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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2002 Commission File Number 1-5823

____________________

CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 36-6169860
(I.R.S. Employer
Identification No.)
|                                                                        |  |                                                
|CNA Plaza
Chicago, Illinois
(Address of principal executive offices)    |  | 60685
(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 May 1, 2002
|                              |  |                           
|Common Stock, Par value $2.50 |  | 223,596,861               



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CNA FINANCIAL CORPORATION
INDEX

| |                                                                                       |                                                                                                                |  |          |   | 
| | ------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- |  | -------- | - | 
| |                                                                                       |                                                                                                                |  | PAGE NO.
| |                                                                                       |                                                                                                                |  |         
| | PART I. FINANCIAL INFORMATION                                                         |                                                                                                                |  |          |  
| | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                          |                                                                                                                |  |          |  
| |                                                                                       | CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 (Unaudited) AND DECEMBER 31, 2001                         |  |          | 1 | 
| |                                                                                       | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001 |  |          | 2 | 
| |                                                                                       | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 |  |          | 3 | 
| |                                                                                       | NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) MARCH 31, 2002                                |  |          | 4 | 
| | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |                                                                                                                |  | 25       |  
| | PART II. OTHER INFORMATION                                                            |                                                                                                                |  |          |  
| | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                              |                                                                                                                |  | 53       |  
| | SIGNATURES                                                                            |                                                                                                                |  | 53       |  





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CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |        |        | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | -------------------------- | ------------------------------------------ | ------ | ----------- | ------ | ------------ | ------ | ------ | ------ | 
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        | (Unaudited) |        |              |        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        | March 31,   |        | December 31,
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        | 2002        |        | 2001        
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |             
|(In millions, except share data)                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |             
|Assets                                             |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |             
|                                                   | Investments:                                                                                                                                                                                                 |                                                                                      |                            |                                            |        |             |        |              |       
|                                                   |                                                                                                                                                                                                              | Fixed maturity securities available-for-sale (amortized cost of $29,394 and $28,970) |                            | $                                          | 29,164 |             |        | $            | 29,164 |       
|                                                   |                                                                                                                                                                                                              | Equity securities available-for-sale (cost of $1,073 and $1,168)                     |                            |                                            | 1,250  |             |        |              | 1,338  |       
|                                                   |                                                                                                                                                                                                              | Mortgage loans and real estate (less accumulated depreciation of $0 and $1)          |                            |                                            | 31     |             |        |              | 35     |       
|                                                   |                                                                                                                                                                                                              | Policy loans                                                                         |                            |                                            | 190    |             |        |              | 194    |       
|                                                   |                                                                                                                                                                                                              | Other invested assets                                                                |                            |                                            | 1,395  |             |        |              | 1,355  |       
|                                                   |                                                                                                                                                                                                              | Short-term investments                                                               |                            |                                            | 3,184  |             |        |              | 3,740  |       
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      | Total investments          |                                            |        | 35,214      |        |              |        | 35,826 |       
|                                                   | Cash and cash equivalents                                                                                                                                                                                    |                                                                                      |                            | 94                                         |        |             |        | 142          |       
|                                                   | Receivables:                                                                                                                                                                                                 |                                                                                      |                            |                                            |        |             |        |              |       
|                                                   |                                                                                                                                                                                                              | Reinsurance                                                                          |                            |                                            | 13,979 |             |        |              | 13,823 |       
|                                                   |                                                                                                                                                                                                              | Insurance                                                                            |                            |                                            | 4,014  |             |        |              | 4,006  |       
|                                                   |                                                                                                                                                                                                              | Less allowance for doubtful accounts                                                 |                            |                                            | (362   | )           |        |              | (351   | )     
|                                                   | Accrued investment income                                                                                                                                                                                    |                                                                                      |                            | 368                                        |        |             |        | 385          |       
|                                                   | Receivable for securities sold                                                                                                                                                                               |                                                                                      |                            | 1,236                                      |        |             |        | 443          |       
|                                                   | Deferred acquisition costs                                                                                                                                                                                   |                                                                                      |                            | 2,467                                      |        |             |        | 2,424        |       
|                                                   | Prepaid reinsurance premiums                                                                                                                                                                                 |                                                                                      |                            | 1,547                                      |        |             |        | 1,221        |       
|                                                   | Federal income taxes recoverable (includes $513 and $617 due from Loews)                                                                                                                                     |                                                                                      |                            | 509                                        |        |             |        | 611          |       
|                                                   | Deferred income taxes                                                                                                                                                                                        |                                                                                      |                            | 892                                        |        |             |        | 737          |       
|                                                   | Property and equipment at cost (less accumulated depreciation of $810 and $797)                                                                                                                              |                                                                                      |                            | 436                                        |        |             |        | 444          |       
|                                                   | Intangibles                                                                                                                                                                                                  |                                                                                      |                            | 247                                        |        |             |        | 265          |       
|                                                   | Other assets                                                                                                                                                                                                 |                                                                                      |                            | 2,222                                      |        |             |        | 2,194        |       
|                                                   | Separate account business                                                                                                                                                                                    |                                                                                      |                            | 3,691                                      |        |             |        | 3,798        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            | Total assets                               |        | $           | 66,554 |              |        | $      | 65,968 | 
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       
|Liabilities and Stockholders Equity               |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |             
|Liabilities:                                       |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |             
|                                                   | Insurance reserves:                                                                                                                                                                                          |                                                                                      |                            |                                            |        |             |        |              |       
|                                                   |                                                                                                                                                                                                              | Claim and claim adjustment expense                                                   |                            | $                                          | 30,880 |             |        | $            | 31,266 |       
|                                                   |                                                                                                                                                                                                              | Unearned premiums                                                                    |                            |                                            | 4,960  |             |        |              | 4,505  |       
|                                                   |                                                                                                                                                                                                              | Future policy benefits                                                               |                            |                                            | 7,055  |             |        |              | 7,306  |       
|                                                   |                                                                                                                                                                                                              | Policyholders funds                                                                 |                            |                                            | 540    |             |        |              | 546    |       
|                                                   | Collateral on loaned securities and derivatives                                                                                                                                                              |                                                                                      |                            | 971                                        |        |             |        | 923          |       
|                                                   | Payables for securities purchased                                                                                                                                                                            |                                                                                      |                            | 1,607                                      |        |             |        | 606          |       
|                                                   | Participating policyholders funds                                                                                                                                                                           |                                                                                      |                            | 111                                        |        |             |        | 118          |       
|                                                   | Debt                                                                                                                                                                                                         |                                                                                      |                            | 2,567                                      |        |             |        | 2,567        |       
|                                                   | Reinsurance balances payable                                                                                                                                                                                 |                                                                                      |                            | 2,882                                      |        |             |        | 2,723        |       
|                                                   | Other liabilities                                                                                                                                                                                            |                                                                                      |                            | 2,870                                      |        |             |        | 3,019        |       
|                                                   | Separate account business                                                                                                                                                                                    |                                                                                      |                            | 3,691                                      |        |             |        | 3,798        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      | Total liabilities          |                                            |        | 58,134      |        |              |        | 57,377 |       
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       
|Commitments and contingencies (Note F, G, H and J) |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |             
|Minority interest                                  |                                                                                                                                                                                                              |                                                                                      | 237                        |                                            |        |             | 224    |             
|Stockholders equity:                              |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |             
|                                                   | Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270 shares
issued at March 31, 2002 and December 31, 2001; and 223,596,861 shares outstanding at
March 31, 2002 and December 31, 2001) |                                                                                      |                            | 565                                        |        |             |        | 565          |       
|                                                   | Additional paid-in capital                                                                                                                                                                                   |                                                                                      |                            | 1,031                                      |        |             |        | 1,031        |       
|                                                   | Retained earnings                                                                                                                                                                                            |                                                                                      |                            | 6,761                                      |        |             |        | 6,683        |       
|                                                   | Accumulated other comprehensive income                                                                                                                                                                       |                                                                                      |                            | (35                                        | )      |             |        | 226          |       
|                                                   | Treasury stock, at cost                                                                                                                                                                                      |                                                                                      |                            | (70                                        | )      |             |        | (70          | )     
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      | 8,252                      |                                            |        |             | 8,435  |             
|                                                   | Notes receivable for the issuance of common stock                                                                                                                                                            |                                                                                      |                            | (69                                        | )      |             |        | (68          | )     
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      | Total stockholders equity |                                            |        | 8,183       |        |              |        | 8,367  |       
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            | Total liabilities and stockholders equity |        | $           | 66,554 |              |        | $      | 65,968 | 
|                                                   |                                                                                                                                                                                                              |                                                                                      |                            |                                            |        |             |        |              |        |       

The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements (Unaudited).

1



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CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ---- | ----- | ----- | - | - | ----- | ----- | -
|Three months ended March 31                                                     |                                                                                       | 2002 |       | 2001 
|                                                                                |                                                                                       |      |       |      
|(In millions, except per share data)                                            |                                                                                       |      |       |       |   |   |       |      
|Revenues                                                                        |                                                                                       |      |       |       |   |   |       |      
|                                                                                | Net earned premiums                                                                   |      | $     | 2,837 |   |   | $     | 2,498 |  
|                                                                                | Net investment income                                                                 |      |       | 426   |   |   |       | 507   |  
|                                                                                | Realized investment gains, net of participating policyholders
and minority interests |      |       | 1     |   |   |       | 371   |  
|                                                                                | Other revenues                                                                        |      |       | 184   |   |   |       | 193   |  
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Total revenues                                                                  |                                                                                       |      | 3,448 |       |   |   | 3,569 |      
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Claims, Benefits and Expenses                                                   |                                                                                       |      |       |       |   |   |       |      
|                                                                                | Insurance claims and policyholders benefits                                          |      |       | 2,310 |   |   |       | 2,069 |  
|                                                                                | Amortization of deferred acquisition costs                                            |      |       | 440   |   |   |       | 424   |  
|                                                                                | Other operating expenses                                                              |      |       | 492   |   |   |       | 480   |  
|                                                                                | Restructuring and other related charges                                               |      |       |      |   |   |       | 6     |  
|                                                                                | Interest                                                                              |      |       | 37    |   |   |       | 43    |  
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Total claims, benefits and expenses                                             |                                                                                       |      | 3,279 |       |   |   | 3,022 |      
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Income from continuing operations before income tax and minority
interest       |                                                                                       |      | 169   |       |   |   | 547   |      
|Income tax expense                                                              |                                                                                       |      | (51   | )     |   |   | (185  | )    
|Minority interest                                                               |                                                                                       |      | (5    | )     |   |   | (6    | )    
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Income from continuing operations                                               |                                                                                       |      | 113   |       |   |   | 356   |      
|Loss from discontinued operations, net of tax of $9 and $0                      |                                                                                       |      | (35   | )     |   |   | 0     |      
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Income before cumulative effect of a change in accounting principle             |                                                                                       |      | 78    |       |   |   | 356   |      
|Cumulative effect of a change in accounting principle, net of tax
of $0 and $33 |                                                                                       |      |      |       |   |   | (61   | )    
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Net income                                                                      |                                                                                       | $    | 78    |       |   | $ | 295   |      
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Basic and Diluted Earnings Per Share                                            |                                                                                       |      |       |       |   |   |       |      
|                                                                                | Income from continuing operations                                                     |      | $     | 0.51  |   |   | $     | 1.95  |  
|                                                                                | Loss from discontinued operations, net of tax                                         |      |       | (0.16 | ) |   |       |      |  
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|                                                                                | Income before cumulative effect of a change in accounting
principle                   |      |       | 0.35  |   |   |       | 1.95  |  
|                                                                                | Cumulative effect of a change in accounting principle, net of tax                     |      |       |      |   |   |       | (0.34 | )
|                                                                                |                                                                                       |      |       |       |   |   |       |      
|Basic and diluted earnings per share available to common
stockholders           |                                                                                       | $    | 0.35  |       |   | $ | 1.61  |      
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  
|Weighted average outstanding common stock and common stock
equivalents          |                                                                                       |      | 223.6 |       |   |   | 183.3 |      
|                                                                                |                                                                                       |      |       |       |   |   |       |       |  

The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements (Unaudited).

