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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                    FORM 10-Q

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

 For the Quarterly Period Ended September 30, 1998 Commission File Number 1-5823

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


                            CNA FINANCIAL CORPORATION

             (Exact name of registrant as specified in its charter)


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

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


                                 (312) 822-5000
              (Registrant's telephone number, including area code)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  preceding  12 months  (or for such  shorter  periods  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No...


     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.


            Class                               Outstanding at November 2, 1998
-------------------------------------           -------------------------------
Common Stock, Par value $2.50                              183,889,569

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                                Page (1) of (41)
<PAGE>

                            CNA FINANCIAL CORPORATION

                                     INDEX

PART I.   FINANCIAL INFORMATION                                         PAGE NO.
-------   ---------------------                                         --------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

   CONDENSED CONSOLIDATED BALANCE SHEETS
     SEPTEMBER 30, 1998 (Unaudited) and DECEMBER 31, 1997..................    3

   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
     FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.......    4

   CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
     (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.....    5

   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
     FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.................    6

   NOTES TO CONDENSED CONSOLIDATED FINANCIAL
     STATEMENTS (Unaudited) SEPTEMBER 30, 1998.............................    7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
     AND RESULTS OF OPERATIONS.............................................   18


PART II.  OTHER INFORMATION

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K.................................   37

          SIGNATURES.......................................................   38

EXHIBIT 11     COMPUTATION OF NET INCOME PER COMMON SHARE..................   39

EXHIBIT 12.1  COMPUTATION OF RATIO OF EARNINGS
                      TO FIXED CHARGES.....................................   40

EXHIBIT 12.2  COMPUTATION OF RATIO OF NET INCOME, AS ADJUSTED,
                      TO FIXED CHARGES.....................................   40

EXHIBIT 27     FINANCIAL DATA SCHEDULE.....................................   41

                                      (2)
<PAGE>
                           CNA FINANCIAL CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                                 SEPTEMBER    DECEMBER 31
                                                                                   1998           1997
(In millions of dollars, except share data)                                      (UNAUDITED)
---------------------------------------------------------------------------------------------------------
ASSETS
  Investments:
<S>                                                                              <C>            <C>
    Fixed maturities available for sale (cost: $28,446 and $29,020).............. $29,322        $29,548
    Equity securities available for sale (cost: $970 and $695)...................   1,362            814
    Mortgage loans and real estate (less accumulated depreciation: $1 and $1)....      65             85
    Policy loans.................................................................     176            177
    Other invested assets........................................................     831            695
    Short-term investments ......................................................   4,549          4,884
                                                                                  --------       --------
       TOTAL INVESTMENTS.........................................................  36,305         36,203
  Cash...........................................................................     135            383
  Receivables:
    Reinsurance..................................................................   6,235          6,057
    Insurance ...................................................................   6,686          6,086
    Other .......................................................................     270            208
    Less allowance for doubtful accounts.........................................    (305)          (303)
  Deferred acquisition costs.....................................................   2,359          2,142
  Accrued investment income......................................................     418            389
  Receivables for securities sold................................................   1,289            744
  Federal income taxes recoverable (includes $102 and $26 due from Loews)........      82             18
  Deferred income taxes..........................................................     899          1,070
  Property and equipment at cost (less accumulated depreciation: $676 and $553)..     790            747
  Prepaid reinsurance premiums...................................................     292            202
  Intangibles....................................................................     595            620
  Other assets...................................................................   1,135          1,222
  Separate Account business......................................................   5,381          5,812
                                                                                    ------         ------
----------------------------------------------------------------------------------------------------------
       TOTAL ASSETS                                                               $62,566        $61,600
==========================================================================================================
</TABLE>
<PAGE>
                            CNA FINANCIAL CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS - continued
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                                 SEPTEMBER     DECEMBER 31
                                                                                   1998           1997
(In millions of dollars, except share data)                                      (UNAUDITED)
---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY                                                          
Liabilities:                                                                                  
  Insurance reserves:
     <S>                                                                         <C>            <C>   
     Claim and claim expense .................................................... $29,369        $29,558
     Unearned premiums...........................................................   5,084          4,700
     Future policy benefits......................................................   5,262          4,829
     Policyholders' funds........................................................     767            742
  Securities sold under repurchase agreements....................................      58            153
  Payables for securities purchased..............................................   1,072            648
  Participating policyholders' equity............................................     150            132
  Long-term debt.................................................................   2,967          2,897
  Other liabilities..............................................................   3,483          3,820
  Separate Account business......................................................   5,381          5,812
                                                                                  --------       --------
       TOTAL LIABILITIES.........................................................  53,593         53,291
                                                                                  --------       --------
Commitments and contingent liabilities  - Notes C and D                                       
Stockholders' equity:                                                                         
  Common stock ($2.50 par value;                                                            
    Authorized - 200,000,000 shares;
    Issued - 185,525,907 shares;
    Outstanding - 183,704,086 shares)............................................     464            464
  Money market cumulative preferred stock........................................     150            150
  Additional paid-in capital.....................................................     126            126
  Retained earnings..............................................................   7,408          6,983
  Accumulated other comprehensive income.........................................     892            589
  Treasury stock, at cost........................................................     (67)            (3)
                                                                                   --------       --------
       TOTAL STOCKHOLDERS' EQUITY................................................   8,973          8,309
-----------------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 $62,566        $61,600
===========================================================================================================
<FN>
     See accompanying Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)
</FN>
</TABLE>

                                       (3)
<PAGE>
                            CNA FINANCIAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30                              THREE MONTHS             NINE MONTHS
(In millions of dollars, except per share data)     1998          1997       1998         1997
-------------------------------------------------------------------------------------------------
Revenues:
<S>                                               <C>           <C>        <C>          <C>    
 Premiums........................................  $ 3,300       $ 3,336    $10,135      $10,031
 Net investment income...........................      521           530      1,641        1,641
 Realized investment gains ......................       97           237        512          475
 Other...........................................      211           206        598          537
                                                   ---------     ---------  ---------    --------
Total Revenues                                       4,129         4,309     12,886       12,684
                                                   ---------     ---------  ---------    --------
Benefits and expenses:
 Insurance claims and policyholders' benefits....    2,774         2,854      8,561        8,607          
 Amortization of deferred acquisition costs......      545           621      1,804        1,738
 Other operating expenses(Note H)................      783           384      1,764        1,223
 Interest expense................................       53            57        168          153
                                                   ---------     ---------  ---------    --------
Total Benefits and Expenses                          4,155         3,916     12,297       11,721
                                                   ---------     ---------  ---------    --------
 Income (loss) before income tax.................      (26)          393        589          963
Income tax expense (benefit).....................      (12)          119        160          276
                                                   ---------     ---------  ---------    --------
  Net (loss) income                                $   (14)      $   274    $   429      $   687
=================================================================================================
EARNINGS PER SHARE
Net (loss) income ...............................  $ (0.09)      $  1.47    $  2.29      $  3.68
                                                   =========     =========  =========    ========

Weighted average outstanding shares of
common stock (in millions of shares).............    185.2         185.4      185.2        185.4
=================================================================================================
<FN>
      See accompanying Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)
</FN>
</TABLE>
                                      (4)
<PAGE>
                           CNA FINANCIAL CORPORATION
            CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                          ACCUMULATED
                                                       ADDITIONAL                           OTHER        TOTAL
                             COMMON PREFERRED TREASURY  PAID IN   COMPREHENSIVE RETAINED COMPREHENSIVE STOCKHOLDERS'
(In millions of dollars)      STOCK  STOCK     STOCK    CAPITAL     INCOME      EARNINGS  INCOME         EQUITY
--------------------------------------------------------------------------------------------------------------------
<S>                          <C>     <C>      <C>       <C>       <C>           <C>      <C>           <C>      
BALANCE,JANUARY 1, 1997       $  464  $  150   $  (3)    $  126                   $6,024  $   299       $ 7,060                     
Comprehensive income:
  Net income.................     -       -       -          -     $  687            687       -            687
Other comprehensive income: 
Change in other comprehensive
 income......................     -       -       -          -        175             -       175           175
                                                                   --------
  Total comprehensive income                                       $  862
                                                                   ========
Preferred dividends..........     -       -       -          -                        (5)      -             (5)
----------------------------- ------- -------  -------   --------                -------- --------     ----------
BALANCE, SEPTEMBER 30, 1997   $  464  $  150   $  (3)    $  126                  $ 6,706  $   474      $  7,917                     
==================================================================               ================================

BALANCE, DECEMBER 31, 1997    $  464  $  150   $  (3)    $  126                  $ 6,983  $   589      $  8,309
Comprehensive income:
 Net income..................     -       -       -          -     $  429            429       -            429
Other comprehensive income:
Change in other comprehensive
 income......................     -       -       -          -        303             -       303           303
                                                                   --------
  Total comprehensive income                                       $  732
                                                                   ========
 Purchase of Treasury Stock       -       -      (64)        -                         -       -            (64)
 Preferred dividends........      -       -       -          -                        (4)      -             (4)
----------------------------- ------- -------  -------   --------                -------- --------     ----------
BALANCE, SEPTEMBER 30, 1998   $  464  $  150   $ (67)    $  126                  $ 7,408  $   892      $  8,973                     
==================================================================               ================================
<FN>
     See accompanying Notes to Condensed Consolidated Financial Statements
                                  (Unaudited)
</FN>
</TABLE>
                                      (5)
<PAGE>
                            CNA FINANCIAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30                                                  1998              1997
(In millions of dollars)
----------------------------------------------------------------------------------------------------------
<S>                                                                               <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income ...................................................................... $   429     $    687
 Adjustments to reconcile net income to net cash flows from operating activities:
  Net realized investment gains, pre-tax .........................................    (512)        (475)
  Participating policyholders' interest...........................................      15            2
  Amortization of intangibles.....................................................      85           20
  Amortization of bond discount...................................................    (165)         (81)
  Depreciation....................................................................     124          132
  Changes in:
   Insurance receivables, net.....................................................    (838)        (413)
   Deferred acquisition costs.....................................................    (217)        (369)
   Accrued investment income......................................................     (29)          98
   Federal income taxes...........................................................     (64)         165
   Deferred income taxes..........................................................      (2)         156
   Prepaid reinsurance premiums...................................................     (90)         (77)
   Insurance reserves.............................................................     666          993
   Reinsurance payables...........................................................    (111)         (60)
   Other liabilities..............................................................      67         (991)
   Other, net.....................................................................     (88)        (146)
                                                                                  ------------  ----------
       Total adjustments .........................................................  (1,159)      (1,046)
                                                                                  ------------  ----------
       NET CASH FLOWS FROM OPERATING ACTIVITIES ..................................    (730)        (359)
                                                                                  ------------  ----------
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

