and
distribution  within  the  context of an effort to  position  itself as a market
leader.

In  summary,  CNA ended a very  successful  first  century in 1996.  Through the
support of our business partners and the continuing dedication of CNA employees,
we moved ahead with a range of business expansion opportunities while continuing
to produce strong earnings.

Looking  ahead,  1997 is likely to be even more  challenging  than  1996.  It is
expected that excess  capacity in the industry  across  virtually all lines will
put  greater  pressure  on margins.  CNA will  continue to focus on  efficiency,
flexibility  and  profitability  with an  emphasis on  technology,  distribution
outreach and selected  opportunities for business  expansion.  These directions,
combined with its foundation of financial  strength,  position CNA for continued
success.  Our  challenge  is to  build  on the  legacy  of the  past for an even
brighter future.

Sincerely,

S/DENNIS H. CHOOKASZIAN

Dennis H. Chookaszian
Chairman and Chief Executive Officer
CNA Insurance Companies

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       9
<PAGE>






                                      CNA

<PAGE>

                           FINANCIAL SECTION CONTENTS
--------------------------------------------------------------------------------
                                      1996




                                       12

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


                                       30

                           CONSOLIDATED BALANCE SHEET


                                       32

                      STATEMENT OF CONSOLIDATED OPERATIONS


                                       33

                 STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY


                                       34

                      STATEMENT OF CONSOLIDATED CASH FLOWS


                                       37

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       81

                          INDEPENDENT AUDITORS' REPORT


                                       82

                            COMMON STOCK INFORMATION


                                       83

                               CORPORATE DIRECTORY




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       11
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                              Consolidated Results


Consolidated Results

In 1996, CNA substantially completed its merger with The Continental Corporation
(Continental) while continuing to build on the strength of 1995's operating
results.  The results reflect continued improvement in the underlying
operations, including improved loss experience, particularly in workers' compen-
sation business and growth in  individual  life,  partially  offset  by
increased  weather  related catastrophes. Additionally, capital gains contribut-
ed significantly to earnings.

CNA acquired Continental through a cash merger for approximately $1.1 billion on
May 10,  1995  (See  Note L). As a  result,  Continental  became a wholly  owned
subsidiary  of CNA  Financial  Corporation,  and  the  consolidated  results  of
operations  include  Continental  subsequent to the acquisition date. CNA funded
the  cash  purchase  price  with  proceeds  from a  five-year  revolving  credit
facility. Continental is an insurance holding company principally engaged in the
business of owning a group of property and casualty insurance companies.

CNA is the  largest  commercial  insurer in the  United  States,  third  largest
property-casualty  company and the twenty second largest life insurance  company
in the country,  based on 1995 net written  premium.  Based on market share, CNA
ranks first among United States  insurers in commercial  affiliation  marketing,
commercial  multiple  peril,  personal  packages  and  ocean  marine;  second in
commercial auto,  general  liability,  medical  malpractice,  federal  employees
health benefit plans,  multiple peril crop,  surety,  offshore energy,  accounts
receivable  credit;  third  in  automobile   warranty,   directors  &  officers,
farmowners  multiple  peril,  and  recreational  watercraft;  fourth in workers'
compensation  and sixth in reinsurance in the United  States.  In addition,  CNA
ranks  first,  second or third for  various  errors &  omissions  coverages  for
architects and engineers, accountants, lawyers and other professionals.

Revenues excluding realized  gains/losses were $16.4 billion, up 15.0% from 1995
and up 45.6% from 1994.  For 1996,  revenues  reflect  increases of $1.7 billion
(14.9%) in earned premiums,  $199.4 million (9.6%) in net investment  income and
$190.0 million (44.8%) in other revenues.

For 1996,  CNA  reported  net  operating  income  (which  excludes  net realized
investment  gains/losses)  of $577.7  million,  or $9.25 per share,  compared to
$462.6 million,  or $7.37 per share,  for 1995 and $187.0 million,  or $2.94 per
share, for 1994.

Realized  investment gains, net of tax, amounted to $387.1 million, or $6.26 per
share in 1996,  compared to net realized  investment gains of $294.4 million, or
$4.77 per share in 1995 and net realized investment losses of $150.5 million, or
$2.43 per share, in 1994.

Net income for 1996 was $964.8 million,  or $15.51 per share,  compared with net
income of $757.0 million,  or $12.14 per share,  for 1995 and $36.5 million,  or
$0.51 per share in 1994.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       12
<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                                    1996          1995*         1994
-------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                <C>           <C>             <C>
OPERATING SUMMARY (excluding realized investment
gains/losses):
Revenues:
   Premiums                                          $13,479.0      $11,735.1     $9,474.4
   Net investment income                               2,276.0        2,076.6      1,551.2
   Other                                                 614.2          424.2        220.1
-------------------------------------------------------------------------------------------
Total revenues                                        16,369.2       14,235.9     11,245.7
Benefits and expenses                                 15,628.5       13,649.5     11,144.4
   Income before income tax                              740.7          586.4        101.3
Income tax (expense) benefit                            (163.0)        (123.8)        85.7
-------------------------------------------------------------------------------------------
   Net operating income
   (excluding realized investment gains/losses)      $   577.7      $   462.6     $  187.0
===========================================================================================
SUPPLEMENTAL FINANCIAL DATA:
Net operating income (loss) by group:
   Property/Casualty                                 $   575.8      $   457.0     $   147.9
   Life                                                  109.9          103.8          87.0
   Other, primarily interest expense                    (108.0)         (98.2)        (47.9)
--------------------------------------------------------------------------------------------
                                                         577.7          462.6         187.0
--------------------------------------------------------------------------------------------
Net realized investment gains (losses) by group:
   Property/Casualty                                     303.5          207.9        (104.6)
   Life                                                   95.7           85.4         (45.6)
   Other                                                 (12.1)           1.1          (0.3)
---------------------------------------------------------------------------------------------
                                                         387.1          294.4        (150.5)
---------------------------------------------------------------------------------------------
Net income (loss) by group:
   Property/Casualty                                     879.3          664.9          43.3
   Life                                                  205.6          189.2          41.4
   Other, primarily interest expense                    (120.1)         (97.1)        (48.2)
--------------------------------------------------------------------------------------------
                                                     $   964.8      $   757.0     $   36.5
============================================================================================
*Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>

                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       13
<PAGE>


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                          Property/Casualty Operations



Property/Casualty Operations
<TABLE>
<CAPTION>
PROPERTY/CASUALTY GROUP
--------------------------------------------------------------------------------------------
Year Ended December 31                                  1996             1995*          1994
--------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                              <C>               <C>           <C>
Operating Summary (excluding realized
investment gains/losses):
Revenues:
   Premiums                                        $10,127.1         $8,723.8      $6,838.5
   Net investment income                             1,881.3          1,699.8       1,240.4
   Other                                               508.4            348.0         170.4
--------------------------------------------------------------------------------------------
                                                    12,516.8         10,771.6       8,249.3
Benefits and expenses                               11,778.7         10,193.3       8,210.1
--------------------------------------------------------------------------------------------
   Operating income before income tax                  738.1            578.3          39.2
Income tax (expense) benefit                          (162.3)          (121.3)        108.7
--------------------------------------------------------------------------------------------
   Net operating income
   (excluding realized investment gains/losses)    $   575.8         $  457.0      $  147.9
============================================================================================
*Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>

Commercial  lines  customers  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 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.

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

Property/casualty  involuntary risks include mandatory participation in residual
markets,  statutory  assessments for  insolvencies of other insurers,  and other
charges.

The  property/casualty  group also provides loss control,  policy administration
and claim  administration  services  under  service  contracts  for  fees.  Such
services are  provided  primarily in the  workers'  compensation  market,  where
retention of more risk by the employer through self-insurance or high-deductible
programs has become increasingly prevalent.
<PAGE>

Property/casualty  profitability  continued  to show  improvement  in  1996  and
reflects both increases in investment income and improved  underwriting results.
Pretax operating income excluding net realized  investment  gains/losses for the
property/casualty insurance subsidiaries was $738.1 million in 1996, compared to
$578.3 million and $39.2 million in 1995 and 1994,  respectively.  Net operating
income excluding net realized investment gains/losses of CNA's property/casualty
insurance  subsidiaries was $575.8 million for 1996,  compared to $457.0 million
and $147.9 million in 1995 and 1994, respectively.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       14
<PAGE>
-------------------------------------------------------------------------------
                      Property/Casualty Operations (cont.)


Property/casualty revenues,  excluding net realized investment gains/losses were
$12.5  billion,  up  approximately  16.2% from $10.8 billion in 1995 and up from
$8.2 billion in 1994.  Continental  revenues,  excluding net realized investment
gains/losses, for 1996 and 1995 were $3.2 billion and $2.1 billion,respectively.
The 1995 Continental results are subsequent to May 10, 1995.

Property/casualty  earned premiums were $10.1 billion in 1996, up  approximately
16.1%  from the $8.7  billion  earned in 1995 and up from $6.8  billion in 1994.
Continental  earned  premiums  for 1996  and 1995  were  $2.7  billion  and $1.7
billion,  respectively.  The 1995 Continental  results are subsequent to May 10,
1995.

Property/casualty  investment income for 1996 was $1.9 billion, up approximately
10.7% from the $1.7 billion in 1995 and up 51.7% from the $1.2 billion in 1994.

Investment  income increased  primarily due to the inclusion of the Continental
portfolio  for the full year of 1996 offset in part by slightly  lower yields on
the bond segment of the investment portfolio.

The bond segment of the investment portfolio yielded 6.8% in 1996 compared with
6.9% and 6.4%  in 1995 and 1994, respectively.

The  underwriting  loss for 1996 was  $1,143.2  million,  compared  to  $1,121.5
million and $1,201.2 million in 1995 and 1994,  respectively.  The GAAP combined
ratio  was  108.9 for  1996,  compared  with  110.3 and 115.0 for 1995 and 1994,
respectively.

Catastrophe  losses for 1996 on a pretax basis were  approximately $315 million,
compared  with  $149  million  in 1995 and $283  million  in  1994.  CNA's  1996
catastrophe losses were primarily weather related losses, including winter
storms and flooding. CNA's 1995 catastrophe losses related primarily to tropical
storms and hail storms in Texas. CNA's 1994 catastrophe losses related primarily
to the Northridge  earthquake  near  Los  Angeles  and  severe  winter  storms
in  the Northeast.





                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       15
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                      Property Casualty Operations (cont.)


The following table shows the components of underwriting  results for commercial
lines:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - COMMERCIAL
-------------------------------------------------------------------------------------------------
Year Ended December 31                                      1996             1995*          1994
-------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                     <C>                <C>           <C>
Premiums Earned:
     Professional and specialty                         $1,844.9          $1,557.7      $1,010.1
     General liability and commercial automobile         1,754.1           1,648.9       1,261.1
     Workers' compensation                               1,542.5           1,475.8       1,426.3
     Multiple peril                                      1,046.9             869.9         389.0
     Accident and health                                   919.0             699.1         557.1
     Reinsurance and other                               1,188.9             973.9         773.5
-------------------------------------------------------------------------------------------------
                                                         8,296.3           7,225.3       5,417.1
Losses and expenses                                      9,149.4           8,146.1       6,362.8
-------------------------------------------------------------------------------------------------
   Net underwriting losses before investment income     $ (853.1)         $ (920.8)     $ (945.7)
==================================================================================================
* Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>
Premiums for the property/casualty commercial segment increased 14.8% in 1996 to
$8.3  billion  from  $7.2  billion  in 1995 and up from $5.4  billion  in 1994.
Commercial  premiums for Continental  were $1.7 billion and $1.4 billion in 1996
and 1995, respectively.  The Continental results for 1995 were subsequent to May
10, 1995.

Professional and specialty earned premium increased  approximately 18.4% to $1.8
billion in 1996, up from $1.6 billion in 1995 and $1.0 billion in 1994. The 1996
premium  increase was primarily a result of a full year of  Continental  premium
revenue which added  approximately  $175 million in additional premium from 1995
levels. Continental added approximately $460 million of the 1995 increase over
1994.

General liability and commercial  automobile earned premiums were  approximately
$1.8 billion in 1996, up approximately 6.4% from the $1.6 billion earned in 1995
and up 39.1% from the $1.3 billion in 1994.  The  increase in general  liability
premium resulted primarily from an increase in commercial  affiliation marketing
business of $180 million.  Continental  premium revenue was  approximately  $275
million of the increase in 1995 premium over 1994.

Earned premium from workers' compensation increased  approximately 4.5% in 1996,
up from the $1.5 billion and $1.4 billion earned in 1995 and 1994, respectively.
The increase in workers' compensation premium earned resulted from the inclusion
of Continental business for a full year.

Multiple peril earned premium increased  approximately  20.3% to $1.0 billion in
1996,  from $0.9  billion  in 1995 and $0.4  billion in 1994.  The 1996  premium
increase of $177 million is primarily  attributable to an increase in commercial
package  business of $90 million and $40 million  resulting  from  inclusion  of
Continental for a full year.  Continental premium in 1995 was approximately $440
million or 91% of the growth from 1994.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       16
<PAGE>
--------------------------------------------------------------------------------
                      Property/Casualty Operations (cont.)

Accident and health earned  premiums were approximately $0.9 billion in 1996,
increasing  approximately 31.5% from the $0.7 billion earned in 1995 and up from
the $0.6 billion in 1994. Accident and health premium increased primarily due to
increases in mass market  association  premium of $145 million,  group long-term
disability  premium of $25 million,  as well as an increase  from a full year of
Continental of $28 million.

Earned premium from reinsurance and other increased  approximately 22.1% to $1.2
billion in 1996,  up from the $1.0 billion and $0.8  billion  earned in 1995 and
1994,   respectively.

Reinsurance and other premium earned increased by approximately  $215 million to
which the  inclusion of  Continental  results for a full year  contributed  $163
million. Continental added approximately $105 million to 1995 results.

Underwriting  results in commercial  lines improved to a loss of $853.1 million,
an improvement of approximately 7.4% from the $920.8 million loss in 1995 and an
improvement  of 9.8%  from the  $945.7  million  in 1994.  This  improvement  is
primarily  the result of  improved  loss  experience,  particularly  in workers'
compensation   business,   partially   offset  by  increased   weather   related
catastrophes.

The following  table shows the components of  underwriting  results for personal
lines:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - PERSONAL
---------------------------------------------------------------------------------------------
Year Ended December 31                                      1996         1995*          1994
---------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                    <C>            <C>           <C>
Premiums Earned:
     Personal lines packages                            $1,063.3      $  781.6      $  562.6
     Monoline automobile and property coverages            366.5         325.4         314.2
     Accident and health                                   168.9         107.8          88.9
---------------------------------------------------------------------------------------------
                                                         1,598.7       1,214.8         965.7
Losses and expenses                                      1,782.5       1,316.7       1,150.9
---------------------------------------------------------------------------------------------
   Net underwriting losses before investment income     $ (183.8)     $ (101.9)     $ (185.2)
==============================================================================================
* Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>

Personal lines earned premium increased 31.6% to $1.6 billion from the $1.2
billion earned in 1995 and up from the $966 million earned in 1994.  The 1996
increase in personal lines premium resulted primarily from the cancellation of a
quota share agreement, under which Continental ceded premium, and the inclusion
of Continental business for the full year of 1996. Continental was responsible
for $206 million of the $249 million in premium revenue growth from 1994 to
1995.