2



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##### 



CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |        |      |      |  
|-------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------- | -------------------------------- | ----------------- | ------ | ---- | ---- | ------- | ------ | ---- | ---- | -
|Three months ended March 31                        |                                                                                     | 2002                                                                |                                  | 2001             
|                                                   |                                                                                     |                                                                     |                                  |                  
|(In millions)                                      |                                                                                     |                                                                     |                                  |                   |        |      |      |        
|Cash Flows from Operating Activities               |                                                                                     |                                                                     |                                  |                   |        |      |      |        
|                                                   | Net income                                                                          |                                                                     | $                                | 78                |        |      | $    | 295     |       
|                                                   | Adjustments to reconcile net income to net cash flows used by operating activities: |                                                                     |                                  |                   |        |      |      |         |       
|                                                   |                                                                                     | Cumulative effect of a change in accounting principle, net of tax   |                                  |                   |       |      |      |         | 61     |     
|                                                   |                                                                                     | Minority interest                                                   |                                  |                   | 5      |      |      |         | 6      |     
|                                                   |                                                                                     | Loss on disposal of property and equipment                          |                                  |                   | 7      |      |      |         | 22     |     
|                                                   |                                                                                     | Deferred income tax provision                                       |                                  |                   | 26     |      |      |         | 19     |     
|                                                   |                                                                                     | Net realized investment gains                                       |                                  |                   | (1     | )    |      |         | (371   | )   
|                                                   |                                                                                     | Realized loss on disposition of discontinued operations, net of tax |                                  |                   | 37     |      |      |         |       |     
|                                                   |                                                                                     | Equity method income                                                |                                  |                   | (8     | )    |      |         | (40    | )   
|                                                   |                                                                                     | Amortization of intangibles                                         |                                  |                   |       |      |      |         | 5      |     
|                                                   |                                                                                     | Amortization of bond discount                                       |                                  |                   | (18    | )    |      |         | (60    | )   
|                                                   |                                                                                     | Depreciation                                                        |                                  |                   | 24     |      |      |         | 39     |     
|                                                   |                                                                                     | Changes in:                                                         |                                  |                   |        |      |      |         |        |     
|                                                   |                                                                                     |                                                                     | Receivables, net                 |                   |        | (153 | )    |         |        | (196 | )   
|                                                   |                                                                                     |                                                                     | Deferred acquisition costs       |                   |        | (39  | )    |         |        | (26  | )   
|                                                   |                                                                                     |                                                                     | Accrued investment income        |                   |        | 15   |      |         |        | 27   |     
|                                                   |                                                                                     |                                                                     | Federal income taxes recoverable |                   |        | 115  |      |         |        | 159  |     
|                                                   |                                                                                     |                                                                     | Prepaid reinsurance premiums     |                   |        | (326 | )    |         |        | (220 | )   
|                                                   |                                                                                     |                                                                     | Reinsurance balances payable     |                   |        | 159  |      |         |        | 584  |     
|                                                   |                                                                                     |                                                                     | Insurance reserves               |                   |        | 181  |      |         |        | (266 | )   
|                                                   |                                                                                     |                                                                     | Other, net                       |                   |        | (180 | )    |         |        | (218 | )   
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |       
|                                                   |                                                                                     |                                                                     |                                  | Total adjustments |        |      | (156 | )       |        |      | (475 | )
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |       
|Net cash flows used by operating activities        |                                                                                     |                                                                     | (78                              | )                 |        |      | (180 | )      
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |       
|Cash Flows from Investing Activities               |                                                                                     |                                                                     |                                  |                   |        |      |      |        
|                                                   | Purchases of fixed maturity securities                                              |                                                                     |                                  | (14,303           | )      |      |      | (23,089 | )     
|                                                   | Proceeds from fixed maturity securities:                                            |                                                                     |                                  |                   |        |      |      |         |       
|                                                   |                                                                                     | Sales                                                               |                                  |                   | 13,064 |      |      |         | 16,882 |     
|                                                   |                                                                                     | Maturities, calls and redemptions                                   |                                  |                   | 636    |      |      |         | 6,339  |     
|                                                   | Purchases of equity securities                                                      |                                                                     |                                  | (233              | )      |      |      | (312    | )     
|                                                   | Proceeds from sales of equity securities                                            |                                                                     |                                  | 285               |        |      |      | 291     |       
|                                                   | Change in short-term investments                                                    |                                                                     |                                  | 532               |        |      |      | (1,161  | )     
|                                                   | Change in collateral on loaned securities and derivatives                           |                                                                     |                                  | 48                |        |      |      | 1,375   |       
|                                                   | Change in other investments                                                         |                                                                     |                                  | (33               | )      |      |      | (234    | )     
|                                                   | Purchases of property and equipment                                                 |                                                                     |                                  | (25               | )      |      |      | (38     | )     
|                                                   | Sales of property and equipment                                                     |                                                                     |                                  |                  |        |      |      | 258     |       
|                                                   | Dispositions                                                                        |                                                                     |                                  | 71                |        |      |      |        |       
|                                                   | Other, net                                                                          |                                                                     |                                  | (7                | )      |      |      | 20      |       
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |       
|Net cash flows provided by investing activities    |                                                                                     |                                                                     | 35                               |                   |        |      | 331  |        
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |       
|Net Cash Flows from Financing Activities           |                                                                                     |                                                                     |                                  |                   |        |      |      |        
|                                                   | Principal payments on debt                                                          |                                                                     |                                  |                  |        |      |      | (148    | )     
|                                                   | Return of policyholder account balances on investment contracts                     |                                                                     |                                  | (13               | )      |      |      | (21     | )     
|                                                   | Receipts from investment contracts credited to policyholder account balances        |                                                                     |                                  |                  |        |      |      | 1       |       
|                                                   | Proceeds from issuance of debt                                                      |                                                                     |                                  |                  |        |      |      | (2      | )     
|                                                   | Other                                                                               |                                                                     |                                  | 8                 |        |      |      | (2      | )     
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |       
|Net cash flows used by financing activities        |                                                                                     |                                                                     | (5                               | )                 |        |      | (172 | )      
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |       
|Net change in cash and cash equivalents            |                                                                                     |                                                                     | (48                              | )                 |        |      | (21  | )      
|Cash and cash equivalents, beginning of year       |                                                                                     |                                                                     | 142                              |                   |        |      | 163  |        
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |        
|Cash and cash equivalents, end of period           |                                                                                     | $                                                                   | 94                               |                   |        | $    | 142  |        
|                                                   |                                                                                     |                                                                     |                                  |                   |        |      |      |         |       
|Supplemental Disclosures of Cash Flow Information: |                                                                                     |                                                                     |                                  |                   |        |      |      |        
|                                                   | Cash paid (received):                                                               |                                                                     |                                  |                   |        |      |      |         |       
|                                                   |                                                                                     | Interest                                                            |                                  | $                 | 46     |      |      | $       | 26     |     
|                                                   |                                                                                     | Federal income taxes                                                |                                  |                   | (90    | )    |      |         | (9     | )   

The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements (Unaudited).

3



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##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include CNA
Financial Corporation (CNAF) and its controlled subsidiaries, which include
property-casualty insurance companies (principally Continental Casualty Company
(CCC) and The Continental Insurance Company (CIC)) and life and group insurance
companies (principally Continental Assurance Company (CAC), Valley Forge Life
Insurance Company (VFL) and CNA Group Life Assurance Company (CNAGLAC)),
collectively CNA or the Company. As of March 31, 2002, Loews Corporation
(Loews) owned approximately 89% of the outstanding common stock of CNAF.

The accompanying Condensed Consolidated Financial Statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America (GAAP). Certain financial information that is normally
included in annual financial statements, including certain financial statement
footnotes, prepared in accordance with GAAP, is not required for interim
reporting purposes and has been condensed or omitted. These statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in CNAFs Annual Report to Shareholders for the year ended
December 31, 2001 (incorporated by reference in Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2001).

The interim financial data as of March 31, 2002 and 2001 and for the three
months ended March 31, 2002 and 2001 are unaudited. However, in the opinion of
management, the interim data includes all adjustments, consisting of normal
recurring accruals, necessary for a fair statement of the Companys results for
the interim periods. The operating results for the interim periods are not
necessarily indicative of the results to be expected for the full year. All
significant intercompany amounts have been eliminated.

Certain amounts applicable to prior periods have been reclassified to conform
to the current period presentation.

Note B. Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 changes the accounting for goodwill and indefinite-lived
intangible assets from an amortization method to an impairment-only approach.
Amortization of goodwill and indefinite-lived intangible assets, including
goodwill recorded in past business combinations, ceased upon adoption of SFAS
142, which for CNA was January 1, 2002. As permitted by SFAS 142, the Company
will complete goodwill and other acquired intangible asset impairment tests in
2002. Goodwill and other intangible assets of $247 million, which is reflected on the
March 31, 2002 Condensed Consolidated Balance Sheet, will be tested for impairment.
Any resulting asset impairments will be recorded as a cumulative effect
of a change in accounting principle as of January 1, 2002. If the provisions
of SFAS 142, regarding no longer amortizing goodwill and indefinite-lived
intangible assets, were applied to prior periods, net income for the first
three months of 2001 would have been $300 million and basic and diluted
earnings per share would have been $1.64 per share.

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This

4



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##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

statement supersedes Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. Effective January 1, 2002, CNA adopted this statement for all
impairments of long-lived assets and for long-lived assets to be disposed of
occurring after January 1, 2002. The adoption of SFAS 144 did not have a
significant impact on the net income or financial position of the Company;
however, it did impact the income statement presentation of certain operations
sold in 2002.

Note C. Earnings Per Share

Earnings per share applicable to common stock is based on weighted average
outstanding shares. The computation of earnings per share was as follows.

Earnings Per Share

|                                                                                                     |  |      |       |      |  |   |       | 
|---------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|Three Months Ended March 31                                                                          |  | 2002 |       | 2001
|                                                                                                     |  |      |       |     
|(In millions, except per share amounts)                                                              |  |      |       |      |  |   |       | 
|Net income applicable to common stock                                                                |  | $    | 78    |      |  | $ | 295   | 
|                                                                                                     |  |      |       |      |  |   |       | 
|Weighted average outstanding common stock and common stock equivalents                               |  |      | 223.6 |      |  |   | 183.3 | 
|Effect of dilutive securities, employee stock options                                                |  |      |      |      |  |   |      | 
|                                                                                                     |  |      |       |      |  |   |       | 
|Adjusted weighted average outstanding common stock and common stock
equivalents assuming conversions |  |      | 223.6 |      |  |   | 183.3 | 
|                                                                                                     |  |      |       |      |  |   |       | 
|Basic and diluted earnings per share available to common stockholders                                |  | $    | 0.35  |      |  | $ | 1.61  | 
|                                                                                                     |  |      |       |      |  |   |       | 

Note D. Other Invested Assets

Other invested assets include investments in limited partnerships and certain
derivative securities (See Note E for a discussion of derivative securities).
The Companys limited partnership investments are recorded at fair value and
typically reflect a reporting lag of up to three months. Fair value represents
CNAs equity in the partnerships net assets as determined by the General
Partner. The carrying value of the Companys limited partnership investments
was $1,367 million and $1,307 million as of March 31, 2002 and December 31,
2001.