                           CNA FINANCIAL CORPORATION
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS- continued
                                   (Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30                                                  1998              1997
(In millions of dollars)
----------------------------------------------------------------------------------------------------------
<S>                                                                               <C>         <C>
Cash flows from investing activities:
 Purchases of fixed maturities.................................................... (28,438)     (28,756)
 Proceeds from fixed maturities:                                       
  Sales...........................................................................  26,686       27,545
  Maturities, calls and redemptions...............................................   2,655        1,668
 Purchases of equity securities...................................................    (792)        (854)
 Proceeds from sale of equity securities..........................................     509          937
 Change in short-term investments.................................................     419         (993)
 Purchases of property and equipment .............................................    (175)        (195)
 Change in securities sold under repurchase agreements............................     (95)       1,075   
 Change in other investments......................................................    (229)         173              
 Investment in affiliates.........................................................       -          (65)                  
 Other, net.......................................................................     (47)        (151)
                                                                                   ------------  ---------
       NET CASH FLOWS FROM INVESTING ACTIVITIES ..................................     493          384
                                                                                   ------------  ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Dividends paid to preferred stockholders.........................................      (5)          (5)
 Acquisition of treasury stock....................................................     (65)           -
 Receipts from investment contracts credited to policyholder account balances.....      19            7
 Return of policyholder account balances on investment contracts..................     (30)         (18)
 Principal payments on long-term debt.............................................    (942)          (4)
 Proceeds from issuance of long-term debt.........................................   1,012          109          
                                                                                   ------------  ---------
       NET CASH FLOWS FROM  FINANCING ACTIVITIES..................................     (11)          89
                                                                                   ------------  ---------
            Net cash flows........................................................    (248)         114
Cash at beginning of period.......................................................     383          257
----------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                             $    135     $    371
==========================================================================================================
Supplemental disclosures of cash flow information:
 Cash (paid)received:
 Interest ........................................................................$   (147)    $   (148)
 Federal income taxes.............................................................    (187)          50
==========================================================================================================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements 
                                  (Unaudited)
</FN>
</TABLE>
                                      (6)
<PAGE>

                            CNA FINANCIAL CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (Unaudited)

NOTE A.  Basis of Presentation:

         The condensed consolidated financial statements (unaudited) include CNA
Financial    Corporation    (CNAF)   and   its   subsidiaries    which   include
property/casualty  insurance companies (principally Continental Casualty Company
and The Continental Insurance Company) and life insurance companies (principally
Continental   Assurance  Company  and  Valley  Forge  Life  Insurance  Company),
collectively  CNA, or the Company.  As of September 30, 1998, Loews  Corporation
(Loews) owns approximately 85% of the outstanding common stock of CNAF.

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

         The  operating  results  for the interim  periods  are not  necessarily
indicative  of the results to be expected  for the full year.  These  statements
should be read in  conjunction  with the financial  statements and notes thereto
included in CNAF's Annual Report to Shareholders  (incorporated  by reference in
Form 10-K) for the year ended  December 31, 1997 (filed with the  Commission  on
March 31, 1998) and the information shown below.

         The accompanying  condensed consolidated financial statements have been
prepared in conformity with generally accepted  accounting  principles.  Certain
amounts  applicable  to prior  periods  have been  reclassified  to  conform  to
classifications followed in 1998. All intercompany amounts have been eliminated.

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual  results  could differ from those  estimates.  In the
opinion  of  CNA's  management,   these  statements   include  all  adjustments,
consisting  of  normal  recurring  accruals,  which are  necessary  for the fair
presentation of the consolidated  financial position,  results of operations and
cash flows.


NOTE B.  Restricted Investments:

     On December 30, 1993,  CNAF  deposited  $987 million in an escrow  account,
pursuant to the Fibreboard Global Settlement  Agreement,  as discussed in Note C
below. The escrow account  amounted to approximately  $1.08 billion at September
30, 1998 and $1.10  billion at December 31, 1997.  The majority of the funds are
included in  short-term  investments  and are  invested  substantially  in U. S.
Treasury securities.

                                      (7)

<PAGE>
                            CNA FINANCIAL CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued




NOTE C.  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,  Fibreboard  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.

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

         On January 27, 1998, a panel of United  States Fifth  Circuit  Court of
Appeals again  approved the Global  Settlement  Agreement by a 2 to 1 vote.  Two
sets of Objectors filed  petitions for certiorari,  which were docketed on April
16 and 17, 1998,  by the United  States  Supreme  Court.  On June 22, 1998,  the
Supreme  Court granted the petition for  certiorari  filed by one of the sets of
objectors. The Supreme Court has set oral argument for December 8, 1998.

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



SETTLEMENT AGREEMENTS

         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.


                                      (8)
<PAGE>
                            CNA FINANCIAL CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued


         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 $1.53  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 above, the Global Settlement  Agreement has been approved by the Fifth
Circuit a second  time,  but the  Supreme  Court  has  granted  a  petition  for
certiorari filed by one of the sets of objectors to the settlement.

         On October 12, 1993, Casualty, Pacific Indemnity and Fibreboard entered
into the  Trilateral  Agreement to settle the coverage  litigation to operate in
the event that the Global  Settlement  Agreement is disapproved.  The Trilateral
Agreement  calls for payment by Casualty  and Pacific  Indemnity of an aggregate
$2.0 billion,  of which Casualty's  portion is approximately  $1.46 billion,  to
Fibreboard  to resolve  all claims by  Fibreboard  and all future and  unsettled
present  asbestos  claimants  arising  under the policy  issued to Fibreboard by
Casualty.

         Under  either  the  Global  Settlement   Agreement  or  the  Trilateral
Agreement,  Casualty  is also  obligated  to pay prior  settlements  of  present
asbestos claims. As a result of the final approval of the Trilateral  Agreement,
such obligation has become final.

     Through September 30, 1998,  Casualty,  Fibreboard and plaintiff  attorneys
had reached  settlements  with respect to approximately  135,200 claims,  for an
estimated  settlement amount of approximately  $1.63 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under these settlements.  Approximately $1.67 billion (including interest of
$184  million) was paid through  September  30, 1998.  Such  payments  have been
partially  recovered  from  Pacific  Indemnity.  Casualty  may  negotiate  other
agreements for unsettled claims.

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

TOBACCO LITIGATION

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

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


                                      (9)
<PAGE>
                            CNA FINANCIAL CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

         In June of 1997,  the  United  States  District  Court for the  Western
District of Louisiana, Lake Charles Division,  granted a petition to remove this
litigation  to the federal  district  court.  The district  court's  decision is
currently on appeal to the United States Fifth Circuit Court of Appeals.  During
the pending appeal,  all proceedings in state court and in the federal  district
court are stayed. Because of the uncertainties inherent in assessing the risk of
liability at this very early stage of the  litigation,  management  is unable to
make a meaningful  estimate of the amount or range of any loss that could result
from an  unfavorable  outcome of the  pending  litigation.  However,  management
believes  that  the  ultimate  outcome  of the  pending  litigation  should  not
materially affect the results of operations or equity of CNAF.

OTHER LITIGATION

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

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" (PRPs).  Superfund and the mini-Superfunds  (Environmental
Clean-up Laws or ECLs)  establish  mechanisms to pay for clean-up of waste sites
if PRPs fail to do so, and to assign  liability to PRPs. The extent of liability
to be  allocated to a PRP is  dependent  on a variety of factors.  Further,  the
number of waste sites  subject to clean-up  is unknown.  To date,  approximately
1,300 clean-up sites have been identified by the Environmental Protection Agency
on its National  Priorities List ("NPL").  The addition of new clean-up sites to
the NPL has slowed in recent years.  Many clean up sites have been designated by
state authorities as well.

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

         A number of  proposals  to reform  Superfund  have been made by various
parties.  However, no reforms were enacted by Congress in 1998 and it is unclear
as to what  positions  the  Congress  or the  Administration  will take and what
legislation,  if  any,  will  result.  If  there  is  legislation,  and in  some
circumstances even if there is no legislation, the federal role in environmental
clean up may be  significantly  reduced  in favor of state  action.  Substantial
changes in the federal statute or the activity of


                                      (10)
<PAGE>
                            CNA FINANCIAL CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

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 liability of CNA for
environmental  pollution claims may vary substantially from the amount currently
recorded.

         As of  September  30, 1998 and  December  31,  1997,  CNA carried  $646
million and $773 million, respectively, of claim and claim expense reserves, net
of reinsurance recoverables, for reported and unreported environmental pollution
claims.  The reserves relate to claims for accident years 1988 and prior,  after
which CNA adopted the  Simplified  Commercial  General  Liability  coverage form
which  includes  an  absolute  pollution  exclusion.  Unfavorable  environmental
pollution  reserve  development for the nine months ended September 30, 1998 was
$58 million.  There was no environmental  pollution reserve  development for the
nine months ended September 30, 1997.

         CNA's   property/casualty   insurance  subsidiaries  have  exposure  to
asbestos  claims,   including  those   attributable  to  CNA's  litigation  with
Fibreboard  Corporation.  Estimation of asbestos claim reserves involves many of
the same limitations discussed above for environmental  pollution claims such as
inconsistency  of court  decisions,  specific policy  provisions,  allocation of
liability  among  insurers,  missing  policies  and  proof  of  coverage.  As of
September  30, 1998 and December 31, 1997,  CNA carried  $1.46 billion and $1.40
billion,  respectively,  of claim and claim expense reserves, net of reinsurance
recoverables,  for reported and unreported  asbestos-related claims. Unfavorable
asbestos claim reserve  development for the nine months ended September 30, 1998
and 1997 totaled $205 million and $40 million, respectively.

     The unfavorable  reserve development on environmental and asbestos reserves
in 1998 was more than offset by favorable  reserve  development  in other lines,
primarily  commercial  and  specialty  coverages.  Excluding  environmental  and
asbestos reserves,  favorable loss and allocated loss adjustment expense reserve
development approximated $380 million and $340 million for the nine months ended
September 30, 1998 and 1997,  respectively.  Premium  development for these same
periods  approximated  $30  million  favorable  and  $165  million  unfavorable,
respectively.  The large  unfavorable  premium  development in 1997 is primarily
attributable to reductions in residual market premiums.
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------|
|RESERVE SUMMARY                         SEPTEMBER 30, 1998         DECEMBER 31, 1997 |
|                                    -------------------------- ----------------------|
|                                    ENVIRONMENTAL              ENVIRONMENTAL         |
|(In millions of dollars)              POLLUTION      ASBESTOS   POLLUTION   ASBESTOS |
|-------------------------------------------------------------------------------------|
<S>                                 <C>           <C>           <C>          <C>           
|Reported claims:                                                                     |
|    Gross Reserves                  $    279      $   1,308    $    279     $  1,198 |
|      Less reinsurance recoverable       (52)          (101)        (36)        (117)|
|                                       ------        -------     -------    ---------|
|    Net reported claims                  227          1,207         243        1,081 |
|Net unreported claims                    419            248         530          319 |
|-------------------------------------------------------------------------------------|
|NET RESERVES                        $    646      $   1,455    $    773     $  1,400 |
|=====================================================================================|
</TABLE>

                                      (11)
<PAGE>
                            CNA FINANCIAL CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

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

NOTE D.  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, to provide greater  diversification  of
risk, and to minimize  exposures on larger risks. The reinsurance  coverages are
tailored to the specific  risk  characteristics  of each product line with CNA's
retained amount varying by type of coverage. Generally, reinsurance coverage for
property risks is on an excess of loss, per risk basis.  Liability coverages are
generally reinsured on a quota share basis in excess of CNA's retained risk.