The  underwriting  loss in  personal  lines was $183.8  million,  an increase of
approximately  80.4% from the $101.9  million loss in 1995 and an improvement of
approximately 0.8% from the $185.2 million loss in 1994. The change from 1995 to
1996 was primarily due to increased weather related  catastrophes and additional
premium  volume due to the  cancellation  of the quota  share  agreement,  noted
above.
                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       17
<PAGE>

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




The following table shows the components of underwriting results for involuntary
risks:
<TABLE>
<CAPTION>
PROPERTY/CASUALTY - INVOLUNTARY RISKS
------------------------------------------------------------------------------------------------
Year Ended December 31                                        1996          1995*          1994
------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                      <C>             <C>            <C>
Premiums Earned:
   Workers' compensation                                   $ 135.6         $178.2        $350.0
   Private passenger automobile                               57.9           79.7          46.4
   Commercial automobile                                      36.4           19.9          54.3
   Property and multiple peril                                 2.2            5.9           5.0
------------------------------------------------------------------------------------------------
                                                             232.1          283.7         455.7
Losses and expenses                                          338.4          382.5         526.0
------------------------------------------------------------------------------------------------
    Net underwriting losses before investment income       $(106.3)        $(98.8)       $(70.3)
================================================================================================
* Includes the results of The Continental Corporation since May 10, 1995.
</TABLE>

Involuntary  risk earned  premium  decreased to $232 million down  approximately
18.2% from the $284 million earned in 1995 and down from the $456 million earned
in 1994.  The decrease in involuntary risk premium resulted from a greater
willingness on the part of the voluntary market to write these types of risks,
particularly  workers'  compensation  and private  passenger  automobile
coverages.







                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       18
<PAGE>
--------------------------------------------------------------------------------
                      Property/Casualty Operations (Cont.)

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 adjustments becomes apparent.

The following table reflects the effects of management's  ongoing  evaluation of
reserve levels and is comprised of the following components:

RESERVE DEVELOPMENT
------------------------------------------------------
Year Ended
December 31         1996         1995          1994
------------------------------------------------------
(In millions of dollars, (adverse)/favorable)
Environmental
  Pollution         $(65)       $(226)        $(181)
Asbestos             (51)        (274)          (37)
Other                207          378           289
------------------------------------------------------
  Total             $ 91        $(122)        $  71
======================================================

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, multiple insurers 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, management believes it is not practicable to develop a
meaningful range for any such additional reserves that may be required. See Note
E to the Consolidated Financial Statements for further discussion of
environmental pollution and asbestos reserves.

Unfavorable 1996 environmental pollution and asbestos reserve development of $65
million and $51 million, respectively, results from CNA's on-going monitoring of
current  payment and settlement  patterns,  current  pending cases and potential
future claims.

Other 1996 and 1995  favorable  reserve  development,  which  aggregated to $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.

Other  favorable  reserve  development  during 1994  aggregated to $289 million,
which  was  principally   attributable  to  positive   severity   experience  in
professional  liability  lines and  improvement  in  voluntary  and  involuntary
workers' compensation experience.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       19
<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                                Life Operations

Life Operations
<TABLE>
<CAPTION>
LIFE GROUP
---------------------------------------------------------------------------------------------
Year Ended December 31                                          1996        1995         1994
---------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                        <C>       <C>          <C>
OPERATING SUMMARY (excluding realized
investment gains/losses):
Revenues:
   Individual Premium
     Accident and health                                   $     1.8    $   32.7     $   32.6
     Life and annuity                                          629.1       497.1        369.4
----------------------------------------------------------------------------------------------
         Total individual                                      630.9       529.8        402.0
----------------------------------------------------------------------------------------------
   Group Premium
     Accident and health                                     2,548.0     2,189.7      2,111.2
     Life and annuity                                          194.9       312.9        165.0
----------------------------------------------------------------------------------------------
         Total group                                         2,742.9     2,502.6      2,276.2
----------------------------------------------------------------------------------------------
            Total premiums                                   3,373.8     3,032.4      2,678.2
   Net investment income                                       400.0       369.2        310.6
   Other                                                       106.4        76.2         49.6
----------------------------------------------------------------------------------------------
            Total revenues                                   3,880.2     3,477.8      3,038.4
Total benefits and expenses                                  3,709.5     3,317.5      2,904.0
----------------------------------------------------------------------------------------------
            Operating income before income tax                 170.7       160.3        134.4
Income tax expense                                              60.8        56.5         47.4
----------------------------------------------------------------------------------------------
   Net operating income (excluding realized
     investment gains/losses)                              $   109.9    $  103.8     $   87.0
==============================================================================================
</TABLE>
During 1996, CNA's individual and group operations  experienced  another year of
strong growth,  building on the momentum established last year. Profits rose due
to increased  investment income and continued favorable mortality  experience as
well as a change in interest  rate  spread  assumptions  on  interest  sensitive
products.

CNA sells a variety of individual and group insurance  products.  The individual
insurance  products  consist  primarily of term,  universal life,  participating
policies and individual annuity products.  Products developed in 1996 included a
portfolio  of  variable  products  and new  universal  life  products  which are
expected to be marketed in 1997. 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. 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 the medical and  hospitalization  market, CNA
underwrites  the Federal  Employees  Health  Benefits  Program (FEHBP) which had
revenues of $2.1 billion,  $1.9 billion and $1.8 billion in 1996, 1995 and 1994,
respectively.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       20
<PAGE>
--------------------------------------------------------------------------------
                            Life Operations (cont.)

Life insurance revenues,  excluding net realized investment gains, were up 11.6%
to $3.9  billion for 1996 as compared to $3.5 billion for 1995 and up 27.7% from
$3.0 billion for 1994.

Life premiums for 1996 were up 11.3% to $3.4 billion as compared to $3.0 billion
for 1995 and up 26.0% from 1994 premiums of $2.7 billion.

Life and annuity  premiums  continue  to  increase  as demand for CNA's  Viaterm
product remains strong,  with premium increasing  approximately $76 million over
1995's level, as well as an increase in annuity  premiums of  approximately  $47
million.  Individual  policies  in-force  increased  22% in 1996 to 799,000 from
653,000 in 1995.  Individual  accident and health  premiums  declined due to CNA
selling its individual disability income business in late 1995.

Group accident and health  premium  increases  were  primarily  attributable  to
increases in CNA's FEHBP business of approximately  $230 million and an increase
in other group medical  business of approximately  $75 million.  These increases
were offset, in part, by reductions in group life and annuity business.

Life investment  income  increased by  approximately  8.3% due to a larger asset
base generated from the increased  cashflows  resulting from premium growth. The
bond segment of the life investment portfolio yielded 6.5% in 1996 compared with
6.9% and 6.6% in 1995 and 1994, respectively.

CNA's life  insurance net  operating  income  excluding net realized  investment
gains was $109.9 million for 1996,  compared to $103.8 million and $87.0 million
for 1995 and 1994, respectively.









                           CNA FINANCIAL CORPORATION
                          ---------------------------
                                       21
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                                  Investments




Investments
-----------

The following table summarizes CNA's general account  investments  shown at cost
or amortized cost for each of the last five years.

<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS - GENERAL ACCOUNT
-------------------------------------------------------------------------------------------------
December 31                1996   %          1995   %      1994   %       1993   %      1992   %
-------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                    <C>         <C>    <C>      <C>  <C>      <C>  <C>       <C>  <C>      <C>
Investments:
   Fixed maturities
   (at amortized cost):
       Bonds:
         Taxable         $22,631   65     $25,832   75  $17,484   63   $11,933   48  $ 7,286   33
         Tax-exempt        4,860   14       3,453   10    3,717   13     4,725   19    9,502   42
       Redeemable
         preferred stocks     49   --         100   --      423    2       445    2      568    3
   Equity securities:
     Common stocks           478    1         734    2      729    3       433    2      305    1
     Non-redeemable
       preferred stocks      224    1           3   --        8   --        --   --        5   --
   Mortgage loans and
     real estate             123   --         122   --       47   --        62   --       89   --
   Policy loans              174   --         177    1      176    1       174    1      179    1
   Other invested assets     617    2         483    1      103   --        69   --       55   --
   Short-term investments  5,854   17       3,725   11    5,036   18     6,944   28    4,444   20
--------------------------------------------------------------------------------------------------
Investments              $35,010  100%    $34,629  100% $27,723  100%  $24,785  100% $22,433  100%
==================================================================================================
Investments at
   Carrying Value*       $35,412          $35,886       $26,943        $25,363       $22,478
==================================================================================================
*As reported in the Consolidated Balance Sheet
</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.

At December 31, 1996,  total  Separate  Account  business  cash and  investments
amounted  to  $5.7   billion   with  taxable   fixed   maturities   representing
approximately  80.9% of the  total.  Approximately  81.6% of  Separate  Accounts
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>

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.

                           CNA FINANCIAL CORPORATION
                           ------------------------
                                       22
<PAGE>

--------------------------------------------------------------------------------
                              Investments (cont.)


The general account portfolio consists primarily of high quality (BBB or higher)
marketable  fixed  maturities,  92.7% and 93.9% of which are rated as investment
grade at December 31, 1996 and 1995, respectively.

The  following  table  summarizes  the ratings of CNA's  general  account  fixed
maturity debt portfolio at carrying value (market):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
December 31                                        1996       %       1995       %         1994         %

----------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                           <C>       <C>     <C>         <C>     <C>
U.S. government and affiliated securities     $11,625.5   42.0%  $18,904.7   62.3%   $12,697.8      63.8%
Other AAA rated                                 9,184.2   33.2     4,625.2   15.3      3,666.3      18.4
AA and A rated                                  3,657.3   13.3     3,511.5   11.6      2,153.6      10.8
BBB rated                                       1,167.4    4.2     1,424.5    4.7        475.1       2.4
Below investment grade                          2,020.3    7.3     1,862.1    6.1        919.6       4.6
---------------------------------------------------------------------------------------------------------
   Total                                      $27,654.7    100%  $30,328.0    100%   $19,912.4       100%
=========================================================================================================
</TABLE>
The  following  table  summarizes  the  ratings of CNA's  guaranteed  investment
contract  separate  account  fixed  maturity  debt  portfolio at carrying  value
(market):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
December 31                                       1996       %       1995        %      1994          %
--------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                          <C>          <C>   <C>         <C>     <C>          <C>
U.S. government and affiliated securities     $   192.4    5.0%  $ 1,743.4   36.4%  $ 1,302.6     28.4%
Other AAA rated                                 2,244.9   58.1       827.6   17.3       933.4     20.4
AA and A rated                                    661.5   17.1       913.6   19.1       806.9     17.6
BBB rated                                         292.2    7.6       361.1    7.5       436.3      9.5
Below investment grade                            471.6   12.2       944.0   19.7     1,102.1     24.1
--------------------------------------------------------------------------------------------------------
  Total                                       $ 3,862.6    100%  $ 4,789.7    100%  $ 4,581.3      100%

========================================================================================================
</TABLE>

The  ratings in the two  tables  above are  primarily  from  independent  rating
agencies. In 1996, 1995 and 1994, respectively,  89%, 93% and 95% of the general
account  portfolio and 85%, 95% and 94% of the guaranteed  investment  portfolio
were rated by Standard and Poor's.  In addition,  CNA's  investment  in mortgage
loans and real estate as a percentage of total assets,  is  substantially  below
the industry average.

High yield  securities are bonds rated as below  investment grade by bond rating
agencies,  plus private  placements and other unrated  securities  which, in the
opinion of  management,  are below  investment  grade  (below  BBB).  High yield


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       23
<PAGE>

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


securities generally involve a 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.  As of December 31, 1996, CNA's concentration in
high yield bonds including  Separate Account business was approximately  4.2% of
total assets,  compared with  approximately  4.7% of total assets as of December
31, 1995.

Included in CNA's fixed  maturity  securities  at December 31, 1996 (general and
guaranteed investment  portfolios) are $8.6 billion of asset-backed  securities,
consisting of approximately  46.5% in U.S. government agency issued pass-through
certificates,  37.1% in collateralized mortgage obligations (CMOs), and 16.4% in
corporate  asset-backed  obligations.   The  majority  of  CMOs  held  are  U.S.
government  agency issues,  which are actively  traded in liquid markets and are
priced by broker-dealers.

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, 1996,  the amortized  cost of  asset-backed  securities was in excess of the
fair  value by  approximately  $5  million  compared  with  unrealized  gains of
approximately $200 million at December 31, 1995.

At December 31, 1996 and 1995, 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                       1996      1995
-------------------------------------------------
(In millions of dollars)
Security repurchase
   collateral                 $  100.5  $  776.0
Escrow*                        1,062.2   1,044.6
Commercial paper               3,207.3   1,613.1
Money markets                    746.4     114.2
Other                            737.3     176.6
-------------------------------------------------
     Total short-term
        investments           $5,853.7  $3,724.5
=================================================
*See Note A to the Consolidated Financial Statements.
<PAGE>

CNA invests from time to time in certain  derivative  financial  instruments  to
increase  investment  returns  and to reduce the  impact of changes in  interest
rates on certain corporate  borrowings.  CNA considers its derivative securities
as held for trading  purposes,  except for interest rate swaps  associated  with
corporate  borrowings,  and as such, such derivative  securities are recorded at
fair value at the  reporting  date with  changes in market  value  reflected  in
income. The interest rate swaps on corporate  borrowings are accounted for as an
adjustment  to  interest  expense.  See  Note  C of the  Consolidated  Financial
Statements for further information.

CNA's general account investments in bonds and redeemable  preferred stocks were
carried at their fair value of $27.7  billion at December  1996,  compared  with
$30.4  billion  at  December  31,  1995.  At  December  31,  1996 and 1995,  net
unrealized gains on fixed maturity  securities  amounted to  approximately  $181
million and $1,059 million,  respectively. The gross unrealized gains and losses
for the fixed  maturity  securities  portfolio at December  31, 1996,  were $444
million  and $263  million,  respectively,  compared  to $1,136  million and $77
million, respectively, at December 31, 1995.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       24
<PAGE>
--------------------------------------------------------------------------------
                              Investments (cont.)


Net  unrealized  gains on general  account  bonds at December  31, 1996 and 1995
include net  unrealized  gains on high yield  securities  of $41 million and $67
million,  respectively.  Carrying values of high yield securities in the general
account  were $2.0  billion  and $1.9  billion at  December  31,  1996 and 1995,
respectively.