Limited partnerships are a relatively small portion of the Companys overall investment
portfolio. The majority of the limited partnerships invest in a substantial
number of securities that are readily marketable. The Company is a passive
investor in such partnerships and does not have influence over their management, which are committed to operate them according to established guidelines and strategies. These
strategies may include the use of leverage and hedging techniques that
potentially introduce more volatility and risk to the partnerships.

Investments in derivative securities are carried at fair value with changes in
fair value reported as a component of realized gains or losses or other
comprehensive income, depending on its hedge designation.

5



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##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note E. Derivative Financial Instruments

Effective in 2001, the Company accounts for derivatives and hedging in
accordance with Statement of Financial Accounting Standard No. 133, Accounting
for Derivative Instruments and Hedging Activities(SFAS 133). A derivative is
typically defined as an instrument whose value is derived from an underlying
instrument, index or rate, has a notional amount, and can be net settled.
Derivatives include, but are not limited to, the following types of
investments: interest rate swaps, interest rate caps and floors, put and call
options, warrants, futures, forwards and commitments to purchase securities and
combinations of the foregoing. Derivatives embedded within non-derivative
instruments (such as call options embedded in convertible bonds) must be split
from the host instrument and accounted for under SFAS 133 when the embedded
derivative is not clearly and closely related to the host instrument. In
addition, non-investment instruments, including certain types of insurance
contracts that have historically not been considered derivatives can be
derivatives or contain embedded derivatives under SFAS 133.

A summary of the recognized (losses) gains related to derivative financial
instruments follows.

Derivative Financial Instruments Recognized (Losses) Gains

|                                    |                                                             |      |     |      |   |   |     |     |  
|----------------------------------- | ----------------------------------------------------------- | ---- | --- | ---- | - | - | --- | --- | -
|For the three months ended March 31 |                                                             | 2002 |     | 2001
|                                    |                                                             |      |     |     
|(In millions)                       |                                                             |      |     |      |   |   |     |    
|General account                     |                                                             |      |     |      |   |   |     |    
|                                    | Swaps                                                       |      | $   | (1   | ) |   | $   | (5  | )
|                                    | Interest rate caps                                          |      |     | 0    |   |   |     |    |  
|                                    | Forwards                                                    |      |     | 3    |   |   |     | 1   |  
|                                    | Commitments to purchase government and municipal securities |      |     | (14  | ) |   |     |    |  
|                                    | Equity warrants                                             |      |     | (1   | ) |   |     | (2  | )
|                                    | Collateralized debt obligation liabilities                  |      |     | (8   | ) |   |     |    |  
|                                    | Options written                                             |      |     |     |   |   |     | 1   |  
|                                    | Options embedded in convertible debt securities             |      |     | (16  | ) |   |     | (63 | )
|                                    |                                                             |      |     |      |   |   |     |    
|Total                               |                                                             | $    | (37 | )    |   | $ | (68 | )  
|                                    |                                                             |      |     |      |   |   |     |     |  
|Separate accounts                   |                                                             |      |     |      |   |   |     |    
|                                    | Futures purchased                                           |      | $   | (2   | ) |   | $   | (74 | )
|                                    | Futures sold, not yet purchased                             |      |     |     |   |   |     | (1  | )
|                                    | Commitments to purchase government and municipal securities |      |     |     |   |   |     | 1   |  
|                                    | Options purchased                                           |      |     | (1   | ) |   |     | (1  | )
|                                    | Options written                                             |      |     | 1    |   |   |     | 1   |  
|                                    |                                                             |      |     |      |   |   |     |    
|Total                               |                                                             | $    | (2  | )    |   | $ | (74 | )  
|                                    |                                                             |      |     |      |   |   |     |     |  

6



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##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

A summary of the aggregate contractual or notional amounts and estimated fair
values related to derivative financial instruments follows.

Derivative Financial Instruments

|                  |                                                             |        |              |       |  |             |     |     |  |   |     |     |  
|----------------- | ----------------------------------------------------------- | ------ | ------------ | ----- |  | ----------- | --- | --- |  | - | --- | --- | -
|                  |                                                             |        | Contractual/ |       |  |             |     |     |  |   |    
|                  |                                                             |        | Notional     |       |  |             |     |     |  |   |    
|March 31, 2002    |                                                             | Amount |              | Asset |  | (Liability)
|                  |                                                             |        |              |       |  |            
|(In millions)     |                                                             |        |              |       |  |             |     |     |  |   |     |    
|General account   |                                                             |        |              |       |  |             |     |     |  |   |     |    
|                  | Swaps                                                       |        | $            | 541   |  |             | $   | 1   |  |   | $   |    |  
|                  | Interest rate caps                                          |        |              | 500   |  |             |     | 1   |  |   |     |    |  
|                  | Futures sold, not yet purchased                             |        |              | 11    |  |             |     |    |  |   |     |    |  
|                  | Forwards                                                    |        |              | 217   |  |             |     |    |  |   |     | (1  | )
|                  | Equity warrants                                             |        |              | 15    |  |             |     |    |  |   |     |    |  
|                  | Collateralized debt obligation liabilities                  |        |              | 127   |  |             |     |    |  |   |     | (17 | )
|                  | Options purchased                                           |        |              | 8     |  |             |     |    |  |   |     |    |  
|                  | Options embedded in convertible debt securities             |        |              | 664   |  |             |     | 158 |  |   |     |    |  
|                  |                                                             |        |              |       |  |             |     |     |  |   |     |    
|Total             |                                                             | $      | 2,083        |       |  | $           | 160 |     |  | $ | (18 | )  
|                  |                                                             |        |              |       |  |             |     |     |  |   |     |     |  
|Separate accounts |                                                             |        |              |       |  |             |     |     |  |   |     |    
|                  | Futures purchased                                           |        | $            | 891   |  |             | $   | 3   |  |   | $   |    |  
|                  | Futures sold, not yet purchased                             |        |              | 8     |  |             |     |    |  |   |     |    |  
|                  | Commitments to purchase government and municipal securities |        |              | 90    |  |             |     |    |  |   |     |    |  
|                  | Options purchased                                           |        |              | 89    |  |             |     |    |  |   |     |    |  
|                  | Options written                                             |        |              | 93    |  |             |     |    |  |   |     |    |  
|                  |                                                             |        |              |       |  |             |     |     |  |   |     |    
|Total             |                                                             | $      | 1,171        |       |  | $           | 3   |     |  | $ |    |    
|                  |                                                             |        |              |       |  |             |     |     |  |   |     |     |  

Derivative Financial Instruments

|                  |                                                             |        |              |       |  |             |     |     |  |   |     |     |  
|----------------- | ----------------------------------------------------------- | ------ | ------------ | ----- |  | ----------- | --- | --- |  | - | --- | --- | -
|                  |                                                             |        | Contractual/ |       |  |             |     |     |  |   |    
|                  |                                                             |        | Notional     |       |  |             |     |     |  |   |    
|December 31, 2001 |                                                             | Amount |              | Asset |  | (Liability)
|                  |                                                             |        |              |       |  |            
|(In millions)     |                                                             |        |              |       |  |             |     |     |  |   |     |    
|General account   |                                                             |        |              |       |  |             |     |     |  |   |     |    
|                  | Swaps                                                       |        | $            | 504   |  |             | $   | 3   |  |   | $   |    |  
|                  | Interest rate caps                                          |        |              | 500   |  |             |     | 2   |  |   |     |    |  
|                  | Futures sold, not yet purchased                             |        |              | 14    |  |             |     |    |  |   |     |    |  
|                  | Forwards                                                    |        |              | 183   |  |             |     |    |  |   |     | (2  | )
|                  | Commitments to purchase government and municipal securities |        |              | 193   |  |             |     | 14  |  |   |     |    |  
|                  | Equity warrants                                             |        |              | 15    |  |             |     | 1   |  |   |     |    |  
|                  | Collateralized debt obligation liabilities                  |        |              | 170   |  |             |     |    |  |   |     | (38 | )
|                  | Options purchased                                           |        |              | 10    |  |             |     |    |  |   |     |    |  
|                  | Options embedded in convertible debt securities             |        |              | 803   |  |             |     | 189 |  |   |     |    |  
|                  |                                                             |        |              |       |  |             |     |     |  |   |     |    
|Total             |                                                             | $      | 2,392        |       |  | $           | 209 |     |  | $ | (40 | )  
|                  |                                                             |        |              |       |  |             |     |     |  |   |     |     |  
|Separate accounts |                                                             |        |              |       |  |             |     |     |  |   |     |    
|                  | Futures purchased                                           |        | $            | 884   |  |             | $   |    |  |   | $   | (8  | )
|                  | Futures sold, not yet purchased                             |        |              | 10    |  |             |     |    |  |   |     |    |  
|                  | Commitments to purchase government and municipal securities |        |              | 17    |  |             |     |    |  |   |     |    |  
|                  | Options purchased                                           |        |              | 65    |  |             |     | 1   |  |   |     |    |  
|                  | Options written                                             |        |              | 70    |  |             |     |    |  |   |     |    |  
|                  |                                                             |        |              |       |  |             |     |     |  |   |     |    
|Total             |                                                             | $      | 1,046        |       |  | $           | 1   |     |  | $ | (8  | )  
|                  |                                                             |        |              |       |  |             |     |     |  |   |     |     |  

7



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##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Options embedded in convertible debt securities are classified as fixed
maturity securities in the Condensed Consolidated Balance Sheets, consistent
with the host instruments.

Fair Value Hedges

The Companys hedging activities primarily involve hedging interest rate and
foreign currency exposures. The ineffective portion of fair value hedges that
under SFAS 133 meet the criteria for hedge accounting was approximately $1
million and $0 for the three months ended March 31, 2002 and 2001.

Note F. Legal Proceedings and Contingent Liabilities

Tobacco Litigation

Four CNA insurance subsidiaries are defendants in a lawsuit arising out of
policies allegedly issued to Liggett Group, Inc. (Liggett). The lawsuit was
filed by Liggett and its current parent, Brooke Group Holding Inc., in the
Delaware Superior Court, New Castle County, on January 26, 2000. The lawsuit,
which involves numerous insurers, concerns coverage issues relating to over
1,000 tobacco-related claims asserted against Liggett over the past 20 years.
However, Liggett only began submitting claims for coverage under the policies
in January 2000. The trial court granted the CNA insurance subsidiaries
summary judgment motions asserting that they have no duty to defend or to
indemnify as to a number of representative lawsuits. The Delaware Supreme
Court has accepted an appeal of these rulings. CNA believes its coverage
defenses are strong; therefore, based on facts and circumstances currently
known, management believes that the ultimate outcome of the pending litigation
will not materially affect the results of operations and/or financial position
of CNA.

IGI Contingency

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

CNA has determined that a small portion of the premiums assumed under the IGI
Program related to United States workers compensation carve-out business.
CNA is aware that a number of reinsurers with workers compensation carve-out
insurance exposure have disavowed their obligations under various legal
theories. If one or more such companies are successful in avoiding or reducing
their liabilities, then it is likely that CNAs potential liability will also
be

8



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##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

reduced. Moreover, based on information known at this time, CNA reasonably
believes it has strong grounds for avoiding a substantial portion of its United
States workers compensation carve-out exposure through legal action.

As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. CNA believes it has valid and enforceable
reinsurance contracts with the AAHRU Facility and other reinsurers with respect
to the IGI Program, including the United States workers compensation carve-out
business. However, certain reinsurers dispute their liabilities to CNA, and
CNA has commenced arbitration proceedings against such reinsurers.