         The ceding of insurance does not discharge the primary liability of the
original insurer.  CNA places reinsurance with other carriers only after careful
review  of  the  nature  of  the  contract  and a  thorough  assessment  of  the
reinsurers'  credit  quality  and claim  settlement  performance.  Further,  for
carriers  that are not  authorized  reinsurers  in its states of  domicile,  CNA
receives collateral, primarily in the form of bank letters of credit, securing a
large portion of the recoverables.
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------|
|NINE MONTHS ENDED SEPTEMBER 30            EARNED PREMIUMS             ASSUMED/|
|                                -------------------------------------         |
|                                                                         NET  |
|(In millions of dollars)          DIRECT   ASSUMED     CEDED      NET     %   |
|------------------------------------------------------------------------------|
<S>                             <C>       <C>         <C>     <C>      <C>     
|1998                                                                          |
|------------------------------------------------------------------------------|
|Property and Casualty           $ 6,261   $ 1,114     $ 481   $ 6,894   16.2 %|
|Accident and Health               2,624       153       202     2,575    5.9 %|
|Life                                742       112       188       666   16.8 %|
|------------------------------------------------------------------------------|
|    TOTAL PREMIUMS              $ 9,627   $ 1,379     $ 871   $10,135   13.6 %|
|==============================================================================|
|1997                                                                          |
|------------------------------------------------------------------------------|
|Property and Casualty           $ 6,087   $ 1,078     $ 549   $ 6,616   16.3 %|
|Accident and Health               2,806        73       115     2,764    2.6 %|
|Life                                649        92        90       651   14.1 %|
|------------------------------------------------------------------------------|
|    TOTAL PREMIUMS              $ 9,542   $ 1,243     $ 754   $10,031   12.4 %|
|==============================================================================|
</TABLE>

         In the table  above,  life  premium  revenue is  principally  from long
duration  contracts,  property/casualty  earned  premium is from short  duration
contracts,  and  approximately  three-quarters  of  accident  and health  earned
premiums are from short duration contracts.

     Insurance  claims  and  policyholders'  benefits  are  net  of  reinsurance
recoveries of $721 and $618 million for the nine months ended September 30, 1998
and September 30, 1997, respectively.

                                      (12)
<PAGE>
                            CNA FINANCIAL CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE E. Debt:

Borrowings consisted of the following:

|---------------------------------------------------------------------------|
| LONG-TERM DEBT                            SEPTEMBER 30        DECEMBER 31 |
| (In millions of dollars)                     1998                1997     |
|---------------------------------------------------------------------------|
|                                                                           |
|  Variable Rate Debt:                                                      |
|        Credit Facility - CNAF                   $    85      $   400      |
|        Commercial Paper                             650          675      |
|        Credit Facility - CNA Surety                 118          118      |
|  Senior Notes:                                                            |
|        8.875%, due March 1, 1998                      -          150      |
|        8.25%, due April 15, 1999                    101          102      |
|        7.25%, due March 1, 2003                     147          146      |
|        6.25%, due November 15, 2003                 249          249      |
|        6.50%, due April 15, 2005                    497            -      |
|        6.75%, due November 15, 2006                 248          248      |
|        6.45%, due January 15, 2008                  149            -      |
|        8.375%, due August 15, 2012                   98           98      |
|        6.95%, due January 15, 2018                  148            -      |
|        7.25%, Debenture, due November 15, 2023      247          247      |
|  11% Secured Mortgage Notes, due June 1, 2013       158          389      |
|  6.90% - 16.29% Secured Capital Leases,                                   |
|  due December 31, 2011                               46           47      |
|  Other debt, due 1998 through 2019                                        |
|  (rates of 1% to 12.71%)                             26           28      |
|---------------------------------------------------------------------------|
|      TOTAL LONG-TERM DEBT                       $ 2,967      $ 2,897      |
|===========================================================================|


         CNAF has in place an $875 million committed  revolving credit facility,
under which borrowing capacity is reduced by CNAF's commercial paper program. As
of  November 2, 1998,  outstanding  loans  under the credit  facility  were $235
million and outstanding  commercial paper was $500 million. At November 2, 1998,
there was $140 million of unused  borrowing  capacity  under the  facility.  The
interest rate for the credit 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 loans under the credit
facility at  September  30, 1998 was 5.72%  compared to 5.82% at  September  30,
1997.

         The  commercial  paper  borrowings  are  classified as long-term as the
program   is  fully   supported   by  the   committed   credit   facility.   The
weighted-average  interest  rate on  commercial  paper at September 30, 1998 and
1997, respectively, was 5.79 % and 5.82%.


                                      (13)
<PAGE>

                            CNA FINANCIAL CORPORATION
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- continued


         To offset the variable  rate  characteristics  of the credit  facility,
CNAF  entered  into  interest  rate swap  agreements  with  several  banks.  The
agreements  terminate from May 2000 to December 2000. These  agreements  provide
that CNAF pays interest at a fixed rate,  averaging 6.07% at September 30, 1998,
in exchange  for the  receipt of  interest  at the three  month LIBOR rate.  The
effect of these  interest  rate  swaps was to  increase  interest  expense by $1
million  and $3  million  for the  nine  months  ended  September  30,  1998 and
September 30, 1997, respectively.

         The weighted  average  interest rate  (interest  and facility  fees) on
CNAF's revolving credit facility and commercial paper, which reflects the effect
of the  interest  rate  swaps,  was  6.19% at  September  30,  1998 and 6.28% at
September 30, 1997.


         On August 18,  1997,  CNAF filed a  Registration  Statement on Form S-3
with the  Securities  and Exchange  Commission  relating to the issuance of $1.0
billion  of  senior  and  subordinated  debt and  preferred  stock  that  became
effective on October 22, 1997. This shelf registration incorporated $250 million
of securities  remaining available for issuance from a prior shelf registration.
On January 8, 1998,  CNAF issued $150 million  principal  amount of 6.45% senior
notes,  due January 15, 2008, and $150 million  principal amount of 6.95% senior
notes,  due January 15, 2018.  The net proceeds  were used to repay a portion of
the revolving credit facility.


         On April 15, 1998, CNAF issued $500 million  principal  amount of 6.50%
senior notes, due April 15, 2005. The net proceeds were used to prepay a portion
of the secured  mortgage  notes,  pay down a portion of the  existing  bank debt
outstanding  under CNAF's  revolving  credit  facility,  provide  refinancing of
senior notes and provide funds for acquisitions.


         On September 30, 1997, CNA Surety  Corporation,  a 62% owned subsidiary
of CNA,  entered into a $130 million,  5 year  revolving  credit  facility.  The
interest on credit  facility  borrowings is based on LIBOR plus 20 basis points.
Additionally,  there is a credit  facility fee of 10 basis points  annually.  At
September 30, 1998, the outstanding  borrowings  under this credit facility were
$118 million and the weighted average interest rate was 5.73%.



                                      (14)
<PAGE>
                            CNA FINANCIAL CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued



NOTE F.  Accumulated Other Comprehensive Income:


         Comprehensive  income is  comprised  of all  changes  to  stockholders'
equity, including net income, except those changes resulting from investments by
owners and distributions to owners.  The change in the components of accumulated
other comprehensive income are shown below:


|------------------------------------------------------------------------------|
|                                                                  TAX         |
|THREE MONTHS ENDED SEPTEMBER 30, 1998                  PRE-TAX (EXPENSE)  NET |
|(In millions of dollars)                                AMOUNT  BENEFIT AMOUNT|
|------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investment securities:                       |
|       Net unrealized holding gains (losses) arising                          |
|       during the period                                 $ 414  $ (159) $ 255 |
|       Adjustment for gains(losses) included in                               |
|       net income                                           (4)     1     (3) |
|Foreign currency translation adjustments                    10     (1)     9  |
|Adjustment for participating policyholder liabilities        7     (3)     4  |
|==============================================================================|
|TOTAL OTHER COMPREHENSIVE INCOME                         $ 427 $ (162) $ 265  |
|==============================================================================|
                                                                               

|------------------------------------------------------------------------------|
|                                                                  TAX         |
|THREE MONTHS ENDED SEPTEMBER 30, 1997                  PRE-TAX (EXPENSE)  NET |
|(In millions of dollars)                                AMOUNT  BENEFIT AMOUNT|
|------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investment securities:                       |
|       Net unrealized holding gains (losses) arising                          |
|       during the period                                 $ 484 $ (176) $ 308  |
|       Adjustment for gains(losses) included in                               |
|       net income                                            -      -      -  |
|Foreign currency translation adjustments                    (1)     -     (1) |
|Adjustment for participating policyholder liabilities       (4)     1     (3) |
|==============================================================================|
|TOTAL OTHER COMPREHENSIVE INCOME                         $ 479 $ (175) $ 304  |
|==============================================================================|
<PAGE>
                                                                               

|------------------------------------------------------------------------------|
|                                                                  TAX         |
|NINE MONTHS ENDED SEPTEMBER 30, 1998                   PRE-TAX (EXPENSE)  NET |
|(In millions of dollars)                                AMOUNT  BENEFIT AMOUNT|
|------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investment securities:                       |
|       Net unrealized holding gains (losses) arising                          |
|       during the period                                 $ 752 $ (277) $ 475  |
|       Adjustment for gains(losses) included in                               |
|       net income                                         (281)    98   (183) |
|Foreign currency translation adjustments                     6      -      6  |
|Adjustment for participating policyholder liabilities        8     (3)     5  |
|==============================================================================|
|TOTAL OTHER COMPREHENSIVE INCOME                         $ 485 $ (182) $ 303  |
|==============================================================================|
                                                                               

|------------------------------------------------------------------------------|
|                                                                  TAX         |
|NINE MONTHS ENDED SEPTEMBER 30, 1997                   PRE-TAX (EXPENSE)  NET |
|(In millions of dollars)                                AMOUNT  BENEFIT AMOUNT|
|------------------------------------------------------------------------------|
|Net unrealized gains (losses) on investment securities:                       |
|       Net unrealized holding gains (losses) arising                          |
|       during the period                                 $ 455 $ (166) $ 289  |
|       Adjustment for gains(losses) included in                               |
|       net income                                         (175)    61   (114) |
|Foreign currency translation adjustments                     -      -      -  |
|Adjustment for participating policyholder liabilities        -      -      -  |
|==============================================================================|
|TOTAL OTHER COMPREHENSIVE INCOME                         $ 280 $ (105) $ 175  |
|==============================================================================|
 
                                      (15)
<PAGE>
                            CNA FINANCIAL CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE G. Stockholders' Equity

         On May 6, 1998, CNA's Board of Directors approved a three-for-one split
of CNAF's common shares of stock, and authorized a commensurate  increase in the
outstanding  common  shares  from  61,798,262  to  185,394,786.  The shares were
distributed  on June 1,  1998 at a rate of  three  shares  for  each one held by
shareholders of record at the close of business on May 22, 1998. The table below
reflects  the effect of this stock split as if it had  occurred on December  31,
1997.



|-----------------------------------------------------------------------------|
|SUMMARY OF CAPITAL STOCK                                                     |
|-----------------------------------------------------------------------------|
|                                                     NUMBER OF SHARES        |
|                                   ------------------------------------------|
|                                                  SEPTEMBER 30  DECEMBER 31  |
|AS OF                                                1998           1997     |
|-----------------------------------------------------------------------------|
|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, par value of $2.50 voting stock:                               |
|    Authorized                                      200,000,000  200,000,000 |
|    Issued                                          185,525,907  185,525,907 |
|    Outstanding                                     183,704,086  185,394,786 |
|    Treasury stock                                    1,821,821      131,121 |
|                                                                             |
|-----------------------------------------------------------------------------|
 

           The dividend rate on money market preferred stock is determined
approximately  every 49 days by auction.  The money  market  preferred  stock is
redeemable at CNAF's  option,  as a whole or in part, at $100,000 per share plus
accrued and unpaid  dividends.  As of  September  30, 1998  preferred  dividends
declared were approximately $4 million.