At December 31, 1996, all fixed maturity securities in the guaranteed investment
contract  portfolio were carried at fair value and amounted to $3.9 billion.  At
December 31, 1996, net unrealized losses on fixed maturity  securities  amounted
to  approximately  $1 million.  This  compares to $63 million in net  unrealized
gains at December 31, 1995. The gross  unrealized gains and losses for the fixed
maturity  securities  portfolio at December  31, 1996,  were $55 million and $56
million,  respectively,  compared to $122 million and $59 million, respectively,
at December 31, 1995.


At  December  31,  1996,  high yield  securities  in the  guaranteed  investment
contract  portfolio  were  carried at fair value and  amounted to $472  million,
compared with $944 million at December 31, 1995. Net  unrealized  losses on high
yield securities held in such Separate  Accounts were $6 million and $14 million
at December 31, 1996 and 1995, respectively.



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       25
<PAGE>


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
                         Liquidity and Capital Resources


Liquidity and Capital Resources:
--------------------------------

The liquidity  requirements  of CNA,  excluding the  acquisition  of Continental
described below, have been met primarily by funds generated from operations. The
principal  operating  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, 1996, CNA's operating  activities  generated net
positive cash flows of approximately $620 million, compared with $875 million in
1995 and $982 million in 1994. CNA believes that future  liquidity needs will be
met primarily by cash generated from operations.

As a result of the settlement of the Fibreboard litigation, CNA anticipates that
1997 operating cash flows will be substantially  lower, due to anticipated claim
payments. The Fibreboard claim payments for 1997 will include approximately $500
million in payments  made in late  December  1996,  which are  reflected  in the
balance sheet as other  liabilities  (see Note F of the  Consolidated  Financial
Statements).

To finance the  acquisition  of Continental  (including the  refinancing of $205
million  of  Continental  debt) CNA  entered  into a  five-year  $1.325  billion
revolving  credit  facility.  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 5.72% and
6.12% at  December  31,  1996 and  1995,  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.

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.

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

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% and 6.29% at December  31, 1996 and
1995, respectively.


<PAGE>

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

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       26
<PAGE>

--------------------------------------------------------------------------------
                    Liquidity and Capital Resources (cont.)




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,  1996 and 1995,  the  commercial  paper
program  borrowing  totaled $675  million and $500  million,  respectively.  The
weighted-average  interest  rate on  commercial  paper  was  5.67%  and 6.05% at
December 31, 1996 and 1995,  respectively.  The commercial  paper borrowings are
classified as long-term, as borrowing capacity under the committed bank 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 6.28% and 6.50% at December 31, 1996 and 1995, respectively.

As of December  31,  1996,  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 both CNA and The Continental Corporation  (Continental) and CNA's
preferred stock.
<TABLE>
<CAPTION>

|-------------------|==================================||---------------------------------------------|
|                   |        INSURANCE RATINGS         ||     DEBT AND STOCK RATINGS                  |
|                   |==================================||---------------------------------------------|
<S>                <C>          <C>          <C>       <C>       <C>        <C>          <C>
|                   |          Financial Strength      ||                                |            |
|                   |            |            |        ||         |   CNA    |           |Continental |
|                   |   CCC      |     CAC    |   CIC  || Senior  |Commercial| Preferred |  Senior    |
|                   |            |            |        ||  Debt   |  Paper   |   Stock   |   Debt     |
|                   |------------|------------|--------||---------|----------|-----------|------------|
| 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
                            -------------------------
                                       27
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
                              Accounting Standards


Accounting Standards
--------------------

Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
be Disposed Of

In March 1995, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting  Standard (SFAS) No.  121,  "Accounting  for
the Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of."  This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable  intangibles,  and goodwill related to
those assets to be held and used for long-lived assets and certain  identifiable
intangibles to be disposed of. This statement  requires that  long-lived  assets
and certain identifiable  intangibles  to be held and used by the  entity  be
reviewed  for impairment  whenever  events  or  changes  in  circumstances
indicate  that the carrying amount of an asset may not be recoverable.  This
Statement is effective for 1996 financial statements.  This Statement did not
have a significant impact on CNA.

Accounting for Stock-Based Compensation

In  October  1995,  the  FASB  issued  SFAS  123,  "Accounting  for  Stock-Based
Compensation.  " This Statement  establishes  financial accounting and reporting
standards for stock-based employee  compensation plans. The requirements of this
Statement is effective  for 1996  financial  statements.  This  Statement had no
impact on CNA as the Company has no compensation which qualifies.


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

In June 1996, the FASB issued SFAS 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  will not have a
significant impact on CNA.

Accounting Disclosure Rules and Practices

In January 1997, the Securities and Exchange  Commission  approved amendments to
Regulation S-X, Regulation S-K, Regulation S-B, and various forms to clarify and
expand existing  disclosure  requirements  with respect to derivative  financial
instruments and derivative  commodity  instruments.  The new rules would require
enhanced descriptions in the footnotes to the financial statements of accounting
policies  for  derivative   financial   instruments  and  derivative   commodity
instruments. They would also require disclosure outside the financial statements
of  qualitative  and  quantitative  information  about  market  risk  related to
derivative financial instruments,  other financial  instruments,  and derivative
commodity  instruments.  The  requirement of these  amendments are effective for
1997 financial  statements.  These amendments will not have a significant impact
on CNA.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       28
<PAGE>

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




Forward-Looking Statements

When included in this report,  the words  "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  (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.  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  statement  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
                           -------------------------
                                       29
<PAGE>
                       CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                           CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
ASSETS
--------------------------------------------------------------------------------------------------
December 31                                                            1996                 1995
--------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                               <C>                  <C>
Investments-Note B:
   Fixed maturities available for sale
      (cost: $27,539.6 and $29,385.4)                             $27,720.6            $30,444.7
   Equity securities available for sale
     (cost: $701.9 and $736.3)                                        859.1                917.7
   Mortgage loans and real estate (less accumulated
     depreciation: $4.1 and $3.6)                                     123.4                122.4
   Policy loans                                                       174.4                177.2
   Other invested assets                                              681.2                499.9
   Short-term investments-Note A                                    5,853.7              3,724.5
--------------------------------------------------------------------------------------------------
    TOTAL INVESTMENTS                                              35,412.4             35,886.4
--------------------------------------------------------------------------------------------------
Cash                                                                  257.1                221.6
Insurance receivables:
   Reinsurance receivables                                          6,965.0              7,169.1
   Other insurance receivables                                      5,942.5              5,833.9
   Less allowance for doubtful accounts                              (277.2)              (288.7)
Deferred acquisition costs                                          1,854.2              1,493.3
Accrued investment income                                             507.4                545.4
Receivables for securities sold                                       264.4                185.2
Federal income taxes recoverable (includes $151.4
  and $153.0 due from Loews)-Note D                                   133.8                132.7
Deferred income taxes-Note D                                        1,347.0              1,254.9
Property and equipment at cost
   (less accumulated depreciation $436.3 and $313.7)                  645.4                584.7
Prepaid reinsurance premiums                                          295.2                495.4
Intangibles-Note L                                                    417.7                456.3
Other assets                                                          848.9                522.1
Separate Account business                                           6,120.9              5,868.1
--------------------------------------------------------------------------------------------------
         TOTAL ASSETS                                             $60,734.7            $60,360.4
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>


                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       30
<PAGE>

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



<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------
December 31                                                            1996                 1995
<S>                                                              <C>                   <C>

Liabilities:
   Insurance reserves:
      Claim and claim expense-Note E                              $30,829.5            $32,032.4
      Unearned premiums                                             4,658.7              4,549.4
      Future policy benefits                                        4,181.3              3,515.9
      Policyholders' funds                                            745.6                705.0
      Securities sold under repurchase agreements                     100.5                774.1
      Payables for securities purchased                               405.2                163.3
      Participating policyholders' equity                             118.5                140.1
      Short-term debt-Note H                                            0.0                257.6
      Long-term debt-Note H                                         2,764.9              2,767.9
      Other liabilities                                             3,749.8              2,851.1
      Separate Account business                                     6,120.9              5,868.1
--------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                           53,674.9             53,624.9
--------------------------------------------------------------------------------------------------
Commitments and contingent  liabilities-Notes  E, F and G

Stockholders'equity-Note K:
   Common stock ($2.50 par value;
     Authorized - 200,000,000 shares;
     Issued - 61,841,969 shares)                                      154.6                154.6
   Money market cumulative preferred stock                            150.0                150.0
   Additional paid-in capital                                         434.7                434.7
   Retained earnings                                                6,024.3              5,065.6
   Net unrealized investment gains-Note B                             298.7                933.1
   Treasury stock, at cost                                             (2.5)                (2.5)
--------------------------------------------------------------------------------------------------
      TOTAL STOCKHOLDERS' EQUITY                                    7,059.8              6,735.5
--------------------------------------------------------------------------------------------------
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $60,734.7            $60,360.4
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>



                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       31
<PAGE>

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





<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Year Ended December  31                                     1996            1995             1994
--------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
<S>                                                   <C>             <C>              <C>
Revenues:
  Premiums-Note G                                      $13,479.0       $11,735.1        $ 9,474.4
  Net investment income-Note B                           2,276.0         2,076.6          1,551.2
  Realized investment gains (losses)-Note B                618.6           463.8           (246.2)
  Other                                                    614.2           424.2            220.1
--------------------------------------------------------------------------------------------------
                                                        16,987.8        14,699.7         10,999.5
--------------------------------------------------------------------------------------------------
Benefits and expenses:
  Insurance claims and
    policyholders' benefits-Note G                      11,370.6         9,951.7          8,450.3
  Amortization of deferred acquisition costs             2,192.1         1,843.5          1,377.5
  Other operating expenses                               1,879.7         1,679.8          1,235.2
  Interest expense                                         200.4           182.3             70.5
--------------------------------------------------------------------------------------------------
                                                        15,642.8        13,657.3         11,133.5
--------------------------------------------------------------------------------------------------
      Income (loss) before income tax                    1,345.0         1,042.4           (134.0)
Income tax (expense) benefit -Note D                      (380.2)         (285.4)           170.5
--------------------------------------------------------------------------------------------------
    NET INCOME                                         $   964.8       $   757.0        $    36.5
--------------------------------------------------------------------------------------------------
EARNINGS PER SHARE                                     $   15.51       $   12.14        $    0.51
==================================================================================================
WEIGHTED AVERAGE OUTSTANDING SHARES
   OF COMMON STOCK                                          61.8            61.8             61.8
==================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>




                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       32
<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,
December 31, 1993            $154.6      $150.0    $(2.5)     $434.7       $4,284.3   $  360.0    $5,381.1
  Net Income                      -           -        -           -           36.5          -        36.5
  Change in net unrealized
    gains/(losses) - Note B.      -           -        -           -              -     (866.4)     (866.4)
  Preferred dividends             -           -        -           -           (5.3)         -        (5.3)
-----------------------------------------------------------------------------------------------------------
BALANCE
DECEMBER 31, 1994            $154.6      $150.0    $(2.5)     $434.7       $4,315.5   $ (506.4)   $4,545.9
===========================================================================================================
Balance,
December 31, 1994            $154.6      $150.0    $(2.5)     $434.7       $4,315.5   $ (506.4)   $4,545.9
  Net income                      -           -        -           -          757.0          -       757.0
  Change in net unrealized
     gains/(losses) - Note B      -           -        -           -              -    1,439.5     1,439.5
  Preferred dividends             -           -        -           -           (6.9)         -        (6.9)
-----------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1995            $154.6      $150.0    $(2.5)     $434.7       $5,065.6   $  933.1    $6,735.5
============================================================================================================
Balance,
December 31, 1995            $154.6      $150.0    $(2.5)     $434.7       $5,065.6   $  933.1    $6,735.5
  Net income                      -           -        -           -          964.8          -       964.8
  Change in net unrealized
    gains/(losses) - Note B       -           -        -           -              -     (634.4)     (634.4)
  Preferred dividends             -           -        -           -           (6.1)         -        (6.1)
-----------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1996            $154.6      $150.0    $(2.5)     $434.7       $6,024.3   $  298.7    $7,059.8
===========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>


                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       33
<PAGE>

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



<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended December 31                                           1996          1995         1994
------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                         <C>            <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------

Net income                                                    $ 964.8       $ 757.0      $  36.5
                                                              ----------------------------------
Adjustments to reconcile net income to
 net cash flows from operating activities:
  Net realized investment (gains)/losses, pre-tax              (618.6)       (463.8)       246.2
  Participating policyholders' interest                          (4.8)         (3.6)       (12.0)
  Amortization of intangibles                                    25.1          18.9          3.1
  Amortization of bond discount                                (177.6)       (142.7)       (95.5)
  Depreciation                                                  138.2         101.0         66.1
  Changes in:
    Insurance receivables, net                                   83.8        (802.5)      (430.2)
    Deferred acquisition costs                                 (360.9)       (160.8)       (41.0)
    Accrued investment income                                    38.0         (30.4)      (161.2)
    Federal income taxes                                         (1.0)        (39.3)       (14.9)
    Deferred income taxes                                       352.6         221.0        (96.3)
    Prepaid reinsurance premiums                                200.2         129.8         (7.8)
    Insurance reserves                                         (358.0)        427.0      1,468.9
    Reinsurance payables                                       (228.5)        285.9        (25.0)
    Other, net                                                  566.9         577.5         45.3
------------------------------------------------------------------------------------------------
      Total adjustments                                        (344.6)        118.0        945.7
------------------------------------------------------------------------------------------------
      NET CASH FLOWS FROM
        OPERATING ACTIVITIES                                  $ 620.2       $ 875.0      $ 982.2
------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>



                            CNA FINANCIAL CORPORATION
                            ------------------------
                                       34
<PAGE>
--------------------------------------------------------------------------------
                     Statement of Consolidated Cash Flows (Cont.)