CNA has established reserves for its estimated exposure under the program and
an estimate for recoverables from retrocessionaires.

The Company is pursuing a number of loss mitigation strategies. Although the
results of these various actions to date support the recorded reserves, the
estimate of ultimate losses is subject to considerable uncertainty. As a
result of these uncertainties, the results of operations in future years may be
adversely affected by potentially significant reserve additions. Management
does not believe that any such reserve additions will be material to the equity
of the Company.

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 and/or
financial position of CNA.

Note G. Claim and Claim Adjustment Expense Reserves

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

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

9



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Catastrophes are an inherent risk of the property-casualty insurance business
and have contributed to material period-to-period fluctuations in the Companys
results of operations and financial position. The level of catastrophe losses
experienced in any period cannot be predicted and can be material to the
results of operations and/or the financial position of the company.

Environmental Pollution and Other Mass Tort and Asbestos Reserves (APMT)

CNAs property-casualty insurance subsidiaries have potential exposures related
to environmental pollution and other mass tort and asbestos claims.

The following table provides data related to CNAs environmental pollution and
other mass tort and asbestos claim and claim adjustment expense reserves.

Environmental Pollution and Other Mass Tort and Asbestos

|               |  |                 |      |                   |  |                 |       |               |  |   |      |   |  |   |       |   |  |  |  | 
|-------------- |  | --------------- | ---- | ----------------- |  | --------------- | ----- | ------------- |  | - | ---- | - |  | - | ----- | - |  |  |  | 
|               |  | March 31, 2002  |      | December 31, 2001 |  |                 |       |              
|               |  |                 |      |                   |  |                 |       |              
|               |  | Environmental   |      |                   |  |                 |       | Environmental |  |   |      |   |  |   |       |  
|               |  | Pollution and   |      |                   |  |                 |       | Pollution and |  |   |      |   |  |   |       |  
|               |  | Other Mass Tort |      | Asbestos          |  | Other Mass Tort |       | Asbestos      |  |   |      |  
|               |  |                 |      |                   |  |                 |       |               |  |   |      |  
|(In millions)  |  |                 |      |                   |  |                 |       |               |  |   |      |   |  |   |       |  
|Gross reserves |  | $               | 779  |                   |  | $               | 1,579 |               |  | $ | 820  |   |  | $ | 1,590 |  
|Ceded reserves |  |                 | (195 | )                 |  |                 | (355  | )             |  |   | (203 | ) |  |   | (386  | )
|               |  |                 |      |                   |  |                 |       |               |  |   |      |   |  |   |       |  
|Net reserves   |  | $               | 584  |                   |  | $               | 1,224 |               |  | $ | 617  |   |  | $ | 1,204 |  
|               |  |                 |      |                   |  |                 |       |               |  |   |      |   |  |   |       |  

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

Many policyholders have made claims against various CNA insurance subsidiaries
for defense costs and indemnification in connection with environmental
pollution matters. These claims relate to accident years 1989 and prior, which
coincides with CNAs adoption of the Simplified Commercial General Liability
coverage form, which includes what is referred to in the industry as an
absolute pollution exclusion. CNA and the insurance industry are disputing
coverage for many such claims. Key coverage issues include whether cleanup
costs are considered damages under the policies, trigger of coverage,
allocation of liability among triggered policies, applicability of pollution
exclusions and owned property exclusions, the potential for joint and
10

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

several liability and the 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 during 2001 or the first three
months of 2002, and it is unclear what positions Congress or the administration
will take and what legislation, if any, will result in the future. If there is
legislation, and in some circumstances even if there is no legislation, the
federal role in environmental cleanup may be significantly reduced in favor of
state action. Substantial changes in the federal statute or the activity of
the EPA may cause states to reconsider their environmental cleanup statutes and
regulations. There can be no meaningful prediction of the pattern of
regulation that would result or the effect upon CNAs results of operations
and/or financial position.

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

As of March 31, 2002 and December 31, 2001, CNA carried approximately $584
million and $617 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims. There was no environmental pollution and other
mass tort net claim and claim adjustment expense reserve development for the
three months ended March 31, 2002. Unfavorable environmental pollution and
other mass tort development for the three months ended March 31, 2001 amounted
to $3 million.

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

As of March 31, 2002 and December 31, 2001, CNA carried approximately $1,224
million and $1,204 million of net claim and claim adjustment expense reserves,
net of reinsurance recoverables, for reported and unreported asbestos-related
claims. There was no unfavorable asbestos net claim and claim adjustment
expense reserve development for the three months ended March 31, 2002.
Unfavorable asbestos net claim and claim adjustment expense reserve development
for the three months ended March 31, 2001 amounted to $21 million. CNA has
attempted to manage its asbestos-related exposures by aggressively resolving
older claims.

In addition, some asbestos-related defendants have asserted that their claims
for insurance are not subject to aggregate limits on coverage. CNA currently
has such claims from a number of insureds. Some of these claims involve
insureds facing exhaustion of products liability aggregate limits in their
policies, who have asserted that their asbestos-related claims fall within
so-called non-products liability coverage contained within their policies
rather than products
11CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)liability coverage, and that the claimed non-products coverage is not subject
to any aggregate limit. It is difficult to predict the ultimate size of any of
the claims for coverage not subject to aggregate limits or predict to what
extent, if any, the attempts to assert non-products claims outside the
products liability aggregate will succeed.Due to the uncertainties created by volatility in claim numbers and settlement
demands, the effect of bankruptcies, the extent to which non-impaired claimants
can be precluded from making claims and the efforts by insureds to obtain
coverage not subject to aggregate limits, the ultimate liability of CNA for
asbestos-related claims may vary substantially from the amount currently
recorded. Other variables that will influence CNAs ultimate exposure to
asbestos-related claims will be medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix
of asbestos-related diseases presented and the possibility of legislative
reform. Adverse developments with respect to such matters discussed in this
paragraph could have a material adverse effect on CNAs results of operations
and/or financial condition.The results of operations and financial condition of CNA in future years may
continue to be adversely affected by environmental pollution and other mass
tort and asbestos claim and claim adjustment expenses. Management will continue
to review and monitor these liabilities and make further adjustments, including
the potential for further reserve strengthening, as warranted.Note H. ReinsuranceCNA assumes and cedes reinsurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk, minimize exposures on larger risks and to exit certain
lines of business. Reinsurance coverages are tailored to the specific risk
characteristics of each product line and CNAs retained amount varies by type
of coverage. Generally, property risks are reinsured on an excess of loss, per
risk basis. Liability coverages are generally reinsured on a quota share basis
in excess of CNAs retained risk. CNAs life reinsurance includes coinsurance,
yearly renewable term and facultative programs.The Companys overall reinsurance program includes certain property-casualty
contracts, such as the corporate aggregate treaties discussed in more detail
later in this section, that are entered into and accounted for on a funds
withheld basis. Under the funds withheld basis, the Company records a
liability for substantially all of the premiums that are ceded under a
reinsurance contract. The Company is required to increase the funds withheld
balance at stated interest crediting rates. The funds withheld liability is
reduced by any cumulative claim payments made by the Company in excess of the
Companys retention under the reinsurance contract. If the funds withheld
liability is exhausted, interest crediting will cease and additional claim
payments are recoverable from the reinsurer. The funds withheld liability is
recorded in reinsurance balances payable in the Condensed Consolidated Balance
Sheets.Interest cost, on these contracts is credited during all periods in which a
funds withheld liability exists. Interest cost included in other net
investment income, was $58 million and $36 million12CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)for the first quarter of 2002 and 2001. The amount subject to interest
crediting rates on such contracts was $2,877 million and $2,724 million at
March 31, 2002 and December 31, 2001.The amount subject to interest crediting on these funds withheld contracts will
vary over time based on a number of factors, including the timing of loss
payments and ultimate gross losses incurred. The Company expects that it will
continue to incur significant interest costs on these contracts for several
years.The ceding of insurance does not discharge the primary liability of the
Company. Therefore, a credit exposure exists with respect to property-casualty
and life reinsurance ceded to the extent that any reinsurer is unable to meet
the obligations assumed under reinsurance agreements.The effects of reinsurance on earned premiums are shown in the following table.Components of Earned Premiums

|                            |                     |        |       |         |  |       |     |     |  |   |       |       |   |   |       |       | 
|--------------------------- | ------------------- | ------ | ----- | ------- |  | ----- | --- | --- |  | - | ----- | ----- | - | - | ----- | ----- | 
|Three months ended March 31 |                     | Direct |       | Assumed |  | Ceded |     | Net
|                            |                     |        |       |         |  |       |     |    
|(In millions)               |                     |        |       |         |  |       |     |     |  |   |       |       |   |   |       |      
|2002                        |                     |        |       |         |  |       |     |     |  |   |       |       |   |   |       |      
|                            | Property-casualty   |        | $     | 2,440   |  |       | $   | 237 |  |   | $     | 1,015 |   |   | $     | 1,662 | 
|                            | Accident and health |        |       | 973     |  |       |     | 19  |  |   |       | (12   | ) |   |       | 1,004 | 
|                            | Life                |        |       | 263     |  |       |     | 21  |  |   |       | 113   |   |   |       | 171   | 
|                            |                     |        |       |         |  |       |     |     |  |   |       |       |   |   |       |      
|Total earned premiums       |                     | $      | 3,676 |         |  | $     | 277 |     |  | $ | 1,116 |       |   | $ | 2,837 |      
|                            |                     |        |       |         |  |       |     |     |  |   |       |       |   |   |       |       | 
|2001                        |                     |        |       |         |  |       |     |     |  |   |       |       |   |   |       |      
|                            | Property-casualty   |        | $     | 2,021   |  |       |     | 310 |  |   | $     | 866   |   |   | $     | 1,465 | 
|                            | Accident and health |        |       | 877     |  |       |     | 56  |  |   |       | 61    |   |   |       | 872   | 
|                            | Life                |        |       | 258     |  |       |     | 77  |  |   |       | 174   |   |   |       | 161   | 
|                            |                     |        |       |         |  |       |     |     |  |   |       |       |   |   |       |      
|Total earned premiums       |                     | $      | 3,156 |         |  | $     | 443 |     |  | $ | 1,101 |       |   | $ | 2,498 |      
|                            |                     |        |       |         |  |       |     |     |  |   |       |       |   |   |       |       | 

For 2002, the Company has entered into an aggregate reinsurance treaty covering
substantially all of the Companys property-casualty lines of business (the
2002 Cover). The loss protection provided by the 2002 Cover is dependent on
the level of subject premium, but there is a maximum aggregate limit of $1,125
million. Maximum ceded premium under the contract is $683 million, and
premiums, claims recoveries and interest charges other than the reinsurers
margin and related fees are made on a funds withheld basis. Interest is
credited on funds withheld at 8%, and all premiums are deemed to have been paid
as of January 1, 2002. Ceded premium related to the reinsurers margin in the
amount of $3 million was recorded for the 2002 Cover for the three months ended March 31, 2002.

The aggregate reinsurance protection from the 2002 Cover attaches at a defined
accident year loss and allocated loss adjustment expense (collectively, losses)
ratio. Under the contract, CNA has the right to elect to cede losses to the
2002 Cover when its recorded accident year losses exceeds the attachment point.
This election period expires March 31, 2004. If no losses are ceded by this
date, the contract is deemed to be commuted. If CNA elects to cede any losses
to the 2002 Cover, it must continue to cede all losses subject to the terms of
the contract.