         On  August  5,  1998,  CNAF's  board of  directors  approved  a plan to
purchase, in the open market or through privately negotiated  transactions,  its
outstanding  common stock from time to time, as the company's  management  deems
appropriate.  During the third quarter of 1998,  pursuant to its announced Share
Repurchase  Program,  CNAF  purchased  1,690,700  shares of its common stock for
approximately $64 million.  Total shares purchased by CNAF and classified on the
September 30, 1998 balance sheet as treasury  stock are 1,821,821 for a decrease
in stockholders'  equity of approximately  $67 million.  As of November 2, 1998,
CNAF has repurchased  2,734,800 shares of its common stock at an aggregate cost,
including commissions, of $102 million.


                                      (16)
<PAGE>

                            CNA FINANCIAL CORPORATION
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- concluded




NOTE H. Restructuring and Other Related Charges


         In the third quarter of 1998, the Company finalized and approved a plan
to  restructure  its  operations.  In  connection  with this plan,  the  Company
recorded pre-tax  restructuring and other related charges totaling $220 million.
The  restructuring  plan  focused  primarily  on  a  net  reduction  in  current
workforce,  the  consolidation  of certain  processing  centers,  the closing of
various  facilities  and the exiting of certain  businesses.  The Company's plan
calls for a reduction in the current workforce of approximately  4,500 employees
resulting in a net reduction of approximately 2,400 employees upon completion of
the plans  activities.  The  charges  recorded  in the third  quarter  relate to
employee termination benefits ($72 million),  the writedown of certain assets to
their fair values ($74  million),  lease  abandonment  costs ($42  million)  and
losses related to the exiting of businesses ($32 million).


NOTE I. Subsequent Events


         On October 9, 1998,  CNAF filed a  Registration  Statement  on Form S-8
with the Securities and Exchange Commission registering $60 million of $2.50 par
value common stock,  to be offered  pursuant to the CNAF Officer Stock Ownership
Plan. On October 9, 1998, prior to the opening of the trading session on the New
York Stock Exchange, CNAF sold 1,229,583 shares of common stock that was held in
treasury stock to certain senior  officers of CNAF at the average of the highest
and lowest sale price on the New York Stock  Exchange,  composite  transactions,
which was a price of $34.91 per  share.  The  purchases  were  financed  by full
recourse  collateralized loans from CNAF totaling approximately $43 million. The
loans are ten year notes which bear interest at the Applicable  Federal Rate for
October 1998 (5.39%), compounding semi-annually.


                                      (17)

<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


         The following  discussion  and analysis  should be read in  conjunction
with the condensed  consolidated financial statements and notes thereto found on
pages 3 to 17,  which  contain  additional  information  helpful  in  evaluating
operating results and financial condition.

         CNA  Financial  Corporation  (CNAF) is a holding  company whose primary
subsidiaries  consist  of   property/casualty   and  life  insurance  companies,
collectively CNA or the Company. CNAF's primary subsidiaries include Continental
Casualty  Company,  primarily a commercial lines writer,  Continental  Assurance
Company and Valley Forge Life Insurance  Company,  life insurance  subsidiaries,
and The  Continental  Insurance  Company,  primarily a personal  lines and ocean
marine writer. CNA is one of the largest writers of commercial property/casualty
insurance  and one of the ten  largest  insurance  organizations  in the  United
States.

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

                                      (18)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

RESULTS OF OPERATIONS:
         The following chart summarizes key components of operating  results for
the three and nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30                                    THREE MONTHS              NINE MONTHS     |
|(In millions of dollars)                                    1998       1997         1998        1997   |
|-------------------------------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED                                                                  |
|INVESTMENT GAINS/LOSSES):                                                                              |
|Revenues:                                                                                              |
|    Premiums:                                                                                          |
<S>                                                   <C>           <C>          <C>         <C>         
|       Property/Casualty                             $    2,514    $   2,489    $   7,707   $   7,489  |
|       Life                                                 786          847        2,428       2,542  |
|                                                        --------      -------      -------     ------- |
|                                                          3,300        3,336       10,135      10,031  |
|    Net investment income                                   521          530        1,641       1,641  |
|    Other                                                   211          206          598         537  |
|                                                        --------      -------      -------     ------- |
|                                                          4,032        4,072       12,374      12,209  |
|Benefits and expenses                                     4,152        3,911       12,287      11,712  |
|                                                        --------      -------      -------     ------- |
|    Operating (loss) income before income tax              (120)         161           87         497  |
|Income tax benefit (expense)                                 50          (40)          24        (114) |
|                                                        --------      -------      -------     ------- |
|    Net operating (loss) income                      $      (70)   $     121    $     111   $     383  |
|                                                        ========      =======      =======     ======= |
|                                                                                                       |
|                                                                                                       |
|SUPPLEMENTAL FINANCIAL DATA:                                                                           |
|Net operating income (excluding restructuring                                                          |
|and other related charges) by group:                                                                   |
|    Property/Casualty                                $      100    $     121    $     300   $     385  |
|    Life                                                      6           24           44          71  |
|    Other, primarily interest expense                       (25)         (24)         (82)        (73) |
|                                                        ========      =======      =======     ======= |
|                                                     $       81    $     121    $     262   $     383  |
|Net operating (loss) income by group:                                                                  |
|    Property/Casualty                                $      (25)   $     121    $     175   $     385  |
|    Life                                                    (20)          24           18          71  |
|    Other, primarily interest expense                       (25)         (24)         (82)        (73) |
|                                                        --------      -------      -------     ------- |
|                                                     $      (70)   $     121    $     111   $     383  |
|                                                        --------      -------      -------     ------- |
|Net realized investment gains (losses) by group:                                                       |
|    Property/Casualty                                $       55    $     126    $     263   $     221  |
|    Life                                                      1           29           56          73  |
|    Other                                                     -           (2)          (1)         10  |
|                                                        --------      -------      -------     ------- |
|                                                     $       56    $     153    $     318   $     304  |
|                                                        --------      -------      -------     ------- |
|Net (loss) income by group:                                                                            |
|    Property/Casualty                                $       30    $     247    $     438   $     606  |
|    Life                                                    (19)          53           74         144  |
|    Other, primarily interest expense                       (25)         (26)         (83)        (63) |
|                                                        --------      -------      -------     ------- |
|                                                     $      (14)   $     274    $     429   $     687  |
|=======================================================================================================|
</TABLE>
                                      (19)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

         On  August  5,  1998,   CNA   announced   estimates  of  the  financial
implications of its initiatives to achieve world-class performance. "World-class
performance",  as defined by the Company,  refers to the Company's  intention to
position  each of its  strategic  business  units  (SBUs) as a market  leader by
sharpening  its focus on customers and employing new  technology to work smarter
and faster.  As a result of these  initiatives,  the Company is  reorganizing  a
number of its SBUs and corporate support areas.

         In the third quarter of 1998, the Company finalized and approved a plan
to  restructure  its  operations.  In  connection  with this plan,  the  Company
recorded pre-tax  restructuring and other related charges totaling $220 million.
The  restructuring  plan focused on a net reduction in the current  workforce of
approximately  4,500  employees  resulting in a net  reduction of  approximately
2,400 employees, the consolidation of certain processing centers, the closing of
various facilities,  and the exiting of certain businesses. The charges recorded
in the third quarter relate to employee termination benefits ($72 million),  the
writedown  of  certain  assets  to  their  fair  values  ($74  million),   lease
abandonment  costs ($42 million) and losses related to the exiting of businesses
($32 million). These activities and changes are more fully discussed below.

         Within its risk management  business,  pre-tax  restructuring and other
related charges  totaled  approximately  $79 million for the third quarter.  The
charges relate to costs  associated with the  consolidation  of claim offices in
approximately  36 market  territories  totaling  approximately $8 million (lease
abandonment costs),  employee  termination benefits related to the net reduction
in workforce  of  approximately  200  employees  at a cost of  approximately  $7
million and the writedown of fixed and intangible  assets of  approximately  $64
million.

         Within its commercial  insurance  business,  pre-tax  restructuring and
other related charges for the third quarter totaled  approximately  $57 million.
The charges relate primarily to the  consolidation of four regional offices into
two zone offices and a reduction of claim  processing  offices from 24 to 8 at a
cost of approximately $21 million (lease  abandonment  costs).  The charges also
consist of approximately $31 million of employee termination benefits related to
the  net  reduction  in  workforce  of  approximately  1,200  employees  and  an
additional $5 million relating to fixed asset writedowns.

         Within its group insurance  business,  pre-tax  restructuring and other
related charges for the third quarter  totaled  approximately  $38 million.  The
charges relate  primarily to the Employer  Health and Affinity lines of business
that the Company  decided to exit and include the employee  termination  benefit
costs related to the net reduction in its current workforce of approximately 400
employees.

         For various other departments within the Company, pre-tax restructuring
and other related charges totaled approximately $25 million and relate primarily
to the closing of leased facilities and employee termination benefits related to
the  reductions in the current  workforce.  Additionally,  the Company  recorded
approximately $21 million in incremental  benefit plan expenses  associated with
the reductions in the Company's workforce.

         The  Company  expects  to record an  additional  $125  million  to $175
million in charges over the next 12 to 15 months,  primarily  relate to employee
related  expenses,  computer  systems,  consulting fees and other related costs.
While  such  costs  relate to the  Company's  overall  plans of  reorganization,
generally  accepted  accounting  principles do not allow for accrual of these in
the period the plan is  adopted.  Rather,  such  costs will be  recorded  in the
period which they are incurred.

                                      (20)
<PAGE>

                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

         While the Company has not yet  completed  its  analysis of  anticipated
cost savings, it estimates that its world-class  initiatives,  which include the
restructuring plan as well as revenue  enhancements and operating  efficiencies,
will result in anticipated  reductions of approximately  200 basis points in the
Company's expense ratio and savings of approximately  $300 to $350 million on an
annualized basis. The Company expects a portion of the anticipated  savings will
be realized beginning in the latter part of 1998 and to achieve the full expense
ratio reduction within 15 months.

         As  part of the  risk  management  business  initiatives,  the  Company
introduced its new risk management service  organization,  RSKCoSM in the fourth
quarter of 1998.  This new  organization  was created through the unification of
its existing claims service  organizations and the integration of the new claims
group with loss  control,  medical  cost  management  and  information  services
businesses. RSKCoSM will employ one of the largest claims technical staff in the
insurance  industry,  and expects to achieve cost savings  through  economies of
scale.

         Related to its decision to exit the Employer Health and Affinity Health
lines of  business,  the Company  actively  explored  the sale of these lines of
business.  In  the  fourth  quarter,  the  Company  entered  into  two  separate
agreements  to  sell a  majority  of  its  Employer  Health  book  of  business.