<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended December 31                                           1996          1995         1994
------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                      <C>             <C>        <C>

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

Purchases of fixed maturities                              $(34,312.2)   $(29,255.3)  $(34,149.4)
Proceeds from fixed maturities:
   Sales                                                     34,864.3      24,065.1     25,287.0
   Maturities, calls and redemptions                          1,796.3       2,855.2      4,506.3
Purchases of equity securities                                 (971.6)     (1,094.1)      (892.8)
Proceeds from sale of equity securities                       1,077.4       1,317.2        649.9
Change in short-term investments                             (2,028.9)      2,941.5      1,895.8
Purchases of property and equipment                            (205.3)       (126.2)      (109.5)
Change in securities sold under repurchase agreements          (673.6)     (1,704.5)     1,865.3
Change in other investments                                     146.1         157.9        (21.7)
Purchase of The Continental Corporation                             -      (1,125.5)           -
Cash acquired in connection with the Continental merger             -         165.1            -
Other acquisitions                                                  -         (72.0)           -
Other, net                                                       19.7         (38.5)         1.8
------------------------------------------------------------------------------------------------
         NET CASH FLOWS FROM INVESTING ACTIVITIES              (287.8)     (1,914.1)      (967.3)
-------------------------------------------------------------------------------------------------

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

Dividends paid to preferred shareholders                         (6.3)         (6.9)        (4.9)
Receipts from investment contracts credited
  to policyholder account balances                               11.0          22.6         32.8
Return of policyholder account
  balances on investment contracts                              (40.6)        (34.3)       (22.4)
Change in short-term debt                                      (257.7)          3.0            -
Principal payments on long-term debt                           (253.7)         (3.3)        (2.9)
Retirement of notes payable                                         -        (205.0)           -
Proceeds from issuance of long-term debt                        250.4       1,337.0          0.5
-------------------------------------------------------------------------------------------------
        NET CASH FLOWS FROM FINANCING ACTIVITIES               (296.9)      1,113.1          3.1
-------------------------------------------------------------------------------------------------
        NET CASH FLOWS                                           35.5          74.0         18.0
Cash at beginning of period                                     221.6         147.6        129.6
-------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                      $    257.1    $    221.6   $    147.6
=================================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>

                            CNA FINANCIAL CORPORATION
                            -------------------------
                                     35
<PAGE>

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



<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Year Ended December 31                                           1996          1995          1994
--------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                          <C>           <C>           <C>
Supplemental disclosure of cash flow information:

   Cash (paid) received:
      Interest expense                                        $(210.8)      $(169.5)       $(71.4)
      Federal income taxes                                       15.5        (102.5)         70.0
==================================================================================================

Supplemental disclosure of cash flow information relating to acquisitions:

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)

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.
* There were no significant acquisitions by CNA Financial Corporation during the
  years ended December 31, 1996 and December 31, 1994.
</TABLE>







                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       36
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                   Note A - Significant Accounting Policies:


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

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

The Consolidated  Financial Statements include CNA Financial Corporation (CNA or
the Company) and its subsidiaries which consist of  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.

CNA acquired The Continental Corporation (Continental) through a cash merger for
approximately  $1.1 billion on May 10,  1995,  and as a result,  the  financial
statements include the results of Continental subsequent to that date.

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 insureds,  including  individuals;  small,  medium and
large businesses; associations; professionals and groups.

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 1996. All significant 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.



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

Premium revenue
Insurance  premiums on  property/casualty  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  lifetype  contracts are comprised of contract
charges  and fees which are  recognized  over the  coverage  period.  Other life
insurance premiums are recognized as revenue when due after deductions for ceded
insurance.

Claim and claim expense reserves
Claim and claim expense  reserves,  except reserves for structured  settlements,
workers' compensation lifetime claims and accident and health disability claims,
are based on undiscounted (a) case basis estimates for losses reported on direct
business,  adjusted  in  the  aggregate  for  ultimate  loss  expectations,


                           CNA FINANCIAL CORPORATION
                            ------------------------
                                       37
<PAGE>

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

(b)estimates of unreported  losses based upon past experience,  (c) estimates of
losses on assumed insurance, and (d) 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.

Claim and claim expense reserves are based on estimates and the ultimate
liability may vary significantly from such estimates.  CNA regularly reviews its
reserves,  and any  adjustments  that are made to the reserves are  reflected in
operating  income in the period the need for such  adjustments  become apparent.
Further discussion of claim and claim expense reserves may be found in Note E.

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 recorded in future policy benefits reserves. Obligations
for  structured  settlements  not funded by annuities are carried at the present
value of  future  benefits.  At  December  31,  1996 and  1995,  such  reserves,
discounted at interest  rates  ranging from 6.25% to 7.5%,  totaled $924 million
and $897 million,  respectively,  (reflecting  a discount of $1,556  million and
$1,555 million, respectively).

Workers'  compensation  lifetime claims and accident and health disability claim
reserves  are  discounted  at  interest  rates  ranging  from  3.5% to 6.0% with
mortality  and  morbidity  assumptions  reflecting  the  Company's  and  current
industry  experience.  At December 31, 1996 and 1995, such  discounted  reserves
totaled $2,165 million and $2,240 million,  respectively  (reflecting a discount
of $903 million and $894 million, respectively).

Future policy benefits reserves
Reserves for traditional life insurance 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.  Renewal  expense  estimates  include  the  estimated  effects of
inflation and expenses beyond the premium paying period.

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.
Accrual  of such  assessments  is not  practical,  as past  experience  is not a
reliable indicator of future activity.

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


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       38
<PAGE>
-------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)

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.  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 ordinary 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 adjusted as appropriate.

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 considers its derivative securities as held for trading purposes, except for
interest rate swaps associated with corporate  borrowings,  and as such, trading
derivatives  are recorded at fair value at the  reporting  date.  Interest  rate
swaps associated with corporate borrowings are accounted for as an adjustment to
interest expense.

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 market value.

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 and equity  securities
are reflected as part of stockholders' equity, net of applicable deferred income
taxes and participating policyholders' interest. Unrealized investment gains and
losses on derivative  securities,  except for the interest rate swaps associated
with corporate  borrowings,  are reflected as part of realized  investment gains
and losses.  Unrealized  gains or losses  related to changes in the value of the
interest rate swaps associated with corporate borrowings are not recognized.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       39
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)


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 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  $986.8  million in an escrow  account,
pursuant to the Fibreboard Global Settlement Agreement,  as discussed in Note F.
The funds are  included  in  short-term  investments  and are  invested  in U.S.
Treasury  securities.  The escrow  account  amounted  to  $1,071.2  million  and
$1,044.6 million at December 31, 1996 and 1995, respectively.

Participating business
Participating  business represented 0.5%, 0.6%, and 0.9% of gross life insurance
in force and 0.7%,  0.8%,  and 1.0% of life  insurance  premium income for 1996,
1995, and 1994, 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.  In  the  accompanying  Statement  of
Consolidated  Operations,  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 issues certain  investment and annuity contracts.
The supporting assets and liabilities of these contracts are legally  segregated
and  reflected  in the  accompanying  Consolidated  Balance  Sheet as assets and
liabilities  of  Separate  Account  business.   Continental   Assurance  Company
guarantees   principal  and  a  specified  return  to  the   contractholders  on
approximately 82% of the Separate Account business.  Substantially all assets of
the Separate Account business are carried at fair value.

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

-------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)



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.  Such temporary  differences  primarily
relate to insurance reserves (principally claim reserve  discounting),  unearned
premium   reserves,   net  unrealized   investment   gains/losses  and  deferred
acquisition   costs.   Deferred   taxes  also  arise  from  net  operating  loss
carryforwards.

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 $14.8 million, $10.7 million and $8.3 million in 1996,
1995 and 1994, respectively.

EARNINGS PER SHARE
--------------------------------------------------------------------------------
Earnings  per share  applicable  to common  stock are based on weighted  average
outstanding  shares  of  common  stock of  61,798,000  in 1996,  1995 and  1994,
respectively.



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       41
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                              Note B - Investments




Note B--Investments:
--------------------
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
--------------------------------------------------------------------------------------------------
Year Ended December 31                                              1996         1995         1994
<S>                                                           <C>           <C>          <C>
---------------------------------------------------------------------------------------------------
(In millions of dollars)
Fixed maturities:
   Bonds:
     Taxable                                                    $1,716.4     $1,512.1     $1,009.8
     Tax-exempt                                                    272.5        262.8        333.7
   Redeemable preferred stocks                                       2.0          3.9         13.5
Equity securities                                                   24.6         47.3         17.6
Mortgage loans                                                       9.6         12.6          4.3
Real estate                                                          1.1          0.9          0.9
Policy loans                                                        12.5         12.6         10.2
Short-term investments                                             231.3        214.7        130.5
Security repurchase transactions-income                             77.0        166.8        149.7
Other                                                               45.1         46.2         22.2
---------------------------------------------------------------------------------------------------
                                                                 2,392.1      2,279.9      1,692.4
Investment expense                                                 (43.2)       (46.1)       (23.7)
Security repurchase transactions expenses and fees                 (72.9)      (157.2)      (117.5)
---------------------------------------------------------------------------------------------------
         Net investment income                                  $2,276.0     $2,076.6     $1,551.2
===================================================================================================
</TABLE>


                           CNA FINANCIAL CORPORATION
                          ---------------------------
                                       42
<PAGE>
--------------------------------------------------------------------------------
                          NOTE B - Investments (cont.)


<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
------------------------------------------------------------------------------------------------
Year Ended December 31                                          1996         1995          1994

------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                        <C>          <C>          <C>
Realized investment gains (losses):

   Fixed maturities                                          $ 292.8     $  221.8     $  (296.9)
   Equity securities                                           216.3        140.6          44.5
   Derivative securities                                        18.1         18.7           6.3
   Other, including Separate Account business                   91.4         82.7          (0.1)
                                                             -----------------------------------
                                                               618.6        463.8        (246.2)
Allocated to participating policyholders                       (14.3)        (7.8)         10.9
Income tax (expense) benefit                                  (217.2)      (161.6)         84.8
------------------------------------------------------------------------------------------------
     Net realized investment gains (losses)                    387.1        294.4        (150.5)
------------------------------------------------------------------------------------------------
Change in net unrealized investment gains (losses):
   Fixed maturities                                           (874.8)     1,854.7      (1,299.8)
   Equity securities                                           (26.2)       162.9         (57.0)
   Other, including Separate Account business                  (44.9)       323.2         (45.5)
                                                             -----------------------------------
                                                              (945.9)     2,340.8      (1,402.3)
Allocated to participating policyholders                        18.0        (44.2)         32.5
Income tax benefit (expense)                                   293.5       (857.1)        503.4
------------------------------------------------------------------------------------------------
   Change in net unrealized investment (losses) gains         (634.4)     1,439.5        (866.4)
------------------------------------------------------------------------------------------------
         Net realized and unrealized
           investment gains (losses)                         $(247.3)    $1,733.9     $(1,016.9)
=================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
----------------------------------------------------------------------------------------------------------
Year Ended December 31          1996                        1995                        1994
                         ----------------------  ------------------------------  -------------------------
                           Fixed         Equity        Fixed         Equity        Fixed         Equity
                         Maturities    Securities    Maturities    Securities    Maturities    Securities
----------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                     <C>          <C>            <C>          <C>            <C>           <C>
Proceeds from sales      $34,864.3    $1,077.4       $24,065.1    $1,317.2       $ 25,287.0     $649.9

==========================================================================================================

Gross realized gains     $   412.2    $  241.2       $   412.3    $  198.9        $   178.5     $ 65.8
Gross realized losses       (119.4)      (24.9)         (190.5)      (58.3)          (475.4)     (21.3)
----------------------------------------------------------------------------------------------------------
   Net realized gains
    (losses) on sales    $   292.8    $  216.3       $   221.8    $  140.6        $  (296.9)    $ 44.5
==========================================================================================================
</TABLE>




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       43
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                          Note B - Investments (cont.)



<TABLE>
<CAPTION>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------
                                         1996                                    1995
                            ---------------------------------    ----------------------------------
 December 31                   Gains     Losses      Net              Gains       Losses       Net
---------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                         <C>        <C>       <C>               <C>         <C>       <C>
Fixed maturities             $443.8     $(262.8)  $181.0            $1,136.4    $ (77.1)  $1,059.3
Equity securities             254.3       (97.1)   157.2               197.5      (16.1)     181.4
Other, including Separate
  Account business            171.0       (69.5)   101.5               304.1      (70.9)     233.2
                            -----------------------------------------------------------------------
                             $869.1     $(429.4)   439.7            $1,638.0    $(164.1)  $1,473.9
                            =======      =======                    ========     =======
Allocated to participating
policyholders                                       --                                       (18.1)
Deferred income tax
expense                                           (141.0)                                   (522.7)
---------------------------------------------------------------------------------------------------
     Net unrealized
     investment gains                             $298.7                                  $  933.1
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
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)
<S>                                    <C>            <C>            <C>        <C>
United States Treasury securities and
  obligations of government agencies    $ 9,854.8      $ 72.4         $ 91.9      $ 9,835.3
Asset-backed securities                   6,297.9        53.3           58.9        6,292.3
States, municipalities and political
   subdivisions - tax-exempt              4,859.6       120.9           29.3        4,951.2
Corporate securities                      4,730.1       121.0           63.2        4,787.9
Other debt securities                     1,748.0        59.5           19.2        1,788.3
Redeemable preferred stocks                  49.2        16.7             .3           65.6
--------------------------------------------------------------------------------------------
       Total fixed maturities            27,539.6       443.8          262.8       27,720.6
Equity securities                           701.9       254.3           97.1          859.1
--------------------------------------------------------------------------------------------
         Total                          $28,241.5      $698.1         $359.9      $28,579.7
============================================================================================
</TABLE>

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       44
<PAGE>
--------------------------------------------------------------------------------
                          Note B - Investments Cont.)
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
--------------------------------------------------------------------------------------------------
                                                            Gross           Gross
                                            Amortized     Unrealized     Unrealized      Market
December 31, 1995                              Cost          Gains         Losses        Value
--------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                        <C>           <C>             <C>           <C>
United States Treasury securities and
   obligations of government agencies       $13,064.0     $  479.5        $ 1.3         $13,542.2
Asset-backed securities                       5,939.7        160.3         13.8           6,086.2
States, municipalities and political
   subdivisions - tax-exempt                  3,452.8        163.7         13.4           3,603.1
Corporate securities                          4,522.3        210.3         39.9           4,692.7
Other debt securities                         2,306.3        105.4          7.5           2,404.2
Redeemable preferred stocks                     100.3         17.2          1.2             116.3
--------------------------------------------------------------------------------------------------
       Total fixed maturities                29,385.4      1,136.4         77.1          30,444.7
Equity securities                               736.3        197.5         16.1             917.7
--------------------------------------------------------------------------------------------------
         Total                              $30,121.7     $1,333.9        $93.2         $31,362.4
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
BY CONTRACTUAL MATURITY
------------------------------------------------------------------------------------------------
                                                        1996                        1995
                                            --------------------------  ------------------------
                                             Amortized       Market      Amortized       Market
December 31                                     Cost         Value          Cost         Value
------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                        <C>          <C>             <C>            <C>
Due in one year or less                     $ 2,494.1    $ 2,506.4       $   849.8      $   853.0
Due after one year through five years         8,376.9      8,294.8        11,912.8       12,117.3
Due after five years through ten years        4,810.4      4,828.5         4,537.8        4,761.4
Due after ten years                           5,560.3      5,798.6         6,145.3        6,626.8
Asset-backed securities not due
   at a single maturity date                  6,297.9      6,292.3         5,939.7        6,086.2
--------------------------------------------------------------------------------------------------
         Total                              $27,539.6    $27,720.6       $29,385.4      $30,444.7
==================================================================================================
</TABLE>

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

The carrying value of investments  (other than equity  securities) that have not
produced  income for the last twelve  months is $101.3  million at December  31,
1996,  compared  to $94.8  million  for the same  period  in 1995.  There are no
investments  in a single  issuer,  other than the U.S.  government,  that,  when
aggregated, exceed 10% of stockholders' equity.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       45
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                        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 balance sheet  approximate fair value for
cash, short-term  investments,  other insurance receivables,  accrued investment
income,  receivables  for  securities  sold,  securities  sold under  repurchase
agreements, payables for securities purchased, short-term debt 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
                           -------------------------
                                       46
<PAGE>
--------------------------------------------------------------------------------
                     Note C -- Financial Instruments (cont.)