In 1999, the Company entered into an aggregate reinsurance treaty related to
the 1999 through 2001 accident years covering substantially all of the
Companys property-casualty lines of

13



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

business (the Aggregate Cover). The Company has two sections of coverage under
the terms of the Aggregate Cover. These coverages attach at defined loss and
allocated loss adjustment expense (collectively, losses) ratios for each
accident year. Coverage under the first section of the Aggregate Cover, which
is available for all accident years covered by the contract, has annual limits
of $500 million of ceded losses with an aggregate limit of $1 billion of ceded
losses for the three year period. The ceded premiums are a percentage of ceded
losses and for each $500 million of limit the ceded premium is $230 million.
The second section of the Aggregate Cover, which was only utilized for accident
year 2001, provides additional coverage of up to $510 million of ceded losses
for a maximum ceded premium of $310 million. Under the Aggregate Cover,
interest charges on the funds withheld accrue at 8% per annum. If the
aggregate loss ratio for the three-year period exceeds certain thresholds,
additional premiums may be payable and the rate at which interest charges are
accrued would increase to 8.25% per annum.

The coverage under the second section of the Aggregate Cover was triggered for
the 2001 accident year. As a result of losses related to the September 11,
2001 World Trade Center Disaster and related events (WTC event), the limit
under this section was exhausted. Additionally, as a result of the significant
reserve additions recorded during 2001, the $500 million limit on the 1999
accident year under the first section was also fully utilized. No losses have
been ceded to the remaining $500 million of limit on accident years 2000 and
2001 under the first section.

The impact of the Aggregate Cover on pretax operating results was as follows:

Impact of Aggregate Cover on Pretax Operating Results

|                                         |  |      |     |      |  |   |     |  
|---------------------------------------- |  | ---- | --- | ---- |  | - | --- | -
|For the three months ended March 31      |  | 2002 |     | 2001
|                                         |  |      |     |     
|(In millions)                            |  |      |     |      |  |   |     |  
|Ceded earned premiums                    |  | $    |    |      |  | $ | (42 | )
|Ceded claim and claim adjustment expense |  |      |    |      |  |   | 39  |  
|Interest charges                         |  |      | (13 | )    |  |   | (6  | )
|                                         |  |      |     |      |  |   |     |  
|Pretax impact on operating results       |  | $    | (13 | )    |  | $ | (9  | )
|                                         |  |      |     |      |  |   |     |  

In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property-casualty
lines of business in the Continental Casualty Company pool (the CCC Cover).
The loss protection provided by the CCC Cover has an aggregate limit of
approximately $760 million of ceded losses. The ceded premiums are a percentage
of ceded losses and for the $760 million of limit, the ceded premium is $456
million. The CCC Cover provides continuous coverage in excess of the second
section of the Aggregate Cover discussed above. Under the CCC Cover, interest
charges on the funds withheld generally accrue at 8% per annum. The interest
rate increases to 10% per annum if the aggregate loss ratio exceeds certain
thresholds. Losses of $563 million have been ceded under the CCC Cover through
March 31, 2002.

14



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The impact of the CCC Cover on pretax operating results was as follows:

Impact of CCC Cover on Pretax Operating Results

|                                         |  |      |     |      |  |   |    |  
|---------------------------------------- |  | ---- | --- | ---- |  | - | -- | -
|For the three months ended March 31      |  | 2002 |     | 2001
|                                         |  |      |     |     
|(In millions)                            |  |      |     |      |  |   |    |  
|Ceded earned premiums                    |  | $    | (61 | )    |  | $ | (1 | )
|Ceded claim and claim adjustment expense |  |      | 93  |      |  |   |   |  
|Interest charges                         |  |      | (10 | )    |  |   |   |  
|                                         |  |      |     |      |  |   |    |  
|Pretax impact on operating results       |  | $    | 22  |      |  | $ | (1 | )
|                                         |  |      |     |      |  |   |    |  

Note I. Debt

Debt is composed of the following obligations.

Debt

|                                                              |                               |   |           |     |              |   |       |     | 
|------------------------------------------------------------- | ----------------------------- | - | --------- | --- | ------------ | - | ----- | --- | 
|                                                              |                               |   | March 31, |     | December 31,
|                                                              |                               |   | 2002      |     | 2001        
|                                                              |                               |   |           |     |             
|(In millions)                                                 |                               |   |           |     |              |   |       |    
|Variable rate debt:                                           |                               |   |           |     |              |   |       |    
|                                                              | Credit facility  CNAF        |   | $         | 500 |              |   | $     | 500 | 
|                                                              | Credit facility  CNA Surety  |   |           | 75  |              |   |       | 75  | 
|Senior notes:                                                 |                               |   |           |     |              |   |       |    
|                                                              | 7.250%, due March 1, 2003     |   |           | 133 |              |   |       | 133 | 
|                                                              | 6.250%, due November 15, 2003 |   |           | 250 |              |   |       | 250 | 
|                                                              | 6.500%, due April 15, 2005    |   |           | 491 |              |   |       | 491 | 
|                                                              | 6.750%, due November 15, 2006 |   |           | 249 |              |   |       | 249 | 
|                                                              | 6.450%, due January 15, 2008  |   |           | 149 |              |   |       | 149 | 
|                                                              | 6.600%, due December 15, 2008 |   |           | 199 |              |   |       | 199 | 
|                                                              | 8.375%, due August 15, 2012   |   |           | 68  |              |   |       | 68  | 
|                                                              | 6.950%, due January 15, 2018  |   |           | 148 |              |   |       | 148 | 
|Debenture, 7.250%, due November 15, 2023 - CNAF               |                               |   | 240       |     |              |   | 240   |    
|Capital leases, 8.000%-19.980%, due through December 31, 2011 |                               |   | 38        |     |              |   | 38    |    
|Other debt, 1.000%-8.500%, due through 2019                   |                               |   | 27        |     |              |   | 27    |    
|                                                              |                               |   |           |     |              |   |       |    
|Total debt                                                    |                               | $ | 2,567     |     |              | $ | 2,567 |    
|                                                              |                               |   |           |     |              |   |       |     | 

The Companys $500 million revolving credit facility is composed of two parts:
a $250 million 364-day component with an expiration date of April 29, 2002
(with an option enabling CNAF to convert borrowings into a one-year term loan)
and a $250 million three-year component with an April 30, 2004 expiration date.
The option to convert the 364-day facility to a one-year term loan was
exercised in April 2002. The term loan begins on April 29, 2002 and expires on
April 29, 2003.

The Company pays a facility fee to the lenders for having funds available for
loans under both components of the facility. The fee varies based on the
long-term debt ratings of the Company. At March 31, 2002, the facility fee on
the 364-day component was 15.0 basis points and the facility fee on the
three-year component was 17.5 basis points. The facility fee paid to the
lenders during the 364-day component commitment is not payable with respect to
any period of time during which the one-year term loan is in effect.

In addition to the facility fees, the Company pays interest on any outstanding
debt/borrowings under the facility based on a rate determined using the
long-term debt ratings of the Company.

15



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The interest rate is equal to the London Interbank Offering Rate (LIBOR) plus
60 basis points for the 364-day component and LIBOR plus 57.5 basis points for
the three-year component. Further, if the Company has outstanding loans greater
than 50% of the amounts available under the facility, the Company also will pay
a utilization fee of 12.5 basis points on such loans.

A Moodys Investors Service (Moodys) downgrade of the CNAF senior debt rating
from Baa2 to Baa3 would increase the facility fee on the three-year component
of the facility from 17.5 basis points to 25 basis points. The applicable
interest rate on the one-year term loan would increase from LIBOR plus 60 basis
points to LIBOR plus 80 basis points and the applicable interest rate on the
three-year facility component would increase from LIBOR plus 57.5 basis points
to LIBOR plus 75 basis points. The utilization fee would remain unchanged on
both components at 12.5 basis points.

The terms of CNAs credit facility requires the Company to maintain certain
financial ratios and combined property-casualty company statutory surplus
levels. At March 31, 2002 and 2001, CNA was in compliance with all restrictive
debt covenants.

Note J. Commitments and Contingencies

In the normal course of business, CNA has obtained letters of credit in favor
of various unaffiliated insurance companies, regulatory authorities and other
entities. At March 31, 2002 there were approximately $270 million of
outstanding letters of credit.

The Company has committed approximately $181 million to future capital calls
from various third-party limited partnership investments in exchange for an
ownership interest in the related partnerships.

The Company has a commitment to purchase a $100 million floating rate note
issued by the California Earthquake Authority in the event California
earthquake-related insurance losses exceed $4.9 billion prior to December 31,
2002.

The Company is obligated to make future payments totaling $516 million for
non-cancelable operating leases expiring from 2002 through 2014 primarily for
office space and data processing, office and transportation equipment.
Estimated future minimum payments under these contracts are as follows: $81
million in 2002; $94 million in 2003; $74 million in 2004; $64 million in 2005;
and $203 million in 2006 and beyond.

16



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##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note K. Comprehensive Income

Comprehensive income is composed of all changes to stockholders equity, except
those changes resulting from transactions with stockholders in their capacity
as stockholders. The components of comprehensive (loss) income are shown
below.

Comprehensive (Loss) Income

|                                                                                                        |                                                                   |                                                                                            |      |      |      |   |     |   |     |  
|------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---- | ---- | ---- | - | --- | - | --- | -
|Three months ended March 31                                                                             |                                                                   | 2002                                                                                       |      | 2001
|                                                                                                        |                                                                   |                                                                                            |      |     
|(In millions)                                                                                           |                                                                   |                                                                                            |      |      |      |   |     |  
|Net income                                                                                              |                                                                   | $                                                                                          | 78   |      |      | $ | 295 |  
|                                                                                                        |                                                                   |                                                                                            |      |      |      |   |     |  
|Other comprehensive (loss) income:                                                                      |                                                                   |                                                                                            |      |      |      |   |     |  
|                                                                                                        | Change in unrealized gains/losses on general account investments: |                                                                                            |      |      |      |   |     |   |    
|                                                                                                        |                                                                   | Holding (losses) gains arising during the period                                           |      |      | (435 | ) |     |   | 202 |  
|                                                                                                        |                                                                   | Less: unrealized gains at beginning of period included in realized gains
during the period |      |      | (11  | ) |     |   | (60 | )
|                                                                                                        |                                                                   |                                                                                            |      |      |      |   |     |  
|                                                                                                        |                                                                   | Net change in unrealized gains/losses on general account investments                       |      |      | (446 | ) |     |   | 142 |  
|                                                                                                        |                                                                   | Net change in unrealized gains/losses on separate accounts and other                       |      |      | (22  | ) |     |   | 19  |  
|                                                                                                        |                                                                   | Foreign currency translation adjustment                                                    |      |      | 13   |   |     |   | 4   |  
|                                                                                                        |                                                                   | Allocation to participating policyholders and minority interests                          |      |      | 5    |   |     |   | (8  | )
|                                                                                                        |                                                                   |                                                                                            |      |      |      |   |     |  
|Other comprehensive (loss) income, before tax and cumulative effect of a
change in accounting principle |                                                                   |                                                                                            | (450 | )    |      |   | 157 |  
|Deferred income tax benefit (expense) related to other comprehensive income
(loss)                      |                                                                   |                                                                                            | 189  |      |      |   | (38 | )
|                                                                                                        |                                                                   |                                                                                            |      |      |      |   |     |  
|Other comprehensive (loss) income, before cumulative effect of a change in
accounting principle         |                                                                   |                                                                                            | (261 | )    |      |   | 119 |  
|Cumulative effect of a change in accounting principle, net of tax of $0 and $31                         |                                                                   |                                                                                            |     |      |      |   | 58  |  
|                                                                                                        |                                                                   |                                                                                            |      |      |      |   |     |  
|Other comprehensive (loss) income, net of tax and cumulative effect of a
change in accounting principle |                                                                   |                                                                                            | (261 | )    |      |   | 177 |  
|                                                                                                        |                                                                   |                                                                                            |      |      |      |   |     |  
|Total comprehensive (loss) income                                                                       |                                                                   | $                                                                                          | (183 | )    |      | $ | 472 |  
|                                                                                                        |                                                                   |                                                                                            |      |      |      |   |     |  

Note L. Business Segments

The Companys reportable segments are strategic businesses that offer different
types of products and services. The Company has five operating segments:
Standard Lines, Specialty Lines, CNA Re, Group Operations and Life Operations.
In addition to these five operating segments, certain other activities are
reported in the Corporate and Other segment.