Consolidated Results
--------------------

         Consolidated revenues, which consist of premium, net investment income,
realized  investment gains and other revenue,  were $12.89 billion for the first
nine  months of 1998,  up slightly  from  $12.68  billion for the same period in
1997.  For the first nine  months of 1998,  revenues,  as  compared  to the same
period in 1997, reflect an increase in earned premium of $104 million, resulting
from an increase in  property/casualty  premiums  of $218  million,  offset by a
decline in life premium of $114  million.  Investment  income was  approximately
$1.64  billion for both the first nine months of 1998 and 1997.  Other  revenues
were $598  million for the first nine months of 1998 as compared to $537 million
for the same period in 1997,  primarily  due to increased  revenues from several
subsidiaries of the Company.

         Net operating income, which excludes net realized investment gains, was
$111 million, or $0.57 per share, for the first nine months of 1998, compared to
net operating income of $383 million, or $2.04 per share, for the same period in
1997. Net operating income for the first nine months of 1998 includes  after-tax
restructuring  and other related  charges of $151  million,  or $0.82 per share.
Excluding these charges, net operating income for the period ended September 30,
1998 was $262 million,  or $1.39 per share. The Company recorded a net operating
loss of $70 million, or $0.39 per share, for the third quarter of 1998, compared
to net  operating  income  of $121  million,  or $0.64 per  share,  for the same
quarter in 1997.  The net operating  loss for the third quarter of 1998 includes
the after-tax restructuring and other related charges of $151 million. Excluding
these charges, net operating income for the period was $81 million, or $0.43 per
share.

                                      (21)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

         Realized  investment  gains,  net of tax,  for the first nine months of
1998 were $318 million, or $1.72 per share,  compared to net realized investment
gains for the first  nine  months of 1997 of $304  million,  or $1.64 per share.
Realized  investment  gains,  net of tax, for the third quarter of 1998 were $56
million,  or $0.30 per share,  compared to net realized investment gains for the
third quarter of 1997 of $153 million, or $0.83 per share. The components of the
net realized investment gains (losses) are as follows:

|-----------------------------------------------------------------------------|
|NET REALIZED INVESTMENT GAINS(LOSSES)                                        |
|NINE MONTHS ENDED SEPTEMBER 30                              1998       1997  |
|(In millions of dollars)                                                     |
|-----------------------------------------------------------------------------|
|Bonds:                                                                       |
|     U.S. Government                                    $      165   $  103  |
|     Tax exempt                                                 58       26  |
|     Asset-backed                                               30       18  |
|     Taxable                                                    83      102  |
|                                                          ---------   -----  |
|        Total bonds                                            336      249  |
|Stocks                                                          12       57  |
|Derivative security investments                                 28        2  |
|Separate Accounts and other                                    136      167 *|
|                                                          ---------   -----  |
|     Realized investment gains reported in revenues            512      475  |
|Participating policyholders' interest                           (9)      (8) |
|Income tax expense                                            (185)    (163) |
|                                                          ---------   -----  |
|     NET REALIZED INVESTMENT GAINS                      $      318   $  304  |
|=============================================================================| 
*INCLUDES A REALIZED INVESTMENT GAINS OF $89 MILLION ON THE MERGER OF CNA SURETY
CORPORATION AND CAPSURE HOLDINGS CORP.

         Net income for the first nine months of 1998 was $429 million, or $2.29
per share,  compared  to $687  million,  or $3.68 per share,  for the first nine
months of 1997.  Net  income for the first nine  months of 1998,  excluding  the
after-tax  restructuring and other related charges of $151 million, or $0.82 per
share, was $580 million, or $3.11 per share. The Company recorded a net loss for
the third quarter of $14 million, or $0.09 per share,  compared to net income of
$274 million,  or $1.47 per share, for the third quarter of 1997.  Excluding the
restructuring  and other related  charges,  net income for the third quarter was
$137  million,  or $0.73 per share.  The Company's net income for the first nine
months of 1998 includes after-tax catastrophe losses of $141 million;  after-tax
catastrophe losses in the first nine months of 1997 were $51 million.  After-tax
catastrophe losses were $43 million for the third quarter of 1998 as compared to
$2 million for the same period in 1997.


                                      (22)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

Property/Casualty Operations
----------------------------
<TABLE>
<CAPTION>
|-------------------------------------------------------------------------------------|
|PROPERTY/CASUALTY GROUP                                                              |
|PERIOD ENDED SEPTEMBER 30                             THREE MONTHS     NINE MONTHS   |
|(In millions of dollars)                             1998     1997    1998    1997   |
|-------------------------------------------------------------------------------------|
|Operating Summary (excluding realized                                                |
|investment gains/losses):                                                            |
|Revenues:                                                                            |
     <S>                                             <C>     <C>      <C>     <C>      
|    Premiums                                        $2,514  $ 2,489  $7,707  $ 7,489 |
|    Net investment income                              412      432   1,313    1,343 |
|    Other                                              181      173     516      448 |
|                                                     ------  -------  ------  -------|
|                                                     3,107    3,094   9,536    9,280 |
|Benefits and expenses                                3,161    2,936   9,351    8,781 |
|                                                     ------  -------  ------  -------|
|    (Loss) income before income tax                    (54)     158     185      499 |
|Income tax recovery (expense)                           29      (37)    (10)    (114)|
|                                                     ------  -------  ------  -------|
|    NET OPERATING (LOSS) INCOME (EXCLUDING REALIZED                                  |
|       INVESTMENT GAINS/LOSSES)                     $  (25) $   121  $  175  $   385 |
|=====================================================================================|
</TABLE>
         Property/casualty  revenues  for the nine months  ended  September  30,
1998, excluding net realized investment  gains/losses,  increased 2.8%, to $9.54
billion   compared   to  $9.28   billion   in  the  same   period  a  year  ago.
Property/casualty  earned  premium  increased  $218  million,  or 2.9%  from the
comparable  period in the prior  year.  The  increase  in earned  premium is due
primarily  to  increases  in  involuntary  risk  premium of  approximately  $207
million,  personal lines premium of $92 million, $80 million of premium from CNA
Surety  Corporation  which was formed in September  of 1997,  and $48 million of
premium from Omega  Aseguradora de Reisgo de Trabajo,  an  Argentinean  worker's
compensation  carrier that was acquired in June of 1997.  These  increases  were
partially offset by a decrease in commercial lines premium of approximately $150
million and group lines of approximately $92 million.

         Lower  involuntary  premium  levels  in 1997  reflected  reductions  in
estimates  of premium  for 1996 and prior  periods,  primarily  in the  workers'
compensation  line of  business,  and a greater  willingness  on the part of the
voluntary  market,  including  CNA,  to write  these  types of  risks.  The 1998
estimated  premiums  reflect a return to  historical  levels.  The  increase  in
personal  lines premium is  attributable  to increases in California  Earthquake
Authority  premium of $34 million as well as an  increase of $45 million  across
various lines.  The decrease in commercial lines is primarily due to competitive
pricing pressures throughout the industry. The decrease in group lines is mainly
due to the  decision to exit the Employer  Health and  Affinity  Health lines of
business.

         Investment  income  decreased  $30  million or 2.2% for the nine months
ended  September  30, 1998 as compared to the same period for 1997 due primarily
to lower yielding  investments.  The fixed maturities  segment of the investment
portfolio  yielded 6.1% in the first nine months of 1998 as compared to 6.3% for
the first nine months of 1997.

         Other  revenues  increased to $516 million or 15.2% for the nine months
ended  September  30,  1998,  as compared to $448 million for the same period in
1997.  This increase is primarily due to increased  revenues from CNA's computer
leasing, professional employers organization and automobile warranty businesses.

                                      (23)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued



         Pre-tax operating income, excluding net realized gains/losses,  for the
property/casualty  insurance  subsidiaries  was $185 million for the nine months
ended September 30, 1998,  compared to $499 million for the same period one year
ago. Underwriting losses for the nine and three months ended September 30, 1998,
were $1.1  billion and $465  million,  compared to $844 million and $273 million
for the same  periods  in 1997.  The  increase  in 1998  underwriting  losses is
primarily due to the restructuring and other related charges recorded during the
third  quarter,  as well as an  increase in pre-tax  catastrophe  losses for the
first nine months of 1998 of approximately $138 million.

         Pre-tax catastrophe losses for the nine months ended September 30, 1998
were $217 million,  as compared to $79 million for the same period in 1997.  The
increase in  catastrophe  losses is mainly due to spring storms  throughout  the
United States and hurricane damage  sustained during the third quarter.  Pre-tax
catastrophe  losses for the three months ended  September 30, 1998 and September
30, 1997 were $66 million and $3 million, respectively.

         CNA's  property/casualty  insurance subsidiaries recorded net operating
income,  excluding net realized  investment  gains/losses,  of $175 for the nine
months ended September 30, 1998, and a net operating loss of $25 million for the
three months ended September 30, 1998. This compares to net operating  income of
$385 million and $121 million for the nine and three months ended  September 30,
1997, respectively.  Net realized investment gains for the nine and three months
ended  September  30, 1998 were $263 million and $55  million,  compared to $221
million and $126 million in the comparable periods of 1997.

                                      (24)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued
Life Operations
---------------
<TABLE>
<CAPTION>
|---------------------------------------------------------------------------------------------|
|LIFE GROUP                                                                                   |
|PERIOD ENDED SEPTEMBER 30                                THREE MONTHS        NINE MONTHS     |
|(In millions of dollars)                              1998       1997      1998        1997  |
|---------------------------------------------------------------------------------------------|
|OPERATING SUMMARY (EXCLUDING REALIZED                                                        |
| INVESTMENT GAINS/LOSSES):                                                                   |
|Revenues:                                                                                    |
     <S>                                             <C>        <C>     <C>        <C>         
|    Premiums                                        $   786    $  847  $  2,428   $    2,544 |
|    Net investment income                               111       102       335          306 |
|    Other                                                30        33        82           89 |
|                                                      ------    ------   -------    ---------|
|                                                        927       982     2,845        2,939 |
|Benefits and expenses                                   955       943     2,818        2,827 |
|                                                      ------    ------   -------    ---------|
|    (Loss) income before income tax                     (28)       39        27          112 |
|Income tax recovery (expense)                             8       (15)       (9)         (41)|
|                                                      ------    ------   -------    ---------|
|    NET OPERATING (LOSS) INCOME (EXCLUDING REALIZED                                          |
|       INVESTMENT GAINS/LOSSES)                     $   (20)   $   24  $     18   $       71 |
|=============================================================================================|
</TABLE>
     Life group  revenues,  excluding  realized  investment  gains/losses,  were
approximately  $2.85 billion,  down 3.2% for the nine months ended September 30,
1998  compared to the same period a year ago.  Revenues for the third quarter of
1998 were $927  million as compared to $982 million for the same period in 1997,
representing  a decrease of $55 million or 5.6%.  Life group earned  premium was
$2.43  billion in the first nine months of 1998,  down 4.6% as compared to $2.54
billion for the nine months ended September 30, 1997. For the three months ended
September  30, 1998,  earned  premium  decreased  7.2% to $786 million from $847
million  for the same  period in 1997.  The  decreases  in earned  premiums  are
primarily due to lower  premiums for the Federal  Employees  Health Benefit Plan
(FEHBP). The decrease in FEHBP premiums is due to improved claim experience upon
which  premiums  are based and  continues  the trend from the first half of this
year.