<TABLE>
<CAPTION>
FINANCIAL ASSETS
-------------------------------------------------------------------------------------
                                           1996                      1995
                                 ---------------------------   ----------------------
                                   CARRYING     ESTIMATED       Carrying   Estimated
                                   AMOUNT       FAIR VALUE      Amount     Fair Value
-------------------------------------------------------------------------------------
(In millions of dollars)
<S>                               <C>           <C>            <C>        <C>
Investments:
   Fixed maturities - Note B       $27,720.6     $27,720.6      $30,444.7  $30,444.7
   Equity securities - Note B          859.1         859.1          917.7      917.7
   Mortgage loans                      112.6         114.5          119.3      115.9
   Policy loans                        174.4         162.7          177.2      166.6
   Other invested assets               681.2         681.2          499.9      543.4

Separate Account business:
   Fixed maturities                  4,608.3       4,608.3        5,499.3    5,499.3
   Equity securities                   169.2         169.2          242.7      242.7
   Short-term Investments              906.1         906.1           84.5       84.5
   Other                               437.3         437.3           41.6       48.7
-------------------------------------------------------------------------------------
</TABLE>

The following  methods and  assumptions  were used by CNA in estimating its fair
value disclosures 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 analyses 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 CORPORATION
                           -------------------------
                                       47
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                     Note C -- Financial Instruments (cont.)


<TABLE>
<CAPTION>
FINANCIAL LIABILITIES
---------------------------------------------------------------------------------------------
                                                  1996                        1995
                                         ----------------------------------------------------
                                          CARRYING     ESTIMATED      Carrying     Estimated
December 31                               AMOUNT       FAIR VALUE     Amount       Fair Value
---------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                      <C>          <C>          <C>           <C>
Premium deposits and annuity contracts    $1,064.5     $1,017.6      $ 825.5       $   776.8
Long-term debt                             2,764.9      2,762.2      2,767.9         2,819.9
Financial guarantee liabilities              382.0        378.3        479.6           472.8
Separate Account business:
   Guaranteed investment contracts         3,989.5      4,011.5      4,315.8         4,455.5
   Deferred annuities                         73.0         84.1         74.1           108.2
   Variable separate accounts                568.6        568.6        228.0           228.0
   Other                                     895.6        895.6        585.8           585.8
---------------------------------------------------------------------------------------------
</TABLE>

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

CNA's Senior Notes and debenture are valued based on quoted market  prices.  The
fair value for other  long-term  debt is estimated  using  discounted  cash flow
analyses,  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 or spot interest rates.

The fair value 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 carrying value.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       48
<PAGE>
-------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)




DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------
CNA invests from time to time in certain  derivative  financial  instruments  to
increase  investment  returns and to eliminate the impact of changes in interest
rates on  certain  corporate  borrowings.  Financial  instruments  used for such
purposes  include  interest  rate swaps,  put and call options,  commitments  to
purchase  securities,  futures and  forwards.  The gross  notional  principal or
contractual  amounts of these instruments in the general account at December 31,
1996,  totaled  $1,730.2  million  compared to $2,762.1  million at December 31,
1995.

The fair values  associated  with these  instruments  are generally  affected by
changes in interest rates and the stock market.  The credit exposure  associated
with these  instruments is generally limited to the unrealized fair value of the
instruments and will vary based on changes in market prices. The risk of default
depends on the  creditworthiness of the counterpart to the instrument.  Although
the Company is exposed to the aforementioned credit risk, it does not expect any
counterparty  to fail to  perform  as  contracted  based  on their  high  credit
ratings.  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
                           -------------------------
                                       49

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




A summary of the aggregate  notional or  contractual  amounts and estimated fair
values of these  instruments  at  December  31,  1996 and  1995,  as well as the
monthly average fair values, are presented below.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                            1996                                           1995
                          -----------------------------------------------------------------------------------------
                                          Fair Value                                     Fair Value
                                      -----------------                              -------------------
                          CONTRACTUAL/                                 Contractual/
                           NOTIONAL     ASSET    MONTHLY   RECOGNIZED    Notional      Asset    Monthly  Recognized
December 31                 VALUE    (LIABILITY) AVERAGE   GAIN(LOSS)     Value     (Liability) Average  Gain (Loss)
-------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                      <C>           <C>       <C>        <C>        <C>          <C>        <C>             <C>
Interest rate swaps -
  acquisition debt         $ 950.0      $3.0     $ 6.7     $(4.8)      $1,200.0     $(28.7)    $(14.9)       $  --
Trading:
  Futures                     38.2       0.7       1.6      (1.0)            --         --         --           --
  Forwards                   193.8      (2.1)     (1.8)    (13.1)            --         --         --           --
   Interest rate swaps        85.0      (0.4)      2.3      29.0           93.0       10.0        1.0          8.9
  Commitments to
   purchase government
   and municipal
   securities                406.5      (0.8)     (1.0)       --             --         --         --           --
Options purchased             56.7       2.1       4.8       6.8          973.2       41.4       10.0          9.8
Options written-debt
 and equity securities          --        --      (1.5)      1.2          495.9      (10.0)      (1.7)          --
-------------------------------------------------------------------------------------------------------------------
    TOTAL                 $1,730.2      $2.5     $11.1     $18.1       $2,762.1     $ 12.7      $(5.6)       $18.7
-------------------------------------------------------------------------------------------------------------------
</TABLE>
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 float-
ing 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, 1996, CNA had
outstanding  interest rate swap agreements with several banks having a total
notional principal amount of $950.0 million.  Those agreements which terminate
from May to December 2000 effectively fix the Company's  interest rate exposure
on $950.0 million of variable rate debt.

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.

                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       50
<PAGE>
--------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)


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 now, with delivery and settlement of
specified future date.

Commitments to purchase government and municipal  securities are a commitment to
purchase securities in the future at a predetermined price. Such commitments are
made when  management  believes  this market is  favorable  to the current  cash
market.

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.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       51
<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 1996, the inclusion of the CNA Tax Group in the consolidated  Federal income
tax return of Loews will result in an increased Federal income tax liability for
Loews. Accordingly, CNA will pay to Loews approximately $99 million for 1996. In
1995 and 1994, 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 and $26 million for 1994.

At December 31, 1996, CNA had net operating loss  carryforwards of approximately
$800  million for income tax purposes  that expire in years 2000  through  2010.
Those carryforwards resulted from the Company's 1995 acquisition of Continental.

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       52
<PAGE>
--------------------------------------------------------------------------------
                         Note D - Income Taxes (cont.)




Significant  components  of CNA's  deferred  tax  assets and  liabilities  as of
December 31, 1996 and 1995 are shown in the table below.
<TABLE>
<CAPTION>
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
----------------------------------------------------------------------------------------------
December 31                                                        1996              1995
----------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                          <C>                   <C>
Insurance reserves:
   Property/casualty claim reserve discounting                 $1,145.2              $1,328.0
   Unearned premium reserves                                      268.0                 251.0
   Life reserve differences                                       141.1                 153.4
   Other insurance reserves                                        31.4                  22.8
Deferred acquisition costs                                       (570.1)               (457.2)
Investment valuation differences                                   32.4                  74.8
Postretirement benefits other than pensions                       142.5                 140.5
Net unrealized gains                                             (141.0)               (522.7)
Net operating loss carryforwards                                  279.9                 298.0
Other, net                                                        267.6                 216.3
----------------------------------------------------------------------------------------------
     Total deferred tax assets and liabilities                  1,597.0               1,504.9
Valuation allowance                                              (250.0)               (250.0)
----------------------------------------------------------------------------------------------
     NET DEFERRED TAX ASSETS                                   $1,347.0              $1,254.9
==============================================================================================
</TABLE>

At December 31, 1996,  gross  deferred  tax assets and  liabilities  amounted to
$2.652 billion and $1.305 billion, respectively.  At December 31, 1995,  gross
deferred tax assets and  liabilities amounted to $2.717 billion and $1.462
billion, respectively.

The Loews/CNA Tax Group has a history of  profitability  and anticipates  future
taxable  income  sufficient  to fully  support  recognition  of its deferred tax
balance at December  31,  1996,  including  but not  limited to the  reversal of
existing   temporary   differences  and  the   implementation  of  tax  planning
strategies,   if  needed.  A  valuation  allowance  is  maintained  due  to  the
uncertainty  regarding the  realizability  of deferred tax assets related to the
Continental acquisition.



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       53
<PAGE>

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



Significant components of CNA's income tax provision are as follows:

<TABLE>
<CAPTION>
PROVISION FOR INCOME TAX
=========================================================================================
Year Ended December 31                                  1996          1995         1994
-----------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                  <C>          <C>           <C>
Current tax (expense) benefit on:
  Ordinary loss                                       $ 163.5       $ 94.0       $ 16.8
  Realized investment (gains) losses                   (192.4)      (158.4)        57.4
----------------------------------------------------------------------------------------
     Total current tax (expense) benefit                (28.9)       (64.4)        74.2
----------------------------------------------------------------------------------------
Deferred tax (expense) benefit on:
   Ordinary (income) loss                              (326.5)      (217.8)        68.9
   Realized investment (gains) losses                   (24.8)        (3.2)        27.4
----------------------------------------------------------------------------------------
     Total deferred tax (expense) benefit             $(351.3)      (221.0)        96.3
----------------------------------------------------------------------------------------
     TOTAL INCOME TAX (EXPENSE) BENEFIT               $(380.2)     $(285.4)      $170.5
========================================================================================
</TABLE>
<PAGE>
A reconciliation of the expected income tax (expense) benefit resulting from the
use of  statutory  tax  rates to the  effective  income  tax  (expense)  benefit
follows:
<TABLE>
<CAPTION>
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES
=================================================================================================
                                                     % of               % of               % of
                                                     Pretax             Pretax            Pretax
Year Ended December 31                        1996   Income   1995      Income     1994   Income
-------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                       <C>        <C>     <C>       <C>        <C>      <C>
Expected tax expense on ordinary
   income at statutory rates               $(259.2)  (35.0)%  $(205.2)    (35.0)%   $(35.5)  (35.0)%
Exempt interest and dividends
  received deduction                          86.5    11.7       79.2      13.5      110.1   108.7
Other items, net                               9.7     1.3        2.2       0.4       11.1    10.9
--------------------------------------------------------------------------------------------------
   Income tax (expense) benefit
   on ordinary income                       (163.0)  (22.0)    (123.8)    (21.1)      85.7    84.6
---------------------------------------------------------------------------------------------------
Expected tax (expense) benefit on
  realized investment gains/losses
  at statutory rates                        (211.5)  (35.0)    (159.6)    (35.0)      82.4    35.0
Other items, net                              (5.7)   (0.9)      (2.0)     (0.3)       2.4     1.0
---------------------------------------------------------------------------------------------------
  Income tax (expense) benefit on
  realized investment gains/losses          (217.2)  (35.9)%   (161.6)    (35.3)%     84.8    36.0%
---------------------------------------------------------------------------------------------------
         INCOME TAX (EXPENSE) BENEFIT      $(380.2)           $(285.4)              $170.5
===================================================================================================
</TABLE>


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       54

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




Note E - Liability for Unpaid Claims and Claim Adjustment Expenses
------------------------------------------------------------------

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.  The effects of
inflation, which can be significant,  are implicitly considered in the reserving
process  and  are  part  of the  recorded  reserve  balance.  Reserves  are  not
discounted except in the case of workers' compensation lifetime claims and
accident and health disability claims where the reserves are explicitly
discounted at rates allowed by insurance  regulators that range from 3.5% to
6.0% and  structured  settlements  where such reserves are discounted at
interest rates ranging from 6.25% to 7.5%.

Estimating  loss reserves is a difficult  process as there are many factors that
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
                           -------------------------
                                       55
<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 1996, 1995 and 1994.
<TABLE>
<CAPTION>
CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIMS AND CLAIM EXPENSES
------------------------------------------------------------------------------------------
Year Ended December 31                                 1996             1995          1994
-------------------------------------------------------------------------------------------
In millions of dollars)
<S>                                               <C>              <C>            <C>
Reserves at beginning of year:
  Gross                                             $31,044          $21,639       $20,812
  Ceded reinsurance                                   6,089            2,705         2,491
-------------------------------------------------------------------------------------------
       Net reserves at beginning of year             24,955           18,934        18,321
Continental reserves at acquisition - net               ---            6,063           ---
-------------------------------------------------------------------------------------------
       Total net reserves                            24,955           24,997        18,321
-------------------------------------------------------------------------------------------
Net incurred claims and claim expenses:
  Provision for insured events of current year        7,922            6,787         5,611
  Increase (decrease) in provision
     for insured events of prior years                  (91)             122           (71)
  Amortization of discount                              149              106           100
-------------------------------------------------------------------------------------------
       Total net incurred                             7,980            7,015         5,640
-------------------------------------------------------------------------------------------
Net payments attributable to:
   Current year events                                2,676            2,000         1,388
   Prior year events                                  6,524            5,057         3,639
------------------------------------------------------------------------------------------
       Total net payments                             9,200            7,057         5,027
------------------------------------------------------------------------------------------
Net reserves at end of year                          23,735           24,955        18,934
Ceded reinsurance at end of year                      6,095            6,089         2,705
------------------------------------------------------------------------------------------
       Gross reserves at end of year*               $29,830          $31,044       $21,639
==========================================================================================
* Excludes life claim and claim expense reserves and  intercompany  eliminations
of $1 billion,  $988 million, and $926 million as of December 31, 1996, 1995 and
1994, respectively, included in the Consolidated Balance Sheet.
</TABLE>
<PAGE>

The following reserve development  reflects the effects of management's  ongoing
evaluation of reserve levels and is comprised of the following components:

RESERVE DEVELOPMENT
--------------------------------------------------------------------------------
Year Ended December 31                               1996       1995        1994
--------------------------------------------------------------------------------
(In millions of dollars,(adverse)/favorable)
Environmental Pollution                             $(65)     $(226)      $(181)
Asbestos                                             (51)      (274)        (37)
Other                                                207        378         289
--------------------------------------------------------------------------------
         Total                                      $ 91      $(122)      $  71
--------------------------------------------------------------------------------




                           CNA FINANCIAL CORPORATION
                            ------------------------
                                       56
<PAGE>
--------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)


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

The CNA  property/casualty  insurance companies have potential exposures related
to environmental pollution and asbestos claims.