The Corporate and Other segment is comprised primarily of losses and expenses
related to the centralized adjusting and settlement of APMT claims, certain
run-off insurance operations and other operations. Additionally, the Corporate
and Other segments results include interest expense on corporate borrowings,
asbestos claims related to Fibreboard Corporation, eBusiness initiatives and
CNA UniSource.

All significant intrasegment income and expense has been eliminated. Standard
Lines other revenues and expenses include revenues for services provided by
RSKCoSM to other units within the Standard Lines segment that are eliminated at
the consolidated level. Intrasegment revenue and expenses eliminated at the
consolidated level were approximately $36 million and $39 million for the three
months ended March 31, 2002 and 2001.

17



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

In the following two tables, the caption net operating income (loss) is used
by the Company as an operating measure of segment performance. Net operating
income (loss) is calculated by deducting net realized investment gains or
losses (investment gains or losses after deduction of related income taxes and
minority interests), gains or losses from discontinued operations, net of
tax, and the cumulative effect of a change in accounting principle, net of tax
and minority interest, from net income. Net realized investment gains or
losses are excluded from net operating income because investment gains or
losses related to the Companys available-for-sale investment portfolio are
largely discretionary, are generally driven by economic factors that are not
necessarily consistent with key drivers of underwriting performance, and are
therefore not an indication of trends in operations.

18



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|--------------------------------------------------------------------------------------------- | --------------------- | -------- | ------ | --------- |  | ------ | ----- | ---------- |  | ---------- | ----- | --------- |  | --------- | ----- | ------ |  | - | ----- | --- |  | - | ----- | -- |  | - | --- | --- | - | - | ------ | ----- | 
|Three months ended                                                                            |                       | Standard |        | Specialty |  |        |       |            |  | Group      |       | Life      |  | Corporate |       | Elimi- |  |   |       |    
|March 31, 2002                                                                                |                       | Lines    |        | Lines     |  | CNA Re |       | Operations |  | Operations |       | and Other |  | nations   |       | Total 
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |       
|(In millions)                                                                                 |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |      
|Revenues:                                                                                     |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |      
|                                                                                              | Net earned premiums   |          | $      | 1,010     |  |        | $     | 514        |  |            | $     | 137       |  |           | $     | 938    |  |   | $     | 240 |  |   | $     | 4  |  |   | $   | (6  | ) |   | $      | 2,837 | 
|                                                                                              | Net investment income |          |        | 102       |  |        |       | 61         |  |            |       | 34        |  |           |       | 43     |  |   |       | 156 |  |   |       | 30 |  |   |     |    |   |   |        | 426   | 
|                                                                                              | Other revenues        |          |        | 83        |  |        |       | 54         |  |            |       | 1         |  |           |       | 2      |  |   |       | 49  |  |   |       | 35 |  |   |     | (40 | ) |   |        | 184   | 
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Total operating revenues                                                                      |                       |          | 1,195  |           |  |        | 629   |            |  |            | 172   |           |  |           | 983   |        |  |   | 445   |     |  |   | 69    |    |  |   | (46 | )   |   |   | 3,447  |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Claims, benefits and expenses                                                                 |                       |          | 1,190  |           |  |        | 565   |            |  |            | 112   |           |  |           | 958   |        |  |   | 391   |     |  |   | 109   |    |  |   | (46 | )   |   |   | 3,279  |      
|Operating income (loss) from continuing operations
before income tax and minority interest    |                       |          | 5      |           |  |        | 64    |            |  |            | 60    |           |  |           | 25    |        |  |   | 54    |     |  |   | (40   | )  |  |   |    |     |   |   | 168    |      
|Income tax benefit (expense)                                                                  |                       |          | 4      |           |  |        | (24   | )          |  |            | (19   | )         |  |           | (8    | )      |  |   | (19   | )   |  |   | 14    |    |  |   |    |     |   |   | (52    | )    
|Minority interest                                                                             |                       |          |       |           |  |        | (5    | )          |  |            |      |           |  |           |      |        |  |   |      |     |  |   |      |    |  |   |    |     |   |   | (5     | )    
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Net operating income (loss) from continuing
operations                                        |                       |          | 9      |           |  |        | 35    |            |  |            | 41    |           |  |           | 17    |        |  |   | 35    |     |  |   | (26   | )  |  |   |    |     |   |   | 111    |      
|Realized investment gains, net of tax and
participating policyholders and minority
interests |                       |          | 5      |           |  |        | (4    | )          |  |            | 8     |           |  |           | 5     |        |  |   | 9     |     |  |   | (21   | )  |  |   |    |     |   |   | 2      |      
|Loss from discontinued operations, net of tax of $9                                           |                       |          |       |           |  |        |      |            |  |            |      |           |  |           |      |        |  |   | (35   | )   |  |   |      |    |  |   |    |     |   |   | (35    | )    
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |      
|Net income (loss)                                                                             |                       | $        | 14     |           |  | $      | 31    |            |  | $          | 49    |           |  | $         | 22    |        |  | $ | 9     |     |  | $ | (47   | )  |  | $ |    |     |   | $ | 78     |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Receivables, net                                                                              |                       | $        | 6,851  |           |  | $      | 3,129 |            |  | $          | 2,597 |           |  | $         | 1,027 |        |  | $ | 938   |     |  | $ | 3,089 |    |  | $ |    |     |   | $ | 17,631 |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Insurance reserves                                                                            |                       | $        | 14,631 |           |  | $      | 7,244 |            |  | $          | 5,406 |           |  | $         | 2,708 |        |  | $ | 8,199 |     |  | $ | 5,257 |    |  | $ | (10 | )   |   | $ | 43,435 |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 

19



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|--------------------------------------------------------------------------------------------- | --------------------- | -------- | ------ | --------- |  | ------ | ----- | ---------- |  | ---------- | ----- | --------- |  | --------- | ----- | ------ |  | - | ----- | --- |  | - | ----- | -- |  | - | --- | --- | - | - | ------ | ----- | 
|Three months ended                                                                            |                       | Standard |        | Specialty |  |        |       |            |  | Group      |       | Life      |  | Corporate |       | Elimi- |  |   |       |    
|March 31, 2001                                                                                |                       | Lines    |        | Lines     |  | CNA Re |       | Operations |  | Operations |       | and Other |  | nations   |       | Total 
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |       
|(In millions)                                                                                 |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |      
|Revenues:                                                                                     |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |      
|                                                                                              | Net earned premiums   |          | $      | 858       |  |        | $     | 458        |  |            | $     | 159       |  |           | $     | 818    |  |   | $     | 215 |  |   | $     | 4  |  |   | $   | (14 | ) |   | $      | 2,498 | 
|                                                                                              | Net investment income |          |        | 162       |  |        |       | 92         |  |            |       | 48        |  |           |       | 43     |  |   |       | 133 |  |   |       | 29 |  |   |     |    |   |   |        | 507   | 
|                                                                                              | Other revenues        |          |        | 83        |  |        |       | 33         |  |            |       |          |  |           |       | 5      |  |   |       | 74  |  |   |       | 40 |  |   |     | (42 | ) |   |        | 193   | 
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Total operating revenues                                                                      |                       |          | 1,103  |           |  |        | 583   |            |  |            | 207   |           |  |           | 866   |        |  |   | 422   |     |  |   | 73    |    |  |   | (56 | )   |   |   | 3,198  |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Claims, benefits and expenses                                                                 |                       |          | 1,016  |           |  |        | 516   |            |  |            | 182   |           |  |           | 846   |        |  |   | 357   |     |  |   | 155   |    |  |   | (56 | )   |   |   | 3,016  |      
|Restructuring and other related charges                                                       |                       |          |       |           |  |        |      |            |  |            |      |           |  |           |      |        |  |   |      |     |  |   | 6     |    |  |   |    |     |   |   | 6      |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Operating income (loss) from
continuing operations before income
tax and minority interest    |                       |          | 87     |           |  |        | 67    |            |  |            | 25    |           |  |           | 20    |        |  |   | 65    |     |  |   | (88   | )  |  |   |    |     |   |   | 176    |      
|Income tax (expense) benefit                                                                  |                       |          | (22    | )         |  |        | (18   | )          |  |            | (7    | )         |  |           | (5    | )      |  |   | (23   | )   |  |   | 24    |    |  |   |    |     |   |   | (51    | )    
|Minority interest                                                                             |                       |          |       |           |  |        | (6    | )          |  |            |      |           |  |           |      |        |  |   |      |     |  |   |      |    |  |   |    |     |   |   | (6     | )    
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Net operating income (loss) from
continuing operations                                        |                       |          | 65     |           |  |        | 43    |            |  |            | 18    |           |  |           | 15    |        |  |   | 42    |     |  |   | (64   | )  |  |   |    |     |   |   | 119    |      
|Realized investment gains, net of tax
and participating policyholders and
minority interests |                       |          | 78     |           |  |        | 32    |            |  |            | 16    |           |  |           | 4     |        |  |   | 45    |     |  |   | 62    |    |  |   |    |     |   |   | 237    |      
|(Loss) income from discontinued
operations, net of tax of $0                                  |                       |          |       |           |  |        |      |            |  |            |      |           |  |           |      |        |  |   | 0     |     |  |   |      |    |  |   |    |     |   |   |       |      
|Cumulative effect of a change in
accounting principle, net of tax of
$33                      |                       |          | (30    | )         |  |        | (14   | )          |  |            | (5    | )         |  |           | (1    | )      |  |   | (3    | )   |  |   | (8    | )  |  |   |    |     |   |   | (61    | )    
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |      
|Net income (loss)                                                                             |                       | $        | 113    |           |  | $      | 61    |            |  | $          | 29    |           |  | $         | 18    |        |  | $ | 84    |     |  | $ | (10   | )  |  | $ |    |     |   | $ | 295    |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Receivables, net                                                                              |                       | $        | 5,814  |           |  | $      | 1,935 |            |  | $          | 2,262 |           |  | $         | 1,201 |        |  | $ | 632   |     |  | $ | 2,454 |    |  | $ |    |     |   | $ | 14,298 |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Insurance reserves                                                                            |                       | $        | 14,811 |           |  | $      | 6,166 |            |  | $          | 4,434 |           |  | $         | 2,619 |        |  | $ | 7,862 |     |  | $ | 2,863 |    |  | $ |    |     |   | $ | 38,755 |      
|                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 

20



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note M. Restructuring and Other Related Charges

2001 Restructuring

In 2001, the Company finalized and approved two separate restructuring plans.
The first plan related to the Companys Information Technology operations (the
IT Plan). The second plan related to restructuring the property-casualty
segments and Life Operations, discontinuation of the variable life and annuity
business and consolidation of real estate locations (the 2001 Plan).