         Investment income for the nine months ended September 30, 1998 was $335
million as  compared to $306  million for the same period a year ago.  The fixed
maturities  segment of the life investment  portfolio  yielded 6.4% in the first
nine months of 1998 and 6.3% for the first nine months of 1997.

         Pre-tax operating income for the life insurance subsidiaries, excluding
net realized investment gains/losses,  was $27 million for the nine months ended
September  30, 1998,  compared to $112 million for the same period in 1997.  For
the three  months ended  September  30, 1998,  the life  insurance  subsidiaries
recorded  a  pre-tax  operating  loss of $28  million  as  compared  to  pre-tax
operating  income of $39 million for the same  period in 1997.  The  decrease in
pre-tax  operating  income is primarily due to lower premium  revenue and higher
losses in the  group  medical  business  for the  first  nine  months of 1998 as
compared to the same period in 1997. Additionally,  pre-tax operating income was
reduced by restructuring  and other related charges of approximately $38 million
attributable  to the Employer  Health and Affinity Health lines of business that
the Company decided to exit which include the employee termination benefit costs
related to the net  reduction  in its current  workforce  of  approximately  400
employees.

     Net realized investment gains for the nine and three months ended September
30,  1998 were $56  million  and $1  million,  compared  to $73  million and $29
million for the same periods in 1997.
                                      (25)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

Investments
-----------
<TABLE>
<CAPTION>
|-----------------------------------------------------------------------|------------------------------|
|SUMMARY OF GENERAL ACCOUNT INVESTMENTS                                 |        NINE MONTHS ENDED     |
|AT CARRYING VALUE                                                      |        SEPTEMBER 30, 1998    |
|                                                                       |------------------------------|
|                                                                       |     CHANGE IN  |             |
|                                         SEPTEMBER 30,    DECEMBER 31, | NET UNREALIZED |   REALIZED  |
|(In millions of dollars)                     1998             1997     |   GAINS(LOSSES)|GAINS(LOSSES)|
|-----------------------------------------------------------------------|----------------|-------------|
|FIXED MATURITY SECURITIES:                                             |                |             |
<S>                                      <C>              <C>                <C>             <C>        
|U.S. Treasury securities and                                           |                |             |
|    obligations of government agencies  $     10,075     $     12,980  |    $       236 |   $     165 |
|Asset-backed securities                        6,766            4,804  |            137 |          30 |
|Tax exempt securities                          6,144            4,724  |             98 |          58 |
|Taxable securities                             6,337            7,040  |           (124)|          83 |
|                                           ----------      ----------- |      ----------|     --------|
|    Total fixed maturity securities           29,322           29,548  |            347 |         336 |
|Stocks                                         1,362              814  |            272 |          12 |
|Short-term investments                         4,549            4,884  |              - |         (14)|
|Other investments                              1,064              945  |           (107)|         113 |
|Derivative security investments                    8               12  |              - |          28 |
|                                           ----------      ----------- |      ----------|     --------|
|    TOTAL INVESTMENTS                   $     36,305     $     36,203  |            512 |         475 |
|                                           ==========      =========== |                |             |
|Other, principally Separate Accounts                                   |              9 |          37 |
|Participating policyholders' interest                                  |             (6)|          (9)|
|Income tax expense                                                     |           (180)|        (185)|
|                                                                       |      ----------|     --------|
|    NET INVESTMENT GAINS                                               |    $       335 |   $     318 |
|=======================================================================|================|=============|
                                                                                                                
|-----------------------------------------------------------------------|
|SHORT-TERM INVESTMENTS:                                                |
|-----------------------------------------------------------------------|
|Security repurchase collateral          $         58     $        154  |
|Escrow                                         1,049            1,065  |
|U.S. Treasuries                                  525              558  |
|Commercial paper                               1,981            1,850  |
|Money markets                                    312              624  |
|Other                                            624              633  |
|-----------------------------------------------------------------------|
|    TOTAL SHORT-TERM INVESTMENTS        $      4,549     $      4,884  |
|=======================================================================|
</TABLE>
         CNA's  general  account  investment  portfolio  is managed to  maximize
after-tax  investment  return,  while  minimizing  credit risks with investments
concentrated  in high quality  securities to support its insurance  underwriting
operations.

         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,  prepayments,  tax and credit  considerations,  or other similar factors.
Accordingly, the fixed maturity securities are classified as available for sale.
<PAGE>

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

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

                                      (26)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued


         The  general  account  portfolio  consists  primarily  of high  quality
marketable fixed maturity securities,  approximately 93.7% of which are rated as
investment  grade. At September 30, 1998,  tax-exempt  securities and short-term
investments,   excluding   collateral  for  securities  sold  under   repurchase
agreements,  comprised  approximately  16.9%  and  12.4%,  respectively,  of the
general  account's  total  investment  portfolio  compared  to 13.1% and  13.1%,
respectively, at December 31, 1997. Historically,  CNA has maintained short-term
assets  at  a  level  that  provided  for  liquidity  to  meet  its   short-term
obligations,  as well as reasonable  contingencies  and anticipated claim payout
patterns.  Short-term  investments  at both  September 30, 1998 and December 31,
1997  are  substantially  higher  than  historical  levels  in  anticipation  of
Fibreboard-related  claim payments.  At September 30, 1998, the major components
of  the  short-term   investment   portfolio  consist  primarily  of  high-grade
commercial paper and U.S. Treasury bills.

         As of September  30, 1998,  the market value of CNA's  general  account
investments  in  fixed  maturities  was  $29.32  billion  and was  greater  than
amortized cost by approximately $876 million. This compares to a market value of
$29.55 billion and approximately $528 million of net unrealized investment gains
at December 31, 1997. The gross  unrealized  investment gains and losses for the
fixed  maturity  securities  portfolio at September 30, 1998 were $1,138 million
and $262  million,  respectively,  compared to $644  million  and $116  million,
respectively, at December 31, 1997.

         Net unrealized  investment gains on general account fixed maturities at
September  30, 1998 include net  unrealized  losses on high yield  securities of
$137 million, compared to net unrealized losses of $2 million on such securities
at December 31, 1997. 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.
CNA's investment in high yield securities in the general account  decreased $377
million to  approximately  $1.86  billion at September 30, 1998 when compared to
December 31, 1997.

         At September  30, 1998,  total  Separate  Account cash and  investments
amounted to $5.25 billion with taxable fixed  maturity  securities  representing
approximately 83.9% of the Separate Accounts' portfolios. Approximately 68.0% of
Separate Account  investments are used to fund guaranteed  investments 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  portfolio  is generally  matched with the  corresponding
payout pattern of the liabilities of the guaranteed  investment  contracts.  The
fair  value  of all  fixed  maturity  securities  in the  guaranteed  investment
portfolio  was $3.44 billion at September 30, 1998 and $3.83 billion at December
31,  1997.  At  September  30,  1998,  fair  value  exceeded  amortized  cost by
approximately $101 million. This compares to an unrealized gain of approximately
$71 million at December  31, 1997.  The gross  unrealized  investment  gains and
losses for the  guaranteed  investment  fixed maturity  securities  portfolio at
September 30, 1998, were $118 million and $17 million, respectively, as compared
to  unrealized  gains of $87  million  and  unrealized  losses of $16 million at
December 31, 1997.

         Carrying values of high yield  securities in the guaranteed  investment
portfolio  were $278 million at September  30, 1998 and $310 million at December
31, 1997. Net unrealized investment losses on high yield securities held in such
Separate  Accounts  were $19 million at September  30,  1998,  and $1 million at
December 31, 1997.


                                      (27)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

         High yield 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 September 30, 1998,
CNA's  concentration  in high yield  bonds,  including  Separate  Accounts,  was
approximately  3.7% of total assets as compared to 3.2% at December 31, 1997. In
addition,  CNA's investments in mortgage loans and real estate are substantially
below the industry average, representing less than one quarter of one percent of
its total assets.

         Included in CNA's  fixed  maturity  securities  at  September  30, 1998
(general and guaranteed investment portfolios) are $9.01 billion of asset-backed
securities,   consisting  of  approximately  54.5%  in  collateralized  mortgage
obligations  ("CMOs"),  15.2% in corporate  asset-backed  obligations,  16.6% in
corporate  mortgage  backed  security pass thru  obligations,  and 13.7% in U.S.
Government agency issued  pass-through  certificates.  The majority of CMOs held
are corporate  mortgage-backed  securities,  which are actively traded in liquid
markets and are priced by broker-dealers.  At September 30, 1998, the fair value
of asset-backed  securities  exceeded the amortized cost by  approximately  $299
million compared to net unrealized  investment gains of $114 million at December
31, 1997. CNA limits the risks  associated with interest rate  fluctuations  and
prepayments by concentrating  its CMO investments in early planned  amortization
classes with relatively short principal repayment windows.

         At September 30, 1998,  36.2% of the general  account's  fixed maturity
securities portfolio was invested in U.S. Government securities,  36.4% in other
AAA rated  securities and 15.1% in AA and A rated  securities.  CNA's guaranteed
investment  fixed  maturity  securities  portfolio  is  comprised  of 5.7%  U.S.
Government securities, 61.9% in other AAA rated securities and 13.9% in AA and A
rated securities. These ratings are primarily from Standard & Poor's.

MARKET RISK:

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

         A  significant  component  of market  risk is price  risk.  Price  risk
relates to changes  in the level of prices  due to  changes in  interest  rates,
equity  prices,  foreign  exchange  rates or other factors that relate to market
volatility of the rate, index, or price underlying the financial instrument. The
Company's  primary  market  risk  exposures  are to changes in  interest  rates,
although  the  Company  has certain  exposures  to changes in equity  prices and
foreign currency exchange rates.

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

         The Company's market risk sensitive  instruments presented in the table
on page 31 are classified as held for purposes  other than trading.  The Company
does not generally hold or issue derivatives for trading purposes.

                                      (28)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

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

         The  Company  is  exposed  to  equity  price  risk as a  result  of its
investment  in equity  securities  and  equity  derivatives.  Equity  price risk
results from changes in the level or volatility of equity prices that affect the
value of equity  securities  or  instruments  which derive their value from such
securities  or indexes.  CNA  attempts to mitigate its exposure to such risks by
limiting its investment in any one security or index.

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

Sensitivity Analysis
--------------------

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

         The analysis  assumes that the  composition  of the Company's  interest
sensitive assets and liabilities existing at the beginning of the period remains
constant  over the period  being  measured  and also  assumes  that a particular
change  in  interest  rates  is  reflected  uniformly  across  the  yield  curve
regardless of the time to maturity. Also, the interest rates on certain types of
assets and  liabilities  may fluctuate in advance of changes in market  interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates.  Accordingly,  the analysis may not be indicative  of, is not intended to
provide,  and does not  provide a precise  forecast  of the effect of changes of
market  interest  rates on the  Company's  net income or  stockholders'  equity.
Further,  the computations do not contemplate any actions CNA would undertake in
response to changes in interest rates.