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" ("PRP's"). Superfund and the mini-Superfunds (Environmental
Clean-up Laws or "ECLs") establish mechanisms to pay for clean-up of waste sites
if PRP's  fail to do so,  and to  assign  liability  to  PRP's.  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.  On the other  hand,  the
Congressional  Budget  Office is  estimating  that there will be 4,500  National
Priority List sites,  and other  estimates  project as many as 30,000 sites that
will require  clean-up under ECLs.  Very few sites have been subject to clean-up
to date; the addition of new clean-up sites has  substantially  slowed in recent
years. The extent of clean-up  necessary and the assignment of liability has not
been established.

CNA and the insurance  industry are disputing coverage for many such claims. Key
coverage issues include whether Superfund  response costs are considered damages
under the policies, trigger of coverage,  applicability of pollution exclusions,
the potential for joint and several  liability and  definition of an occurrence.
Similar  coverage  issues  exist for  clean-up of waste sites not covered  under
Superfund.  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.
Despite Superfund taxing authority  expiring at the end of 1995, no reforms have
been enacted by Congress.  No  predictions  can be made 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
pattern of 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  exposure  to  CNA  for
environmental pollution claims cannot be meaningfully quantified.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       57
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
   Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)


Claim and claim expense reserves  represent  management's  estimates of ultimate
liabilities  based on  currently  available  facts  and case  law.  However,  in
addition to the uncertainties  previously  discussed,  additional issues related
to,  among other  things,  specific  policy  provisions,  multiple  insurers and
allocation of liability among insurers,  consequences of conduct by the insured,
missing  policies  and proof of  coverage  make  quantification  of  liabilities
exceptionally difficult and subject to adjustment based on new data.

As of December 31, 1996 and December 31, 1995,  CNA carried  approximately  $908
million and $1,063 million,  respectively,  of claim and claim expense reserves,
net of  reinsurance  recoverable,  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.
Unfavorable  reserve  development  for the year ended  December 31, 1996 was $65
million as  compared  to  unfavorable  reserve  development  for the years ended
December  31,  1995  and 1994  which  totaled  $226  million  and $181  million,
respectively.  Unfavorable  environmental reserve development results from CNA's
on-going monitoring of settlement patterns,  current pending cases and potential
future claims.

CNA has  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  encounter
many of the same limitations discussed above for environmental  pollution claims
such as inconsistency of court decisions,  specific policy provisions,  multiple
insurers and allocation of liability among insurers,  missing policies and proof
of coverage.  As of December 31, 1996 and 1995, CNA carried approximately $1,506
million and $2,191 million,  respectively,  of claim and claim expense reserves,
net of reinsurance  recoverable,  for reported and  unreported  asbestos-related
claims.  Unfavorable  reserve development for the years ended December 31, 1996,
1995 and 1994 totaled $51 million,$274 million and $37 million, respectively.

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 potential  liabilities and make further  adjustments as
warranted.




                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       58
<PAGE>
-------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)




OTHER
-----

Other 1996 and 1995 reserve  development,  which  aggregated to $207 million and
$378 million,  respectively,  of favorable reserve development,  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.

Other favorable reserve development during 1994 aggregated to $289 million which
was principally   attributable  to  positive  severity  experience  in
professional liability  lines  and   improvement  in  voluntary  and involuntary
workers' compensation experience.

CNA,  consistent with sound 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.

Beginning the latter part of 1995 and through 1996 to date,  CNA has been
actively  settling many of its larger environmental  pollution and asbestos-
related  claim exposures.  This strategy  has  resulted in a large volume of
claim  payments  during  1996,  and corresponding  reductions in reserves.  In
addition,  Fibreboard  claim payments escalated  in 1996 as some  scheduled
payments  came due.  Management  does not believe that these recent activities
have changed facts or circumstances evident at December 31, 1995, therefore,  no
material  modifications to previous reserve estimates have been made in 1996.




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       59
<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.  Continental claims activity for
1995 is included for the period May 10, 1995 through  December 31, 1995.
<TABLE>
<CAPTION>
Reserve Summary
--------------------------------------------------------------------------------
December 31                      1996                             1995
                         ------------------------    ---------------------------
                         Environmental               Environmental
                           Pollution    Asbestos       Pollution      Asbestos
--------------------------------------------------------------------------------
(In millions of dollars)
<S>                       <C>            <C>          <C>            <C>
Gross reserves:
   Reported claims          $  288.9      $1,551.4      $  288.4      $1,947.1
   Unreported claims           714.0          94.0         895.0         369.0
                           -----------------------------------------------------
                             1,002.9       1,645.4       1,183.4       2,316.1
Less reinsurance recoverable   (95.1)       (139.2)       (120.4)       (125.0)
--------------------------------------------------------------------------------
         Net reserves       $  907.8      $1,506.2      $1,063.0      $2,191.1
================================================================================
The following  tables summarize claim activity for  environmental  pollution and
asbestos.
</TABLE>
<TABLE>
<CAPTION>
Environmental Pollution
Changes in Reserves
--------------------------------------------------------------------------------
Year ended December 31                      1996        1995          1994
--------------------------------------------------------------------------------
(In millions of dollars)
<S>                                    <C>          <C>            <C>
Net reserves at beginning of year       $1,063.0     $  948.8*      $432.6

Reserve strengthening                       64.7        226.0        180.6

Less:  Gross payments                      304.2        183.4        131.8
       Reinsurance recoveries              (84.3)       (71.6)       (24.3)
                                         ---------------------------------------
       Net payments                        219.9        111.8        107.5
--------------------------------------------------------------------------------
         Net reserves at end of year    $  907.8     $1,063.0       $505.7
================================================================================
* Includes Continental net reserves of $443.1 million at May 10, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Asbestos
Changes in Reserves
--------------------------------------------------------------------------------
Year ended December 31                    1996         1995         1994
--------------------------------------------------------------------------------
(In millions of dollars)
<S>                                    <C>          <C>          <C>
Net reserves at beginning of year       $2,191.1     $2,109.1**   $2,080.0

Reserve strengthening                       50.5        273.7         36.8

Less:  Gross payments                      787.7        267.8        245.9
       Reinsurance recoveries              (52.3)       (76.1)       (67.8)
                                         ---------------------------------------
       Net payments                        735.4        191.7        178.1
--------------------------------------------------------------------------------
          Net reserves at end of year   $1,506.2     $2,191.1     $1,938.7
================================================================================
** Includes Continental net reserves of $170.4 million at May 10, 1995.
</TABLE>



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       60
<PAGE>
--------------------------------------------------------------------------------
              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")  to resolve  all future  asbestos-related  bodily  injury  claims
involving  Fibreboard,  which is subject to court approval.  Casualty,  Fibre-
board and Pacific  Indemnity have also reached an agreement  (the  "Trilateral
Agreement"),  on a settlement  to resolve the coverage  litigation  in the
event the Global  Settlement does not obtain final court approval or is
subsequently  successfully  attacked.  The implementation of either the Global
Settlement or the Trilateral Agreement would have the effect of settling
Casualty's litigation with Fibreboard.

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.

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 $1.525  billion to a trust fund for a class of all
future  asbestos  claimants,  defined  generally as those  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 is being sought.  There is limited precedent
with settlements which determine the rights of future claimants to seek relief.

Subsequent  to  the  announcement  of  the  agreement  in  principle,  Casualty,
Fibreboard and Pacific  Indemnity  entered into the Trilateral  Agreement  which
among other things, settles the coverage case in the event the Global Settlement
approval is not


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       61
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
         Note F - Legal Proceedings and Contingent Liabilities (cont.)


ultimately upheld. In such case, Casualty and Pacific Indemnity will  contribute
to a settlement  fund an aggregate of $2 billion,  less certain adjustments.
Such fund would be devoted to the payment of Fibreboard's asbestos liabilities
other than  liabilities  for claims settled before August 23, 1993. Casualty's
share of such fund would be $1.44 billion reduced by a portion of an additional
payment of $635 million which Pacific Indemnity has agreed to pay for claims
either filed or settled  before August 27, 1993. As a result of the final
approval of the Trilateral  Agreement,  Casualty has assumed  responsibility for
the claims that were settled  before  August 27,  1993.  As a part of the Global
Settlement  and  the  Trilateral  Agreement,  Casualty  is  to  be  released  by
Fibreboard from any further liability under the comprehensive  general liability
policy  written  for  Fibreboard  by  Casualty,  including  but not  limited  to
liability for  asbestos-related  claims against Fibreboard.  As indicated above,
court approval of the Trilateral Agreement has become final.

Casualty and Fibreboard have entered into a supplemental agreement which governs
the interim  arrangements and obligations between the parties until such time as
there is either final court  approval or  disapproval  of the Global  Settlement
Agreement.  It also  governs  certain  obligations  between the parties upon the
Global  Settlement  being upheld on appeal including the payment of claims which
are not included in the Global Settlement.

In addition,  Casualty and Pacific Indemnity have entered into an agreement (the
"Casualty-Pacific  Agreement")  which sets  forth the  parties'  agreement  with
respect to the means for allocating among themselves responsibility for payments
arising out of the Fibreboard  insurance  policies.  Under the  Casualty-Pacific
Agreement,  Casualty and Pacific Indemnity have agreed to pay 64.71% and 35.29%,
respectively,  of the $1.525  billion to be used to satisfy the claims of future
claimants,  plus certain expenses. The $1.525 billion has already been deposited
into an escrow for such purpose. As a result of final approval of the Trilateral
Agreement,  Pacific Indemnity's share for unsettled present claims and presently
settled claims will be $635 million.

Through  December 31, 1996,  Casualty,  Fibreboard  and plaintiff  attorneys had
reached  settlements  with  respect  to  approximately  135,200  claims,  for an
estimated  settlement amount of approximately  $1.60 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under  these  settlements.  Approximately  $1.31  billion  was paid  through
December  31,  1996,  including  approximately  $500  million paid in the fourth
quarter  of 1996 as a result of the  Trilateral  Agreement  becoming  final.  As
described above, 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.

Casualty believes that final court approval of the Trilateral  Agreement and its
implementation  has eliminated any further material exposure with respect to the
Fibreboard  matter,  and  subsequent  reserve  adjustments,  if  any,  will  not
materially affect the 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
                           -------------------------
                                       62
<PAGE>
--------------------------------------------------------------------------------
                              Note G - Reinsurance


Note G -- Reinsurance
---------------------
The effects  of  reinsurance  on earned  premiums  are  shown in the  following
schedules:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                                Earned                         Assumed/
                                                Premiums                         Net
                             ----------------------------------------------------------
Year Ended December 31         Direct       Assumed        Ceded          Net       %
---------------------------------------------------------------------------------------
(In millions of dollars)
<S>                         <C>          <C>          <C>          <C>         <C>
1996
  Life                      $   736       $  121        $   55      $   802     15.1%
  Accident and health         3,575          187           176        3,586      5.2
  Property/casualty           8,957        1,558         1,424        9,091     17.1
---------------------------------------------------------------------------------------
     TOTAL PREMIUMS         $13,268       $1,866        $1,655      $13,479     13.8%
=======================================================================================
1995
  Life                      $   701       $  109        $   21      $   789     13.8%
  Accident and health         3,017          125           106        3,036      4.1
  Property/casualty           7,868        1,335         1,293        7,910     16.9
---------------------------------------------------------------------------------------
     Total premiums         $11,586       $1,569        $1,420      $11,735     13.4%
=======================================================================================
1994
  Life                      $   408       $  107        $   23      $   492     21.7%
  Accident and health         2,678          158            45        2,791      5.7
  Property/casualty           5,601        1,251           661        6,191     20.2
---------------------------------------------------------------------------------------
     Total premiums         $ 8,687       $1,516        $  729      $ 9,474     16.0%
=======================================================================================
</TABLE>



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       63
 <PAGE>

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

The  effects of  reinsurance  on  written  premiums  are shown in the  following
schedules:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended December 31                                    Written Premiums
                               ----------------------------------------------------
                                                                                        Assumed/
(In millions of dollars)          Direct       Assumed        Ceded          Net          Net %
-----------------------------------------------------------------------------------------------
<S>                            <C>          <C>            <C>          <C>             <C>
1996
  Life                          $   736       $  121        $   55       $   802         15.1%
  Accident and health             3,708          188           183         3,713          5.1
  Property/casualty               9,032        1,632         1,287         9,377         17.4
------------------------------------------------------------------------------------------------
    TOTAL PREMIUMS              $13,476       $1,941        $1,525       $13,892         14.0%
================================================================================================
1995
  Life                          $   701       $  109        $   21       $   789         13.8%
  Accident and health             3,159          126           137         3,148          4.0
  Property/casualty               9,421        1,408         1,814         9,015         15.6
------------------------------------------------------------------------------------------------
     Total premiums             $13,281       $1,643        $1,972       $12,952         12.7%
================================================================================================
1994
  Life                          $  408        $  107        $   23       $   492         21.7%
  Accident and health            2,746           159            45         2,860          5.5
  Property/casualty              5,647         1,251           669         6,229         20.1
------------------------------------------------------------------------------------------------
     Total premiums             $8,801        $1,517        $  737       $ 9,581         15.8%
================================================================================================
</TABLE>
The ceding of insurance  does not  discharge  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 its states of  domiciles,  CNA  receives  collateral,
primarily in the form of bank letters of credit, securing a large portion of the
recoverables.  Such  collateral  totaled  approximately  $800.9 million and $1.1
billion at December 31, 1996 and 1995,  respectively.

CNA's largest recoverable from a single reinsurer,  including prepaid
reinsurance premiums, is with Lloyds of London and  approximates  $440  million
and $435 million at December 31, 1996 and 1995, respectively.

Insurance claims and policyholder benefits are net of reinsurance  recoveries of
$1,220.0  million,  $934.8 million and $827.9  million for 1996,  1995 and 1994,
respectively.
<PAGE>

The impact of reinsurance  on life insurance  in-force is shown in the following
schedule:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
                                Life Insurance In-Force            Assumed/
                           -----------------------------------
(In millions of dollars)   Direct    Assumed     Ceded    Net         Net%
<S>                       <C>        <C>         <C>     <C>        <C>
----------------------------------------------------------------------------
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
December 31, 1994            75,419  52,014       5,953   121,480     42.8
============================================================================
</TABLE>

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       64
<PAGE>
--------------------------------------------------------------------------------
                                 Note H - Debt

Note H -- Debt
--------------
Long-term and short-term borrowings consisted of the following:
<TABLE>
<CAPTION>
LONG-TERM AND SHORT-TERM DEBT
--------------------------------------------------------------------------------------------
December 31                                                               1996         1995
--------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                                   <C>          <C>
Long-term:
   Variable Rate Debt:
       Credit Facility                                                 $  400.0     $  825.0
       Commercial Paper                                                   675.0        500.0
   Senior Notes:
       8 7/8%, due March 1, 1998                                          149.6        149.2
       8 1/4%, due April 15, 1999                                         102.0        102.8
       7 1/4%, due March 1, 2003                                          145.9        145.4
       6 1/4%, due November 15, 2003                                      248.4        248.2
       6 3/4%, due November 15, 2006                                      248.1            -
       8 3/8%, due August 15, 2012                                         97.9         97.9
   71/4%  Debenture, due November 15, 2023                                247.1        247.1
   11% Secured Mortgage Notes, due June 30, 2013                          386.6        386.6
   5.9% - 16.29% Secured Capital Leases, due through December 31, 2011     46.8         46.0
   Other debt, due 1997 through 2019 (rates of 1% to 12.71%)               17.5         19.7
---------------------------------------------------------------------------------------------
      Total long-term debt                                              2,764.9      2,767.9
Short-term debt                                                               -        257.6
---------------------------------------------------------------------------------------------
      TOTAL DEBT                                                       $2,764.9     $3,025.5
=============================================================================================
</TABLE>
To finance the  acquisition  of Continental  (including the  refinancing of $205
million  of  Continental  debt) CNA  entered  into a  five-year  $1.325  billion
revolving  credit  facility.  In 1996,  the Company  renegotiated  the  facility
extending the maturity to May 2001.  The interest rate for 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, 1996 was
5.72%. Under the terms of the facility, CNA may prepay the debt without penalty.