IT Plan

The overall goal of the IT Plan was to improve technology for the underwriting
function and throughout the Company and to eliminate inefficiencies in the
deployment of IT resources. The changes facilitate a strong focus on
enterprise-wide system initiatives. The IT Plan had two main components, which
included the reorganization of IT resources into the Technology and Operations
Group with a structure based on centralized, functional roles and the
implementation of an integrated technology roadmap that includes common
architecture and platform standards that directly support the Companys
strategies.

In the first quarter of 2001, the Company incurred $6 million pretax of
restructuring and other related charges for the IT Plan related to employee
severance charges.

No restructuring and other related charges related to the IT Plan have been
incurred in 2002; however, payments were made in the first quarter of 2002
related to amounts accrued as of December 31, 2001. The following table
summarizes the remaining IT Plan accrual at March 31, 2002 and the activity in
that accrual during the first quarter of 2002.

IT Plan Accrual

|                                   |  |               |    |       |  |       |   |  |  |   |    |  
|---------------------------------- |  | ------------- | -- | ----- |  | ----- | - |  |  | - | -- | -
|                                   |  | Employee      |    |       |  |       |   |  |  |  
|                                   |  | Termination   |    |       |  |       |   |  |  |  
|                                   |  | And Related   |    | Other |  |       |   | 
|                                   |  | Benefit Costs |    | Costs |  | Total
|                                   |  |               |    |       |  |      
|(In millions)                      |  |               |    |       |  |       |   |  |  |   |    |  
|Accrued costs at December 31, 2001 |  | $             | 10 |       |  | $     | 1 |  |  | $ | 11 |  
|Payments charged against liability |  |               | (1 | )     |  |       |  |  |  |   | (1 | )
|                                   |  |               |    |       |  |       |   |  |  |   |    |  
|Accrued costs at March 31, 2002    |  | $             | 9  |       |  | $     | 1 |  |  | $ | 10 |  
|                                   |  |               |    |       |  |       |   |  |  |   |    |  

The IT Plan is not expected to result in decreased operating expense in the
foreseeable future because savings from the workforce reduction will be used to
fund new technology-related initiatives. Employee termination and related
benefit payments will continue through 2004 due to employment contract
obligations.

2001 Plan

The overall goal of the 2001 Plan is to create a simplified and leaner
organization for customers and business partners. The major components of the
plan include a reduction in the number of strategic business units (SBUs) in
the property-casualty operations, changes in the strategic focus of the Life
Operations and consolidation of real estate locations. The reduction in the

21



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

number of property-casualty SBUs resulted in consolidation of SBU functions,
including underwriting, claims, marketing and finance. The strategic changes
in Life Operations include a decision to discontinue writing variable life and
annuity business.

No restructuring and other related charges related to the 2001 Plan were
incurred in 2002; however, payments were made in the first quarter of 2002
related to amounts accrued as of December 31, 2001. The following table
summarizes the remaining 2001 Plan accrual as of March 31, 2002 and the
activity in that accrual during the first quarter of 2002.

2001 Plan Accrual

|                                   |  |               |     |             |  |          |    |       |  |   |     |   |  |   |     |  
|---------------------------------- |  | ------------- | --- | ----------- |  | -------- | -- | ----- |  | - | --- | - |  | - | --- | -
|                                   |  | Employee      |     |             |  |          |    |       |  |   |     |   |  |  
|                                   |  | Termination   |     | Lease       |  | Impaired |    |       |  |  
|                                   |  | and Related   |     | Termination |  | Asset    |    |       |  |  
|                                   |  | Benefit Costs |     | Costs       |  | Charges  |    | Total
|                                   |  |               |     |             |  |          |    |      
|(In millions)                      |  |               |     |             |  |          |    |       |  |   |     |   |  |   |     |  
|Accrued costs at December 31, 2001 |  | $             | 66  |             |  | $        | 56 |       |  | $ | 30  |   |  | $ | 152 |  
|Costs that did not require cash    |  |               |    |             |  |          |   |       |  |   | (25 | ) |  |   | (25 | )
|Payments charged against liability |  |               | (34 | )           |  |          | (6 | )     |  |   |    |   |  |   | (40 | )
|                                   |  |               |     |             |  |          |    |       |  |   |     |   |  |   |     |  
|Accrued costs at March 31, 2002    |  | $             | 32  |             |  | $        | 50 |       |  | $ | 5   |   |  | $ | 87  |  
|                                   |  |               |     |             |  |          |    |       |  |   |     |   |  |   |     |  

Note N. Significant Transactions

CNA Vida Disposition

In March 2002, the Company completed the sale of the common stock of CNA
Holdings Limited and its subsidiaries (CNA Vida), CNAs life operations in
Chile, to Consorcio Financiero S.A. (Consorcio). In connection with the sale,
CNA received proceeds of $73 million and recorded an after-tax loss from
discontinued operations of $35 million. This loss is composed of $37 million,
net of tax, realized loss on the sale of CNA Vida and income of $2 million, net
of tax, from CNA Vidas operations for the three months ended March 31, 2002.

CNA Vidas assets and liabilities at December 31, 2001 were $479 million and
$367 million. CNA Vidas net earned premiums were $24 million and $33 million
and net operating income was $2 million and $0.4 million for the three months
ended March 31, 2002 and 2001. CNA Vidas results of operation, including the
loss on sale, is presented as discontinued operations in all periods presented
as required by SFAS 144.

2001 Dispositions and Planned Dispositions of Certain Subsidiaries

In 2001, the Company planned to dispose of certain subsidiaries of which
certain subsidiaries were sold during the fourth quarter resulting in an after-tax
loss of $38 million. Revenues and net operating loss of these subsidiaries, included in the results
of the first quarter of 2001 totaled approximately $7 million and $3 million.

22



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Certain other subsidiaries for which the Companys intent to sell was announced
during 2001, including the U.K. subsidiaries of CNA Re and CNA UniSource, a
payroll processing company, continue to be held for disposition as of March 31,
2002. During 2001, a loss of approximately $150 million was recorded on these
subsidiaries which were held for disposition but not yet sold, based upon
impairment analyses. Such impairment analysis, which included determining the
anticipated loss from the planned disposition of these subsidiaries, involved
the estimation of the net realizable value of each subsidiary held for
disposition.

The subsidiaries that continue to be held for disposition as of March 31, 2002
contributed revenues of approximately $48 million and $109 million and net
operating losses of $2 million and $3 million in the first quarter of 2002 and
2001. The assets and net assets of these subsidiaries were approximately $2.7
billion and $0.1 billion as of March 31, 2002. The anticipated sale of the
U.K. insurance subsidiaries will be subject to regulatory approval and all
anticipated sales are expected to be completed in 2002.

The statutory surplus of CNA Re Ltd., CNA Res principal reinsurance company in
the United Kingdom, was below the required regulatory minimum surplus level at
December 31, 2001. After CCC contributed $120 million of
capital on March 25, 2002, the surplus of CNA Re Ltd. is above the
regulatory minimum.

Note O. Discontinued Operations

CNA reports net assets of discontinued operations, which primarily consists of
operations discontinued in the mid-1990s, in other assets on the Condensed
Consolidated Balance Sheets. The following table provides more detailed
information regarding those net assets.

Discontinued Operations

|                                      |  |           |      |              |  |   |      |  
|------------------------------------- |  | --------- | ---- | ------------ |  | - | ---- | -
|                                      |  | March 31, |      | December 31,
|(In millions)                         |  | 2002      |      | 2001        
|                                      |  |           |      |             
|Total investments                     |  | $         | 471  |              |  | $ | 467  |  
|Other assets                          |  |           | 249  |              |  |   | 264  |  
|Insurance reserves                    |  |           | (404 | )            |  |   | (412 | )
|Other liabilities                     |  |           | (21  | )            |  |   | (25  | )
|                                      |  |           |      |              |  |   |      |  
|Net assets of discontinued operations |  | $         | 295  |              |  | $ | 294  |  
|                                      |  |           |      |              |  |   |      |  

Note P. Related Party Transactions

CNA reimburses Loews, or pays directly to Loews employees, approximately $18
million annually for management fees, travel and related expenses, and expenses
of investment facilities and services provided to CNA.

CNA and its eligible subsidiaries are included in the consolidated federal
income tax return of Loews and its eligible subsidiaries. During the first
quarter of 2002 and 2001, CNA received a tax refund of $91 million and $16
million from Loews.

CNA writes, at standard rates, a limited amount of insurance for Loews and its
affiliates. Total premiums from Loews and its affiliates are approximately $6
million on an annual basis.

23



---



##### 



CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

CNA assumes the risk for a limited amount of insurance from R.V.I. Guaranty
Company, Inc., a 50% owned affiliate. Written premiums assumed are less than
$13 million on an annual basis.

CNA sponsors a stock ownership plan whereby the Company finances the purchase
of Company stock by certain executive officers.

CCC provided an excess of loss reinsurance contract to the insurance
subsidiaries of CNA Surety Corporation (Surety), a 64% owned and consolidated
subsidiary of CNA, over a three year period that expired on December 31, 2000
(the stop loss contract). The stop loss contract limits the net loss ratios
for Surety with respect to certain accounts and lines of insurance business.
In the event that Suretys accident year net loss ratio exceeds 24% for 1997
through 2000 (the contractual loss ratio), the stop loss contract requires CCC
to pay amounts equal to the amount, if any, by which their actual accident year
net loss ratio exceeds the contractual loss ratio multiplied by the applicable
net earned premiums. The minority shareholders of CNA Surety do not share in
any losses that apply to this contract. Reinsurance balances payable under
this stop loss contract were approximately $17 million and $22 million as of
March 31, 2002 and December 31, 2001.

24



---



##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Consolidated Operations

The following discussion highlights significant factors influencing the
consolidated operations and financial condition of CNA Financial Corporation
(CNAF) and its controlled subsidiaries (CNA). CNA is one of the largest
insurance organizations in the United States, and based on 2000 net written
premiums, is the ninth largest property-casualty company and the 40th largest
life insurance company.

As of March 31, 2002, Loews Corporation (Loews) owned approximately 89% of the
outstanding common stock of CNAF. The following discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and related
Notes found on pages 1 to 24 and with CNAFs Annual Report to Shareholders for
the year ended December 31, 2001.

CNA conducts its operations through five operating segments: Standard Lines,
Specialty Lines and CNA Re (which comprise the property-casualty segments),
Group Operations and Life Operations. In addition to the five operating
segments, certain other activities are reported in the Corporate and Other
segment. These operating segments reflect the way CNA distributes its products
to the marketplace, manages its operations and makes business decisions.

Segment disclosures of prior periods have been modified to conform to the
current period presentation.

The following discussion of operating results focuses on net operating
income. Net operating income is calculated by deducting net realized
investment gains or losses (investment gains or losses after deduction of
related income taxes and minority interests), gains or losses from discontinued
operations, net of tax, and the cumulative effect of a change in accounting
principle, net of tax and minority interest, from net income. Net operating
income, as defined above, is used in managements discussion of the results of
operations because net realized investment gains or losses related to the
Companys available-for-sale investment portfolio are largely discretionary,
are generally driven by economic factors that are not necessarily consistent
with key drivers of underwriting performance, and are therefore not an
indication of trends in operations.

25



---



##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

Operating Results

The following table summarizes key components of operating results for the
three months ended March 31, 2002 and 2001.