                                      (29)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

         The  sensitivity  analysis  assumes  an  instantaneous  shift in market
interest rates,  with scenarios of interest rates  increasing and decreasing 100
and 150 basis  points  from their  levels at  September  30, 1998 with all other
variables held constant.  A 100 and 150 basis point increase in market  interest
rates  would  result  in a  pre-tax  decrease  in the net  financial  instrument
position of $1.60 billion and $2.38 billion,  respectively.  Similarly a 100 and
150 basis point  decrease  in market  interest  rates would  result in a pre-tax
increase in the net  financial  instrument  position of $1.67  billion and $2.53
billion, respectively.

         The Company's long-term debt,  including interest rate swap agreements,
as of September 30, 1998 is denominated in U.S.  dollars.  Approximately  93% of
the  Company's  long-term  debt  has  been  issued  at  fixed  rates or has been
effectively  converted  into fixed rate debt by interest rate swap  arrangements
which mature in May 2000 through  December  2000. As such,  interest  expense on
this indebtedness would not be impacted by interest rate shifts. The impact of a
100 and 150 basis point  increase  in market  interest  rates would  result in a
decrease  in the market  value of the fixed rate debt by $138  million  and $201
million,  respectively.  The  impact of a 100 and 150 basis  point  decrease  in
market  interest  rates would  result in an increase in the market  value of the
fixed rate debt by $154 million and $237 million,  respectively. The impact of a
100 and 150 basis point  increase in market  interest rates on the variable rate
debt  would  result in  additional  interest  expense of $2.2  million  and $3.2
million,  respectively, per year. A 100 and 150 basis point decrease in interest
rates  would  lower   interest   expense  by  $2.2  million  and  $3.2  million,
respectively, per year.

         Equity price risk was measured  assuming an  instantaneous  10% and 25%
change  in the  Standard  & Poor's  500  Index  (the  Index)  from its  level of
September 30, 1998, with all other variables held constant. The Company's equity
holdings were assumed to be perfectly  correlated with this index. A 10% and 25%
decrease in the Index would result in a $240 million and $599 million  decrease,
respectively,  in the net financial instrument  position.  Of these amounts, $82
million  and  $205  million,  respectively,  would be  offset  by  decreases  in
liabilities to customers under variable annuity contracts.  Similarly, increases
in the index would  result in like  increases  in the net  financial  instrument
position.

         The  sensitivity  analysis  also assumes an  instantaneous  10% and 20%
change in the foreign currency  exchange rates versus the U.S. Dollar from their
levels at September 30, 1998, with all other variables held constant.  A 10% and
20%  strengthening  of the U.S. dollar versus other  currencies  would result in
decreases  of $196  million  and $391  million in the net  financial  instrument
position.  Weakening of the U.S. dollar versus all other currencies would result
in like increases in the net financial instrument position.

                                      (30)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued


         The following table reflects an increase in interest rates of 100 basis
points, a decline of 10% in foreign currency exchange rates and a 10% decline in
the S&P 500 index.

|------------------------------------------------------------------------------|
|                                                                              |
|SEPTEMBER 30, 1998                        MARKET   INTEREST CURRENCY   EQUITY |
|(In millions of dollars)                  VALUE   RATE RISK   RISK      RISK  |
|------------------------------------------------------------------------------|
|Held for Other Than Trading Purposes                                          |
|    General accounts                                                          |
|       Fixed maturity securities       $   29,322    $ (1,450)  $(135) $    - |
|       Equity securities                    1,362           -      (1)   (136)|
|       Short-term investments               4,549          (6)    (36)      - |
|       Interest rate swaps                    (15)         11       -       - |
|------------------------------------------------------------------------------|
|         Total general accounts            35,218      (1,445)   (172)   (136)|
|------------------------------------------------------------------------------|
|    Separate Accounts                                                         |
|       Fixed maturity securities            4,405        (157)    (22)     (3)|
|       Equity securities                      186           -       -     (19)|
|       Short-term investments                 457          (1)     (2)      - |
|       Equity index futures                     -           2       -     (82)|
|------------------------------------------------------------------------------|
|         Total Separate Accounts            5,048        (156)    (24)   (104)|
|------------------------------------------------------------------------------|
|         Total all securities          $   40,266    $ (1,601)  $(196) $ (240)|
|==============================================================================|
|LONG TERM DEBT                         $   (3,133)   $    138   $   -  $    - |
|==============================================================================|
                                                                           
         The following table reflects an increase in interest rates of 150 basis
points, a decline of 20% in foreign  currency  exchange rates, and a 25% decline
in the S&P 500 index.
|------------------------------------------------------------------------------|
|                                                                              |
|SEPTEMBER 30, 1998                         MARKET  INTEREST   CURRENCY EQUITY |
|(In millions of dollars)                   VALUE   RATE RISK     RISK    RISK |
|------------------------------------------------------------------------------|
|Held for Other Than Trading Purposes                                          |
|    General accounts                                                          |
|       Fixed maturity securities        $ 29,322   $ (2,151) $ (269)   $    - |
|       Equity securities                   1,362          -      (2)     (341)|
|       Short-term investments              4,549         (9)    (73)        - |
|       Interest rate swaps                   (15)        16       -         - |
|------------------------------------------------------------------------------|
|         Total general accounts           35,218     (2,144)   (344)     (341)|
|------------------------------------------------------------------------------|
|    Separate Accounts                                                         |
|       Fixed maturity securities           4,405       (236)    (44)       (7)|
|       Equity securities                     186          -       -       (46)|
|       Short-term investments                457         (1)     (3)        - |
|       Equity index futures                    -          3       -      (205)|
|------------------------------------------------------------------------------|
|         Total Separate Accounts           5,048       (234)    (47)     (258)|
|------------------------------------------------------------------------------|
|         Total all securities           $ 40,266   $ (2,378) $ (391)   $ (599)|
|==============================================================================|
|LONG-TERM DEBT                          $ (3,133)  $    201  $    -    $    - |
|==============================================================================|

                                      (31)
<PAGE>

                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued


FINANCIAL CONDITION:

|------------------------------------------------------------------------------|
|FINANCIAL POSITION                                  SEPTEMBER 30   DECEMBER 31|
|(in millions of dollars, except per share data)        1998           1997    |
|------------------------------------------------------------------------------|
|                                                                              |
|Assets                                            $     62,566     $ 61,600   |
|Stockholders' equity                                     8,973        8,309   |
|Accumulated other comprehensive income                     892          589   |
|Book value per common share                              47.63        44.01   |
|==============================================================================|

         CNA's assets  increased  approximately  $960 million from  December 31,
1997 to $62.57  billion as of September 30, 1998.  The major  components of this
increase were an increase of approximately $840 million in insurance receivables
and  approximately  $545 million for receivables for securities sold offset by a
decrease of  approximately  $170 million in deferred income taxes and a decrease
of approximately $430 million in separate account business.

         During  the first  nine  months  of 1998,  CNA's  stockholders'  equity
increased by $664 million,  or 8.0%, to $8.97 billion.  The major  components of
this change  were net income of $429  million  and change in  accumulated  other
comprehensive income of $303 million.

         The  statutory  surplus  of  the  property/casualty   subsidiaries  was
approximately  $7.0  billion at both  September  30, 1998 and December 31, 1997.
Statutory  surplus  increased  by net income of $291 million and a change in net
unrealized  investment  gains of $25  million.  These  increases  were more than
offset by $367 million reductions in surplus, primarily dividends. The statutory
surplus of the life insurance  subsidiaries  was  approximately  $1.2 billion at
September 30, 1998 and December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES:

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

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

     For the nine months ended  September 30, 1998,  CNA's  operating cash flows
were a negative $730  million,  compared to a negative $359 million for the nine
months ended September 30, 1997.  Negative cash flows for 1998 are primarily the
result of reduced income from operations  while negative cash flows for 1997 are
substantially the result of the settlement of asbestos and environmental claims,
including those attributable to the Fibreboard litigation.


                                      (32)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued



         In early 1998,  CNAF was able to take  advantage  of  favorable  market
conditions  to refinance,  on a fixed rate basis,  $300 million of existing debt
under the its revolving credit  facility.  During the second quarter of 1998 the
Company issued $500 million  principal  amount of 6.50% senior notes,  due April
15,  2005.  The net  proceeds  were  used to pay  down  existing  debt,  provide
refinancing of certain senior notes and provide funds for acquisitions.  The net
effect of these  transactions  was an  increase  in cash  flows  from  financing
activities of approximately $61 million

         On  August  5,  1998,  CNAF's  board of  directors  approved  a plan to
repurchase, in the open market or through privately negotiated transactions, its
outstanding  common stock from time to time as market  conditions  warrant.  The
timing  of stock  purchases  are made at the  discretion  of  management.  As of
September  30,  1998,  CNAF  has  repurchased  1,690,700  shares  at a  cost  of
approximately $64 million.  Total shares purchased by CNAF and classified on the
September 30, 1998 balance sheet as treasury stock are  approximately  1,821,821
at a cost of  approximately  $67  million.  As of  November  2,  1998  CNAF  has
repurchased 2,734,800 shares of its common stock at an aggregate cost, including
commissions, of $102 million.

     In the past five years,  several rating agencies have lowered the Company's
ratings with regard to its debt and claims paying  ability.  Some of the factors
causing these downgrades  include  Casualty's  obligations  under the Fibreboard
settlement  and the  merger  with The  Continental  Corporation  in  1995.  More
recently,  rating  agencies  in their  evaluations  of Casualty  have  expressed
concern  with  regard  to the  intensely  competitive  environment  in the  U.S.
commercial insurance markets, among other factors.

     The  Company  intends  to take a number  of steps to  address  the issue of
lowered  ratings  and,  among  other  things,  intends  to enhance  its  capital
structure by  approximately  $500 million.  It is anticipated  that this will be
accomplished in the fourth quarter of 1998 and the first quarter of 1999 through
several  transactions,  including  the  issuance  of  preferred  equity and debt
securities by CNAF.  Loews has advised CNAF that it would be willing to purchase
approximately half of such securities.



IMPACT OF YEAR 2000:

         The widespread use of computer programs,  both in the United States and
internationally,  that rely on two digit date fields to perform computations and
decision  making  functions  may cause  computer  systems  to  malfunction  when
processing  information  involving dates  beginning in 1999.  Such  malfunctions
could lead to business delays and disruptions.  The Company is in the process of
renovating or replacing many of its legacy  systems to accommodate  business for
the year 2000 and beyond. In addition,  the Company is checking embedded systems
in computer  hardware and other  infrastructure  such as elevators,  heating and
ventilating  systems,  and security  systems.  To date, 89% of all planned hours
have been expended, and a similar percentage of milestones have been completed.

     Approximately  81% of the Company's  internal  systems have been internally
tested so far and expect to be running in a production  environment  by December
1, 1998.  This deadline allows a full year for  re-validation  of already tested
and implemented  Year 2000 remediated  systems,  as well as for shake-out of any
previously  unidentified problems and for interacting with business partners and
vendors that are still working on making their programs Year 2000 ready.

                                      (33)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

     Based upon its current  assessment,  the Company  estimates  that the total
cost to replace and upgrade its systems to accommodate Year 2000 processing will
be approximately $60 to $70 million. As of September 30, 1998, approximately $48
million has been spent. However, prior to 1997, the Company did not specifically
separate  technology  charges  for Year 2000 from other  information  technology
charges.  In addition,  while some  hardware  charges are included in the budget
figures,  the Company's hardware costs are typically included as part of ongoing
technology  updates and not  specifically as part of the Year 2000 project.  All
funds spent and to be spent will be financed from current operating funds.