On November  15,  1996,  CNA issued $250  million of 6 3/4%  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  outstanding under the
revolving credit facility. As a result of this debt issuance, borrowing capacity
under the  revolving  credit  facility  was reduced by $250  million,  to $1.075
billion.

An additional $250 million of securities  remain  available for issuance under a
shelf registration.
<PAGE>

In 1995,  to take  advantage of favorable  interest  rates,  CNA  established  a
commercial paper program borrowing $500 million from investors to replace a like
amount of credit facility  financing.  During 1996, CNA increased its borrowings
under the commercial paper program to $675 million. The average interest rate on
the  commercial  paper at December  31,  1996 was 5.67%.  The  commercial  paper
borrowings  are  classified as long-term as borrowing  capacity under the credit
facility will support the commercial  paper.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       65
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                             NOTE H - Debt (cont.)

At year end 1996, 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.

In 1995,  CNA  entered  into  interest  rate  swap  agreements  with a  notional
principal  amount of $1.2 billion,  which  terminate  from May to December 2000.
These agreements provide that CNA pay interest at a fixed rate,  averaging 6.20%
at December  31, 1996 in exchange for the receipt of interest at the three month
LIBOR rate.  Concurrent with the paydown of $250 million on the revolving credit
facility,  CNA terminated  interest rate swaps with a total  notional  amount of
$250 million.

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

The weighted  average interest rate (interest and facility fees) on the variable
rate debt, which includes the revolving credit facility,  commercial  paper, and
the effect of the interest rate swaps,  was 6.28% and 6.50% at December 31, 1996
and 1995, respectively.

On March 1, 1996, CNA paid at the due date $250 million of 8 5/8% senior notes.
These notes were classified as short-term debt in 1995.

The weighted  average interest rates of outstanding  short-term debt,  excluding
current  maturities of long-term  debt, for the year ended December 31, 1995 was
6.19%. There was no debt classified as short-term debt at December 31, 1996.

The following table shows the future  aggregate  minimum  principal  payments on
debt and capitalized lease obligations:

-------------------------------------------------------
Future Aggregate Minimum Principal Payments
-------------------------------------------------------
(In millions of dollars)
1997                                        $      4.0
1998                                             153.8
1999                                             104.9
2000                                               5.5
2001                                           1,081.3
Thereafter                                     1,426.4
------------------------------------------------------
     Total                                  $  2,775.9
======================================================



                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       66
<PAGE>

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




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

PENSION PLANS
--------------------------------------------------------------------------------

CNA has several  noncontributory  pension plans covering all full-time employees
age 21 or over who have completed at least one year of service. The benefits for
the plans are based on years of  credited  service  and the  employee's  highest
sixty consecutive months of compensation.

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.

In conjunction with the Continental  merger, CNA established a separate trust to
administer the Continental Corporation Retirement Plans. The retirement benefits
received  by  Continental  employees  are  equivalent  to the  benefits to which
employees under the CNA Employees' Retirement Plan are entitled.

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 $20.2 million.

The  funded  status  is  determined  using  assumptions  at the end of the year.
Pension cost is determined using assumptions at the beginning of the year.
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT OBLIGATION
-----------------------------------------------------------------------------------------------------
December 31                                       1996*                   1995 *              1994
-----------------------------------------------------------------------------------------------------
                                         OVERFUNDED  UNDERFUNDED  Overfunded  Underfunded  Overfunded
                                            PLANS       PLANS        Plans       Plans        Plans
------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                     <C>         <C>         <C>         <C>          <C>
Actuarial present value of accumulated
plan benefits:
   Vested                                $517.2      $622.5       $491.1      $646.0       $376.4
   Nonvested                               37.7        32.4         28.3        14.1         39.1
-----------------------------------------------------------------------------------------------------
        ACCUMULATED BENEFIT OBLIGATION   $554.9      $654.9       $519.4      $660.1       $415.5
=====================================================================================================
*  The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.

</TABLE>

                           CNA FINANCIAL CORPORATION
                         ---------------------------
                                       67
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                         Note I - Benefit Plans (cont.)



<TABLE>
<CAPTION>
NET PENSIONS ASSET (LIABILITY)
-----------------------------------------------------------------------------------------------------
December 31                                        1996*                    1995 *            1994
------------------------------------------------------------------------------------------------------
                                           OVERFUNDED  UNDERFUNDED  Overfunded Underfunded  Overfunded
                                              PLANS       PLANS        Plans       Plans       Plans
------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                          <C>      <C>             <C>          <C>         <C>
Projected benefit obligation                  $777.8   $ 788.3         $770.0      $ 809.3      $651.4
Plan assets at fair value                      701.9     503.6          629.7        496.3       495.5
------------------------------------------------------------------------------------------------------
   Plan assets less than projected
   benefit obligation                          (75.9)   (284.7)        (140.3)      (313.0)     (155.9)
Unrecognized net asset at January 1, 1986
    being recognized over 12 years              (7.1)      ---          (12.2)         ---       (17.3)
Unrecognized prior service costs                19.1      77.7           21.4        104.0        20.8
Unrecognized net loss                          122.2     (11.8)         164.6         13.5       174.0
------------------------------------------------------------------------------------------------------
       NET PENSION ASSET (LIABILITY)          $ 58.3   $(218.8)        $ 33.5      $(195.5)     $ 21.6
======================================================================================================

*  The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
</TABLE>

<TABLE>
<CAPTION>
NET PERIODIC PENSION COST
-------------------------------------------------------------------------------------------------------------------
December 31                                               1996*                        1995*                 1994*
-------------------------------------------------------------------------- ----------------------------- ----------
                                                  OVERFUNDED UNDERFUNDED     Overfunded      Underfunded Overfunded
                                                     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               $36.5      $18.8          $  32.1          $11.6        $32.3
    Interest cost on projected benefit obligation      53.5       56.8             51.1           32.8         44.7
--------------------------------------------------------------------------------------------------------------------
    Actual return on plan assets                      (31.1)     (29.0)          (115.4)         (43.4)        11.6
    Net amortization and deferral                     (16.0)      (6.0)            72.4           19.5        (43.3)
        NET PERIODIC PENSION COST                     $42.9      $40.6          $  40.2          $20.5        $45.3
====================================================================================================================
*  The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
</TABLE>
<PAGE>
Actuarial assumptions are set forth in the following table.
<TABLE>
<CAPTION>
ASSUMPTIONS
----------------------------------------------------------------------------------------------------
December 31                                              1996          1995          1994       1993
----------------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>           <C>        <C>
Discount rate                                            7.50%         7.25%         8.50%      7.25%
Rate of increase in compensation levels*                 2.75          2.75          4.00       4.50
Expected long-term rate of return on plan assets         7.75-8.50     7.50-8.50     8.75       7.50
-----------------------------------------------------------------------------------------------------
*  Excludes age/service related merit and productivity increases.
</TABLE>



                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       68
<PAGE>
--------------------------------------------------------------------------------
                         Note I - Benefit Plans (cont.)




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

CNA provides  certain  health and dental care  benefits  for eligible  retirees,
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired  persons.  CNA continues to fund benefit costs
principally on the basis of current benefit payments.

Additionally, in conjunction with the Continental merger, CNA is administering a
separate trust for the  postretirement  health care and life insurance  benefits
for  Continental  employees who retired  prior to January 1, 1996.  The benefits
received  by  Continental  retirees  are  equivalent  to the  benefits  to which
employees under the CNA  postretirement  health care and life insurance plan are
entitled.
<TABLE>
<CAPTION>
ACCRUED POSTRETIREMENT BENEFIT COST
----------------------------------------------------------------------------------------
December 31                                                 1996*       1995*      1994
----------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                       <C>        <C>         <C>
Accumulated postretirement benefit obligation:
 Retirees                                                  $172.0     $185.5     $ 27.1
  Fully eligible, active plan participants                   89.0       59.2       53.7
  Other active plan participants                             88.2       62.5       41.1
----------------------------------------------------------------------------------------
    Total accumulated postretirement benefit obligation     349.2      307.2      121.9
Unrecognized prior service cost                                --         --      (11.2)
Unrecognized net gain (loss)                                (12.3)       7.4       19.7
----------------------------------------------------------------------------------------
       ACCRUED POSTRETIREMENT BENEFIT COST                 $336.9     $314.6     $130.4
========================================================================================
* The 1996 and 1995 data includes  postretirement  benefit  obligations  for The
Continental Corporation retirees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NET PERIODIC POSTRETIREMENT BENEFIT COST
---------------------------------------------------------------------------------------
Year Ended December 31                                      1996*       1995*      1994
---------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                      <C>          <C>       <C>
Net periodic postretirement benefit cost:
   Service cost - benefits attributed to employee
      service during the year                              $11.9        $  6.0    $ 8.6
   Interest cost on accumulated postretirement
      benefit obligation                                    24.1          17.5     10.3
   Amortization                                               .4          (1.0)      .7
---------------------------------------------------------------------------------------
       NET PERIODIC POSTRETIREMENT BENEFIT COST            $36.4        $ 22.5    $19.6
=======================================================================================
* The 1996 and 1995 data includes  postretirement  benefit  obligations  for The
Continental Corporation retirees.
</TABLE>



                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       69
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
                         Note I - Benefit Plans (Cont.)




ASSUMPTIONS
--------------------------------------------------------------------------
December 31                                      1996     1995      1994
--------------------------------------------------------------------------

Discount rate:
   Assumptions used in determining
   net periodic benefit cost:                    7.25%    8.50%     7.25%
   Assumptions used in determining
   projected benefit obligation (liability)      7.50     7.25      8.50
--------------------------------------------------------------------------

The  assumed  health  care cost trend  rate used in  measuring  the  accumulated
postretirement benefit obligation was 12% in 1996, declining by 1% per year 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, 1996 by $24.2 million and the aggregate net periodic postretirement
benefit cost for 1996 by $3.1 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 $23.8  million,  $21.6
million and $17.0 million in 1996, 1995 and 1994, respectively



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       70
<PAGE>
--------------------------------------------------------------------------------
                                Note J -- Leases




Note J - Leases:
----------------
CNA occupies  facilities  under lease  agreements  that expire at various  dates
throughout 2011. CNA's home office is partially situated on grounds under leases
expiring  in 2058.  In  addition,  data  processing,  office and  transportation
equipment is 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.  Rent expense for the years
ended  December 31, 1996,  1995 and 1994 was $85.2  million,  $92.4  million and
$50.9 million, respectively.

The table  below  shows the  future  minimum  lease  payments  to be made  under
non-cancelable leases at December 31, 1996.

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

1997                                 $115.6
1998                                   88.4
1999                                   71.1
2000                                   57.4
2001                                   44.1
Thereafter                            262.3
-------------------------------------------
     Total                           $638.9
===========================================


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       71
<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                                               1996              1995
--------------------------------------------------------------------------------

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
                           -------------------------
                                       72

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




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

CNA's insurance affiliates are domiciled in various states, provinces or
countries. These affiliates prepare their statutory financial statements in
accordance with accounting practices  prescribed or otherwise permitted by the
respective state's insurance department. 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's  ability to pay  dividends to its  stockholders  is affected,  in part, by
receipt of dividends from its affiliates. The payment of dividends to CNA by its
insurance  affiliates without prior approval of the insurance department of each
affiliate's state of domicile is limited to formula amounts.  As of December 31,
1996,  approximately $941 million was not subject to prior insurance  department
approval.

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

--------------------------------------------------------------------------------
                         Statutory Capital and Surplus   Statutory Net Income
                         -----------------------------  ------------------------
                              December 31               Year Ended December 31
-----------------------------------------------------  -------------------------
                              1996      1995**          1996     1995**  1994*
--------------------------------------------------------------------------------
(In millions of dollars)

Property/Casualty
  Insurance Subsidiaries      $6,348.8  $5,695.9        $1,208.0 $1,208.3  $67.3
Life Insurance Subsidiaries    1,163.4   1,127.6            57.6     30.2   65.1
--------------------------------------------------------------------------------
*   Excludes The Continental Corporation.
**  Includes The Continental Corporation for the twelve months ended
    December 31, 1995.




                           CNA FINANCIAL CORPORATION
                          ---------------------------
                                       73
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                        Note L - Continental Acquistion



Note L -- Continental Acquisition:
----------------------------------

On December  6, 1994,  CNA entered  into a merger  agreement  to acquire all the
outstanding common stock of The Continental Corporation (Continental).  To
finance the acquisition, CNA entered into a five-year $1.325 billion revolving
credit facility (see Note H). The merger was consummated on May 10, 1995.
The acquisition of Continental has been accounted for as a purchase; therefore,
Continental's operations are 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.

The unaudited pro forma condensed  results of operations  presented below assume
the  Continental  acquisition  had  occurred  at the  beginning  of the  periods
presented:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Pro- Forma - Unaudited
Year Ended December 31                           1995                       1994
--------------------------------------------------------------------------------
(In millions of dollars)
<S>                                       <C>                        <C>
Revenues                                   $16,154.8                  $16,106.5
                                           =========                  ==========
Realized investment gains (losses)
   included in revenue                     $   582.8                  $  (170.2)
                                           =========                  ==========
Income (loss) from continuing
   operations before income tax            $ 1,085.0                  $(1,233.0)
Income tax (expense) benefit                  (316.0)                     562.3
                                           ----------                 ----------
  Income (loss) from continuing operations     769.0                     (670.7)
Income from discontinued operations,
   net of income tax                              --                       39.5
--------------------------------------------------------------------------------
   Net income (loss)                       $   769.0                  $  (631.2)
================================================================================
</TABLE>
The unaudited pro forma condensed financial information is not necessarily
indicative of the results of operations that would  have  occurred  had the
Continental  acquisition  been consummated at the beginning of the period
presented or of future  operations of the combined companies.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       74
<PAGE>
--------------------------------------------------------------------------------
                    Note L - Continental Acquistion (cont.)