     The Company believes that it will be able to resolve the Year 2000 issue in
a timely manner.  However, due to the interdependent nature of computer systems,
the  Company  may be  adversely  impacted  depending  upon  whether  it or other
entities not affiliated with the Company (vendors and business partners) address
this issue  successfully.  To mitigate this impact, the Company is communicating
with its vendors and business  partners to coordinate the Year 2000  conversion.
The Company has already sent Year 2000 information  packages to more than 12,000
independent  agents  to  encourage  them to become  Year 2000  ready on a timely
basis.  The  Company  has also  sent  Year 2000  information  to almost  300,000
business  policyholders  to  increase  their  awareness  of the Year 2000 issue.
Similar information packages have been sent to healthcare providers, lawyers and
others  with  whom  the  Company  has  business  relationships.  Because  of the
interdependent  nature of the issue,  the Company cannot be sure that there will
not be a disruption in its business.

         The Company has also developed business resumption plans to ensure that
the Company is able to continue  critical  processes  through other means in the
event that it becomes  necessary to do so. Formal strategies have been developed
within  each  business  unit and  support  organization  to include  appropriate
recovery processes and use of alternative vendors. More than 200 strategies have
been developed to address recovery plans for approximately 400 processes.  These
plans are being updated quarterly.

         In  addition,   property/casualty   insurance  companies  may  have  an
underwriting  exposure related to Year 2000 issue. Although CNA has not received
any claims for coverage from its  policyholders  based on losses  resulting from
Year 2000 issues,  there can be no assurances that policyholders will not suffer
losses of this type and seek compensation  under insurance polices  underwritten
by CNA. If any claims are made,  coverage,  if any, will depend on the facts and
circumstances  of the  claim  and the  provisions  of the  policy.  The range of
potential  insurance  exposure  created by the Year 2000 problem is sufficiently
broad that it is  impossible  to estimate with any degree of accuracy the extent
to which various types of policies issued by the Company may afford coverage for
loss or claims.  At this time,  in the  absence  of any claims  experience,  the
Company  is  unable  to  forecast  the  nature  and  range  of the  losses,  the
availability  of  coverage  for the losses,  or the  likelihood  of  significant
claims.  As a result,  the  Company is unable to  determine  whether the adverse
impact, if any, in connection with the foregoing circumstances would be material
to the Company.

                                      (34)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - concluded

ACCOUNTING STANDARDS:

         In June 1997, the Financial  Accounting Standards Board (FASB) issued
Statement of Financial  Accounting  Standards  (SFAS) 131,  "Disclosures about
Segments of an Enterprise and Related  Information," which establishes standards
for the way that public business  enterprises report information about operating
segments  in interim and annual  financial  statements.  It requires  that those
enterprises report a measure of segment profit or loss, certain specific revenue
and expense items,  and segment assets,  and that the enterprises  reconcile the
total of those  amounts to the  general-purpose  financial  statements.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas and major customers.  This Statement is effective for financial
statements for periods  beginning  after December 15, 1997.  This Statement need
not be  applied to  interim  financial  statements  in the  initial  year of its
application. CNA intends to expand its business segment disclosure in connection
with the adoption of this standard.

         In  December   1997,  the  American   Institute  of  Certified   Public
Accountants'  Accounting  Standards  Executive  Committee  issued  Statement  of
Position  (SOP)  97-3,  "Accounting  by Insurance  and Other  Enterprises  for
Insurance-Related  Assessments,"  which  provides  guidance  on  accounting  for
insurance-related  assessments.  It requires that entities recognize liabilities
for  insurance-related  assessments when all of the following criteria have been
met: an assessment has been imposed or it is probable that an assessment will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial  statements;  and the amount
of the  assessment  can be  reasonably  estimated.  This  SOP is  effective  for
financial  statements for fiscal years beginning after December 15, 1998. CNA is
currently   evaluating   the  effects  of  this  SOP  on  its   accounting   for
insurance-related  assessments.  Certain insurance industry information required
for compliance is not currently  available and therefore the Company is studying
alternatives  for  estimating  the  accrual.  While  it  is  possible  that  the
cumulative  effect of adoption  could be  material,  the ongoing  impact of this
standard is not expected to be material to the results of operations,  liquidity
or financial position of the Company.

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



                                      (35)
<PAGE>
                            CNA FINANCIAL CORPORATION
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

         In March 1998, the American Institute of Certified Public  Accountants'
Accounting  Standards Executive  Committee issued SOP 98-1,  "Accounting for the
Costs of Computer  Software  Developed  or  Obtained  for  Internal  Use," which
provides  guidance on  accounting  for costs of computer  software  developed or
obtained for internal use and for determining  whether computer  software is for
internal  use.  For  purposes  of this SOP,  internal-use  software  is software
acquired,  internally developed or modified solely to meet the entity's internal
needs for which no substantive  plan exists or is being  developed to market the
software   externally   during  the  software's   development  or  modification.
Accounting  treatment for costs  associated with software  developed or obtained
for  internal  use,  as defined by this SOP,  is based upon a number of factors,
including  the point in time during the project  that costs are incurred as well
as the types of costs incurred.  This SOP is effective for financial  statements
for fiscal years beginning after December 15, 1998. CNA is currently  evaluating
the effects of this SOP.

         In June 1998,  the FASB issued  SFAS 133,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  which  establishes  standards  for  the
accounting and reporting for derivative  instruments and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  as (a) a hedge of the  exposure  to  changes  in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,  or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,  an
unrecognized   firm   commitment,   an   available-for-sale   security,   or   a
foreign-currency-denominated  forecasted transaction. The accounting for changes
in the fair value of a derivative  depends on the intended use of the derivative
and the  resulting  designation.  This  Statement  is  effective  for all fiscal
quarters  of fiscal  years  beginning  after  June 15,  1999.  CNA is  currently
evaluating  the effects of this  Statement on its  accounting  and reporting for
derivatives and hedges.


FORWARD-LOOKING STATEMENTS:

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


                                      (36)
<PAGE>

                            CNA FINANCIAL CORPORATION

                            PART II OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS:

                  Description of Exhibit
                                                        Exhibit      Page
                                                        Number     Number

     Computation of Net Income per Common Share           11           39
     Computation of Ratio of Earnings to Fixed Charges    12.1         40
     Computation of Ratio of Net Income,
           As Adjusted, to Fixed Charges                  12.2         40
     Financial Data Schedule                              27           41


(b)  REPORTS ON FORM 8-K:

         On August 6, 1998,  CNA  Financial  Corporation  filed a report on Form
8-K, which reported second quarter earnings, estimates of reorganization charges
and an approval of a share repurchase program.

                                      (37)
<PAGE>



                            CNA FINANCIAL CORPORATION

                      PART II OTHER INFORMATION - CONCLUDED

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                  CNA FINANCIAL CORPORATION


Date:  November 13, 1998          By:  S/W. JAMES MACGINNITIE
       -----------------              ---------------------
                                       W. James MacGinnitie
                                       Senior Vice President and
                                       Chief Financial Officer


                                      (38)
<PAGE>



                                                                      EXHIBIT 11

                            CNA FINANCIAL CORPORATION
                   COMPUTATION OF NET INCOME PER COMMON SHARE

<TABLE>
<CAPTION>

|----------------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30                          THREE MONTHS      NINE MONTHS  |
|(In millions of dollars, except per share data)  1998      1997    1998      1997 |
|----------------------------------------------------------------------------------|
|Earnings per share:                                                               |
     <S>                                        <C>      <C>      <C>       <C>     
|    Net (loss) income                          $  (14)  $   274  $   429   $  687 |
|    Less preferred stock dividends                  2         2        4        5 |
|                                                ------    ------   ------   ------|
|    Net (loss) income available to                                                |
|    common stockholder's                          (16)  $   272  $   425   $  682 |
|                                                ======    ======   ======   ======|
|    Weighted average shares outstanding         185.2     185.4    185.2    185.4 |
|                                                ======    ======   ======   ======|
|    Net (loss) income per common share         $(0.09)  $  1.47  $  2.29   $ 3.68 |
|                                                ======    ======   ======   ======|
|                                                                                  |
|----------------------------------------------------------------------------------|
</TABLE>

                                      (39)
<PAGE>                                                             
                                                        EXHIBIT 12.1

                            CNA FINANCIAL CORPORATION
                COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

|------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30                                         |
|(In millions of dollars, except ratios)           1998       1997 |
|------------------------------------------------------------------|
|Income before income tax and cumulative effect                    |
|   of accounting changes                        $  589    $   963 |
|Adjustments:                                                      |
|     Interest expense                              168        153 |
|     Interest element of operating lease rental     37         25 |
|                                                  -----    -------|
|     Income before income tax, as adjusted      $  794    $ 1,141 |
|                                                  =====    =======|
|                                                                  |
|Fixed charges:                                                    |
|     Interest expense                           $  168    $   153 |
|     Interest element of operating lease rental     37         25 |
|                                                  -----    -------|
|Fixed charges                                   $  205    $   178 |
|                                                  =====    =======|
|Ratio of earnings to fixed charges (1)             3.9        6.4 |
|------------------------------------------------------------------|

(1) FOR  PURPOSES OF COMPUTING  THIS RATIO,  EARNINGS  CONSIST OF INCOME  BEFORE
INCOME TAXES PLUS FIXED CHARGES OF CONSOLIDATED COMPANIES. FIXED CHARGES CONSIST
OF INTEREST AND THAT PORTION OF OPERATING LEASE RENTAL EXPENSE,  WHICH IS DEEMED
TO BE AN INTEREST FACTOR FOR SUCH RENTALS.



                                                             EXHIBIT 12.2

                            CNA FINANCIAL CORPORATION
                       COMPUTATION OF RATIO OF NET INCOME,
                          AS ADJUSTED, TO FIXED CHARGES

|----------------------------------------------------------------------------|
|PERIOD ENDED SEPTEMBER 30                                                   |
|(In millions of dollars, except ratios)                      1998      1997 |
|----------------------------------------------------------------------------|
|Net Income                                                 $  429    $ 687  |
|Adjustments:                                                                |
|     Interest expense, after tax                              109      100  |
|     Interest element of operating lease rental, after tax     24       16  |
|                                                             -----     ---- |
|Net income, as adjusted                                    $  562    $ 803  |
|                                                             =====     ==== |
|                                                                            |
|Fixed charges:                                                              |
|     Interest expense, after tax                           $  109    $ 100  |
|     Interest element of operating lease rental, after tax     24       16  |
|                                                             -----     ---- |
|Fixed charges                                              $  133    $ 116  |
|                                                             =====     ==== |
|Ratio of net income, as adjusted, to fixed charges (1)        4.2      6.9  |
|--------------------------------------------------------------------------- |
(1)FOR PURPOSES OF COMPUTING THIS RATIO, NET INCOME HAS BEEN ADJUSTED TO INCLUDE
FIXED CHARGES OF  CONSOLIDATED  COMPANIES,  AFTER TAX. FIXED CHARGES  CONSIST OF
INTEREST AND THAT PORTION OF OPERATING LEASE RENTAL EXPENSE,  WHICH IS DEEMED TO
BE AN INTEREST FACTOR FOR SUCH RENTALS.

                                      (40)