Discontinued Operations:
Certain discontinued operations were acquired as part of the Continental merger.
Operating results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Year Ended December 31                             1996                    1995*
--------------------------------------------------------------------------------
(In millions of dollars)
<S>                                              <C>                     <C>
Revenues:
  Premiums                                         $ 1.6                   $ 4.8
  Net investment income                             31.1                    25.6
  Realized investment gains                          6.0                     1.4
  Other                                              3.8                      --
--------------------------------------------------------------------------------
    Total revenues                                  42.5                    31.8
Benefits and expenses                               42.5                    31.8
--------------------------------------------------------------------------------
  Income (loss) before income taxes                   --                      --
  Income taxes                                        --                      --
--------------------------------------------------------------------------------
    Income (loss) from
       discontinued operations                     $  --                   $  --
================================================================================
</TABLE>
*Includes the results of Continental since May 10, 1995.

Net assets of  discontinued  insurance  operations are included in Other Assets,
net of intercompany eliminations, and are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
December 31                                        1996                    1995*
--------------------------------------------------------------------------------
(In millions of dollars)
<S>                                            <C>                     <C>
Assets:
   Investments                                  $  669.1                $  657.2
   Cash                                             22.2                    34.1
   Insurance receivables (net)                     407.8                   424.2
   Other assets                                    389.2                   231.9
--------------------------------------------------------------------------------
     Total assets                                1,488.3                 1,347.2
--------------------------------------------------------------------------------
Liabilities:
   Claim and claim expenses                        846.9                   955.7
   Other liabilities                               427.1                   257.6
--------------------------------------------------------------------------------
     Total liabilities                           1,274.0                 1,213.3
--------------------------------------------------------------------------------
     Net assets                                 $  214.3                $  133.9
================================================================================
</TABLE>


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       75
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                           Note M -- Business Segments



<TABLE>
<CAPTION>
Note M-- Business Segments:
---------------------------
REVENUES
-------------------------------------------------------------------------------------------------------------
Year Ended December 31                                                       1996         1995*         1994
-------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                                    <C>           <C>           <C>
Property/Casualty-commercial                                            $10,241.7     $ 8,952.9    $ 6,562.3
Property/Casualty-personal                                                1,892.3       1,425.9      1,143.2
Property/Casualty-involuntary risks                                         382.8         392.8        543.8
Life-individual                                                             923.1         777.2        595.8
Life-group                                                                2,957.1       2,700.6      2,442.6
-------------------------------------------------------------------------------------------------------------
    CNA Insurance                                                        16,397.0      14,249.4     11,287.7
Other and intercompany eliminations                                         (27.8)        (13.5)       (42.0)
-------------------------------------------------------------------------------------------------------------
      Revenues excluding realized
        investment gains (losses)                                        16,369.2      14,235.9     11,245.7
Realized investment gains (losses):
  Property/Casualty                                                         473.6         320.6       (164.7)
  Life                                                                      163.6         139.2        (81.2)
  Other                                                                     (18.6)          4.0         (0.3)
-------------------------------------------------------------------------------------------------------------
    Total realized investment gains (losses)                                618.6         463.8       (246.2)
-------------------------------------------------------------------------------------------------------------
       TOTAL REVENUES                                                   $16,987.8     $14,699.7    $10,999.5
=============================================================================================================
*Includes the results of Continental since May 10, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAX
-------------------------------------------------------------------------------------------------------------
Year Ended December 31                                                       1996         1995*         1994
-------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                                      <C>        <C>              <C>
Property/Casualty-commercial                                              $  769.6     $  555.5       $ 105.0
Property/Casualty-personal                                                   (17.8)        24.6         (83.6)
Property/Casualty-involuntary risks                                          (13.7)        (1.8)         17.8
Life-individual                                                              100.9         65.4          47.3
Life-group                                                                    69.8         94.9          87.1
--------------------------------------------------------------------------------------------------------------
   CNA Insurance                                                             908.8        738.6         173.6
Interest, other and intercompany eliminations                               (168.1)      (152.2)        (72.3)
--------------------------------------------------------------------------------------------------------------
      Income (loss) excluding realized
         investment gains (losses)                                           740.7        586.4         101.3
--------------------------------------------------------------------------------------------------------------
Realized investment gains (losses)
  net of policyholder's interest:
  Property/Casualty                                                          473.6        320.6        (164.7)
  Life                                                                       149.3        131.4         (70.3)
  Other                                                                      (18.6)         4.0          (0.3)
--------------------------------------------------------------------------------------------------------------
    Total realized investment gains (losses)
       net of policyholders' interest                                        604.3        456.0        (235.3)
--------------------------------------------------------------------------------------------------------------
       TOTAL INCOME (LOSS) BEFORE INCOME TAX                              $1,345.0     $1,042.4       $(134.0)
==============================================================================================================
*Includes the results of Continental since May 10, 1995.
</TABLE>



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       76
<PAGE>
--------------------------------------------------------------------------------
                           Note M -- Business Segments

<TABLE>
<CAPTION>
NET INCOME (LOSS)
----------------------------------------------------------------------------------------------------
Year Ended December 31                                              1996         1995*         1994
----------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                             <C>           <C>           <C>
Property/Casualty-commercial                                      $ 585.4      $ 431.3       $ 169.0
Property/Casualty-personal                                           (5.8)        21.9         (41.7)
Property/Casualty-involuntary risks                                  (3.8)         3.8          20.6
Life-individual                                                      65.5         42.6          30.5
Life-group                                                           44.4         61.2          56.5
-----------------------------------------------------------------------------------------------------
    CNA Insurance                                                   685.7        560.8         234.9
Interest, other and intercompany eliminations                      (108.0)       (98.2)        (47.9)
-----------------------------------------------------------------------------------------------------
Net income excluding net realized
  investment gains (losses)                                         577.7        462.6         187.0
-----------------------------------------------------------------------------------------------------
Net realized investment gains (losses):
  Property/Casualty                                                 303.5        207.9        (104.6)
  Life                                                               95.7         85.4         (45.6)
  Other                                                             (12.1)         1.1          (0.3)
----------------------------------------------------------------------------------------------------
    Total net realized investment gains (losses)                    387.1        294.4        (150.5)
----------------------------------------------------------------------------------------------------
       TOTAL NET REVENUES                                         $ 964.8      $ 757.0       $  36.5
====================================================================================================
*Includes the results of Continental since May 10, 1995.
</TABLE>
<TABLE>
<CAPTION>
ASSETS
-----------------------------------------------------------------------------------------------------
December 31                                                          1996         1995*         1994
-----------------------------------------------------------------------------------------------------
(In millions of dollars)
<S>                                                           <C>             <C>         <C>
Property/Casualty-commercial                                    $39,927.0     $40,886.4    $27,441.2
Property/Casualty-personal                                        4,664.9       4,614.1      2,344.7
Property/Casualty-involuntary risks                               2,406.9       2,464.7      2,166.6
Life-individual                                                   4,739.8       3,996.5      3,733.0
Life-group                                                        9,274.3       9,003.6      8,711.3
-----------------------------------------------------------------------------------------------------
    CNA Insurance                                                61,012.9      60,965.3     44,396.8
Other and intercompany eliminations                                (278.2)       (604.9)       (76.4)
-----------------------------------------------------------------------------------------------------
        TOTAL ASSETS                                            $60,734.7     $60,360.4    $44,320.4
=====================================================================================================
*Includes Continental since May 10, 1995.
</TABLE>



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       77
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                       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 operating 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, 1996 and 1995, gross exposure of financial  guarantee  insurance
contracts amounted to $582 million and $707 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 47% and 44% of the
risks were ceded to  reinsurers at December 31, 1996 and 1995.  Total  exposure,
net of  reinsurance,  amounted to $311  million and $395 million at December 31,
1996  and  1995,  respectively.  At  December  31,  1996  and  1995,  collateral
consisting  of letters  of credit  and debt  service  reserves  amounted  to $28
million and $39 million, respectively.

Gross  unearned  premium  reserves for financial  guarantee  contracts  were $11
million and $17 million at December 31, 1996 and 1995, respectively. Gross claim
and claim expense reserves totaled $371 million and $463 million at December 31,
1996 and 1995, respectively.

Life revenues include $2.1 billion,  $1.9 billion and $1.8 billion in 1996, 1995
and 1994,  respectively,  under contracts covering U.S. government employees and
their dependents (FEHBP).


                           CNA FINANCIAL CORPORATION
                          ---------------------------
                                       78
<PAGE>
--------------------------------------------------------------------------------
Note N - Unaudited Quarterly Financial Data




Note N - Unaudited Quarterly Financial Data:
--------------------------------------------

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                             First        Second       Third       Fourth       Year
--------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data)
<S>                                        <C>           <C>         <C>         <C>         <C>
1996 QUARTERS
Revenues                                    $4,315.4      $4,095.2    $4,255.5    $4,321.7    $16,987.8
Net operating income
   excluding realized gains/losses             145.3         151.5       160.7       120.2        577.7
Net income                                     329.3         202.1       238.5       194.9        964.8
Earnings per share                              5.30          3.25        3.83        3.13        15.51

1995 Quarters
Revenues                                    $3,052.8      $3,659.2    $4,000.9    $3,986.8    $14,699.7
Net operating income
   excluding realized gains/losses             131.5         127.2       103.2       100.7        462.6
Net income                                     152.8         256.7       166.3       181.2        757.0
Earnings per share                              2.44          4.12        2.66        2.91        12.14

1994 Quarters
Revenues                                    $2,604.4      $2,731.0    $2,844.3    $2,819.8    $10,999.5
Net operating income (loss)
   excluding realized gains/losses             (16.8)         17.7        63.6       122.5        187.0
Net income (loss)                              (78.1)        (36.3)       55.0        95.9         36.5
Earnings per share                             (1.28)        (0.61)       0.87        1.53         0.51
---------------------------------------------------------------------------------------------------------
</TABLE>




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       79
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                         Note O - Proposed Acquisition




Note O -- Proposed Acquisition:
------------------------------

In the fourth quarter of 1996, CNA entered into a merger agreement with Capsure
Holdings Corp. (Capsure) to form a new  stock company, CNA Surety Corporation.
CNA will be the majority shareholder of the new company owning approximately 62%
of the shares.  The remaining shares will be held by existing Capsure
shareholders and option holders.  The transaction will be accounted for as a
purchase and is expected to close in the second quarter of 1997. The transaction
closing is subject to the approvals of the Capsure shareholders, state insurance
regulators, certain governmental authorities and the satisfaction of certain
other conditions. Until the required approvals are received and the transaction
is complete, the companies will continue to operate independently.

Capsure provides surety and fidelity bonds  nationwide  through its subsidiaries
Western Surety Company and Universal Surety of America.  Capsure's  revenues for
the year ended December 31, 1996 were approximately  $111 million.  Total assets
were approximately $313 million at December 31, 1996.




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       80
<PAGE>
                          INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------




The Board of Directors and Shareholders
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, 1996 and
1995  and the  related  statements  of  consolidated  operations,  stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1996.  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,  1996  and  1995,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.


S/DELOITTE & TOUCHE LLP

Chicago, Illinois
February 12, 1997




                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       81
<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 3, 1997,  was 2,963.  As of
March 3,  1997,  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
-------------------------------------------------------------
                      1996                           1995
              -----------------------------------------------
Quarter        HIGH      LOW                High        Low
-------------------------------------------------------------
Fourth        108 5/8    95 7/8            123 1/4  106 1/8
Third         104 1/2    95 7/8            106 1/2   86
Second        112        95 3/4             86 7/8   74
First         117 1/2   109 1/2             76 1/2   64 3/4
-------------------------------------------------------------

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

Shareholders  are  cordially  invited to attend  the  annual  meeting at 10 a.m.
Wednesday,  May 7, 1997,  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:

Donald M. Lowry
Senior Vice President,
Secretary and General Counsel
CNA Financial Corporation
CNA Plaza, 43 South
Chicago, Illinois 60685

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       82
<PAGE>
                              CORPORATE DIRECTORY
--------------------------------------------------------------------------------

DIRECTORS
--------------------------------------------------------------------------------
Antoinette Cook Bush
Partner; Skadden, Arps, Slate, Meagher & Flom

Dennis H. Chookaszian
Chairman and Chief Executive Officer,
CNA Insurance Companies

Philip L. Engel
President,
CNA Insurance Companies

Robert P. Gwinn
Retired Chairman and Chief Executive Officer,
Encyclopedia 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
Chairman, Audit Committee; Retired Chairman of the Board,
First Chicago NBD Corporation and The First
National Bank of Chicago

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

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

Preston R. Tisch
Chairman, 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
                           -------------------------
                                       83
<PAGE>

                              CORPORATE DIRECTORY
--------------------------------------------------------------------------------


OFFICERS
--------------------------------------------------------------------------------
Laurence A. Tisch
Chief Executive Officer,
CNA Financial Corporation

Dennis H. Chookaszian
Chairman and Chief Executive Officer,
CNA Insurance Companies

Philip L. Engel
President,
CNA Insurance Companies

William J. Adamson, Jr.
Senior Vice President,
CNA Reinsurance Group
CNA Insurance Companies

James P. Flood
Senior Vice President,
Claims
CNA Insurance Companies

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

Bernard L. Hengesbaugh
Senior Vice President,
Specialty Operations
CNA Insurance Companies

Peter E. Jokiel
Senior Vice President
and Chief Financial Officer,
CNA Financial Corporation

Jonathan D. Kantor *
Senior Vice President,
Secretary and General Counsel
CNA Insurance Companies

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

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

Carolyn L. Murphy
Senior Vice President,
Commercial Operations
CNA Insurance Companies

William H. Sharkey, Jr.
Senior Vice President,
Marketing
CNA Insurance Companies
<PAGE>
Adrian M. Tocklin
Senior Vice President,
Diversified Operations
CNA Insurance Companies

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

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

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

TRANSFER AGENT AND REGISTRAR
----------------------------------------
First Chicago Trust Company of New York




-------------------------------------
*Effective April 1, 1997



                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       84
<PAGE>
                            CNA FINANCIAL COPORATION
                                    APPENDIX
                        OMITTED GRAPH MATERIAL AND OTHER

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

     - Revenues for the period 1986 through 1996
     - Assets for the period 1986 through 1996
     - Stockholders' equity for the period 1986 through 1996
     - Book value per common share 1986 through 1996

(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 Letter To Our
Shareholders found on pages 4 through 9 of the annual report.

Page           Outquotes

4              CNA continued to strenthen its leadership in the insurance
               marketplance.

5              CNA focused on a number of business expansion activities.

6              CNA is the largest U.S. writer of commercial property/casualty
               insurance.

7              CNA continued to build on its proven strategy of industry
               segmentation.

8              CNA had its second consecutive year of strong growth in the
               individual life insurance marketplance.

9              Our challenge is to build on the legacy of the past for an even
               brighter future.

               Page 4 is from CNA Financial Corporation Chairman Edward J. Noha,
               and pages 5 through 9 are from CNA Insurnance Companies Chairman
               and Chief Executive Officer Dennis H. Chookaszian.