Consolidated Operations

|                                                                                    |                                                                   |      |       |       |   |   |       |       |  
|----------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---- | ----- | ----- | - | - | ----- | ----- | -
|Three months ended March 31                                                         |                                                                   | 2002 |       | 2001 
|                                                                                    |                                                                   |      |       |      
|(In millions, except per share data)                                                |                                                                   |      |       |       |   |   |       |      
|Operating revenues:                                                                 |                                                                   |      |       |       |   |   |       |      
|                                                                                    | Net earned premiums                                               |      | $     | 2,837 |   |   | $     | 2,498 |  
|                                                                                    | Net investment income                                             |      |       | 426   |   |   |       | 507   |  
|                                                                                    | Other revenues                                                    |      |       | 184   |   |   |       | 193   |  
|                                                                                    |                                                                   |      |       |       |   |   |       |       |  
|Total operating revenues                                                            |                                                                   |      | 3,447 |       |   |   | 3,198 |      
|Claims, benefits and expenses                                                       |                                                                   |      | 3,279 |       |   |   | 3,016 |      
|Restructuring and other related charges                                             |                                                                   |      |      |       |   |   | 6     |      
|                                                                                    |                                                                   |      |       |       |   |   |       |       |  
|Operating income from continuing operations before income tax and
minority interest |                                                                   |      | 168   |       |   |   | 176   |      
|Income tax expense                                                                  |                                                                   |      | (52   | )     |   |   | (51   | )    
|Minority interest                                                                   |                                                                   |      | (5    | )     |   |   | (6    | )    
|                                                                                    |                                                                   |      |       |       |   |   |       |       |  
|Net operating income from continuing operations                                     |                                                                   |      | 111   |       |   |   | 119   |      
|Realized investment gains, net of tax and minority interest                         |                                                                   |      | 2     |       |   |   | 237   |      
|Loss from discontinued operations, net of tax of $9 and $0                          |                                                                   |      | (35   | )     |   |   | 0     |      
|Cumulative effect of a change in accounting principle, net of tax
of $0 and $33     |                                                                   |      |      |       |   |   | (61   | )    
|                                                                                    |                                                                   |      |       |       |   |   |       |       |  
|Net income                                                                          |                                                                   | $    | 78    |       |   | $ | 295   |      
|                                                                                    |                                                                   |      |       |       |   |   |       |       |  
|Basic and diluted earnings (loss) per share:                                        |                                                                   |      |       |       |   |   |       |      
|                                                                                    | Net operating income from continuing operations                   |      | $     | 0.50  |   |   | $     | 0.65  |  
|                                                                                    | Net realized investment gains, net of tax and minority interest   |      |       | 0.01  |   |   |       | 1.30  |  
|                                                                                    | Loss from discontinued operations, net of tax                     |      |       | (0.16 | ) |   |       | 0.00  |  
|                                                                                    | Cumulative effect of a change in accounting principle, net of tax |      |       |      |   |   |       | (0.34 | )
|                                                                                    |                                                                   |      |       |       |   |   |       |       |  
|Basic and diluted earnings per share available to common
stockholders               |                                                                   | $    | 0.35  |       |   | $ | 1.61  |      
|                                                                                    |                                                                   |      |       |       |   |   |       |       |  
|Weighted average outstanding common stock and common stock
equivalents              |                                                                   |      | 223.6 |       |   |   | 183.3 |      
|                                                                                    |                                                                   |      |       |       |   |   |       |       |  

The following table summarizes net operating income (loss) by segment for the
three months ended March 31, 2002 and 2001.

Net Operating Income (Loss) by Segment

|                            |  |      |     |      |  |   |     |  
|--------------------------- |  | ---- | --- | ---- |  | - | --- | -
|Three months ended March 31 |  | 2002 |     | 2001
|                            |  |      |     |     
|(In millions)               |  |      |     |      |  |   |     |  
|Standard Lines              |  | $    | 9   |      |  | $ | 65  |  
|Specialty Lines             |  |      | 35  |      |  |   | 43  |  
|CNA Re                      |  |      | 41  |      |  |   | 18  |  
|Group Operations            |  |      | 17  |      |  |   | 15  |  
|Life Operations             |  |      | 35  |      |  |   | 42  |  
|Corporate and Other         |  |      | (26 | )    |  |   | (64 | )
|                            |  |      |     |      |  |   |     |  
|Net operating income        |  | $    | 111 |      |  | $ | 119 |  
|                            |  |      |     |      |  |   |     |  

26



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

Net operating income was $111 million, or $0.50 per share, for the first
quarter of 2002 as compared with $119 million, or $0.65 per share, for the same
period in 2001. The decrease in net operating income was due principally to
lower net investment income, driven by decreased limited partnership income,
lower portfolio yields and increased interest costs on funds withheld and other
deposits. These decreases in net investment income were partially offset by
improved underwriting results in the property-casualty segments.

Net income was $78 million, or $0.35 per share, for the first quarter of 2002
as compared with $295 million, or $1.61 per share, for the same period in 2001.
Net realized investment gains for the first quarter of 2002 decreased $235
million as compared with the same period in 2001. Loss from discontinued
operations, net of tax, of $35 million for the first quarter of 2002 and $0.4
million for the same period in 2001 relates to the operating results and loss
on sale of Life Operations Chilean-based subsidiaries (CNA Vida). Included in
the net income for 2001 was a charge of $61 million, net of tax, for the
cumulative effect of a change in accounting principle for derivative financial
instruments.

Net earned premiums increased $339 million for the first quarter of 2002 as
compared with the same period in 2001 primarily as a result of a strong
increasing rate trend in the property-casualty segments, reduced use of
property-casualty reinsurance and premium growth in the Group and Life
Operations. These increases were partially offset by decreased net earned
premiums in CNA Re resulting from the decision to cease writing new business in
its U.K. subsidiary.

Reinsurance

CNA assumes and cedes reinsurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk, minimize exposures on larger risks and to exit certain
lines of business. Reinsurance coverages are tailored to the specific risk
characteristics of each product line and CNAs retained amount varies by type
of coverage. Generally, property risks are reinsured on an excess of loss, per
risk basis. Liability coverages are generally reinsured on a quota share basis
in excess of CNAs retained risk. CNAs life reinsurance includes coinsurance,
yearly renewable term and facultative programs.

The Companys overall reinsurance program includes certain property-casualty
contracts, such as the corporate aggregate treaties discussed in more detail
later in this section, that are entered into and accounted for on a funds
withheld basis. Under the funds withheld basis, the Company records a
liability for substantially all of the premiums that are ceded under a
reinsurance contract. The Company is required to increase the funds withheld
balance at stated interest crediting rates. The funds withheld liability is
reduced by any cumulative claim payments made by the Company in excess of the
Companys retention under the reinsurance contract. If the funds withheld
liability is exhausted, interest crediting will cease and additional claim
payments are recoverable from the reinsurer. The funds withheld liability is
recorded in reinsurance balances payable in the Condensed Consolidated Balance
Sheets.

Interest cost on these contracts is credited during all periods in which a
funds withheld liability exists. Interest cost, included in other net
investment income, was $58 million and $36 million for the first quarter of
2002 and 2001. The amount subject to interest crediting rates on such
contracts was $2,877 million and $2,724 million at March 31, 2002 and December
31, 2001.

27



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

The amount subject to interest crediting on these funds withheld contracts will
vary over time based on a number of factors, including the timing of loss
payments and ultimate gross losses incurred. The Company expects that it will
continue to incur significant interest costs on these contracts for several
years.

For 2002, the Company has entered into an aggregate reinsurance treaty covering
substantially all of the Companys property-casualty lines of business (the
2002 Cover). The loss protection provided by the 2002 Cover is dependent on
the level of subject premium, but there is a maximum aggregate limit of $1,125
million. Maximum ceded premium under the contract is $683 million, and
premiums, claims recoveries and interest charges other than the reinsurers
margin and related fees are made on a funds withheld basis. Interest is
credited on funds withheld at 8%, and all premiums are deemed to have been paid
as of January 1, 2002. Ceded premium related to the reinsurers margin in the
amount of $3 million was recorded for the 2002 Cover for the three months ended March 31, 2002.

The aggregate reinsurance protection from the 2002 Cover attaches at a defined
accident year loss and allocated loss adjustment expense (collectively, losses)
ratio. Under the contract, CNA has the right to elect to cede losses to the
2002 Cover when its recorded accident year losses exceeds the attachment point.
This election period expires March 31, 2004. If no losses are ceded by this
date, the contract is deemed to be commuted. If CNA elects to cede any losses
to the 2002 Cover, it must continue to cede all losses subject to the terms of
the contract.

In 1999, the Company entered into an aggregate reinsurance treaty related to
the 1999 through 2001 accident years covering substantially all of the
Companys property-casualty lines of business (the Aggregate Cover). The
Company has two sections of coverage under the terms of the Aggregate Cover.
These coverages attach at defined loss and allocated loss adjustment expense
(collectively, losses) ratios for each accident year. Coverage under the first
section of the Aggregate Cover, which is available for all accident years
covered by the contract, has annual limits of $500 million of ceded losses with
an aggregate limit of $1 billion of ceded losses for the three year period.
The ceded premiums are a percentage of ceded losses and for each $500 million
of limit the ceded premium is $230 million. The second section of the
Aggregate Cover, which was only utilized for accident year 2001, provides
additional coverage of up to $510 million of ceded losses for a maximum ceded
premium of $310 million. Under the Aggregate Cover, interest charges on the
funds withheld accrue at 8% per annum. If the aggregate loss ratio for the
three-year period exceeds certain thresholds, additional premiums may be
payable and the rate at which interest charges are accrued would increase to
8.25% per annum.

The coverage under the second section of the Aggregate Cover was triggered for
the 2001 accident year. As a result of losses related to the September 11,
2001 World Trade Center Disaster and related events (WTC event), the limit
under this section was exhausted. Additionally, as a result of the significant
reserve additions recorded during 2001, the $500 million limit on the 1999
accident year under the first section was also fully utilized. No losses have
been ceded to the remaining $500 million of limit on accident years 2000 and
2001 under the first section.

28



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

The impact of the Aggregate Cover on pretax operating results was as follows:

Impact of Aggregate Cover on Pretax Operating Results

|                                         |  |      |     |      |  |   |     |  
|---------------------------------------- |  | ---- | --- | ---- |  | - | --- | -
|For the three months ended March 31      |  | 2002 |     | 2001
|                                         |  |      |     |     
|(In millions)                            |  |      |     |      |  |   |     |  
|Ceded earned premiums                    |  | $    |    |      |  | $ | (42 | )
|Ceded claim and claim adjustment expense |  |      |    |      |  |   | 39  |  
|Interest charges                         |  |      | (13 | )    |  |   | (6  | )
|                                         |  |      |     |      |  |   |     |  
|Pretax impact on operating results       |  | $    | (13 | )    |  | $ | (9  | )
|                                         |  |      |     |      |  |   |     |  

In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property-casualty
lines of business in the Continental Casualty Company pool (the CCC Cover).
The loss protection provided by the CCC Cover has an aggregate limit of
approximately $760 million of ceded losses. The ceded premiums are a percentage
of ceded losses and for the $760 million of limit, the ceded premium is $456
million. The CCC Cover provides continuous coverage in excess of the second
section of the Aggregate Cover discussed above. Under the CCC Cover, interest
charges on the funds withheld generally accrue at 8% per annum. The interest
rate increases to 10% per annum if the aggregate loss ratio exceeds certain
thresholds. Losses of $563 million have been ceded under the CCC Cover through
March 31, 2002.

The impact of the CCC Cover on pretax operating results was as follows:

Impact of CCC Cover on Pretax Operating Results

|                                         |  |      |     |      |  |   |    |  
|---------------------------------------- |  | ---- | --- | ---- |  | - | -- | -
|For the three months ended March 31      |  | 2002 |     | 2001
|                                         |  |      |     |     
|(In millions)                            |  |      |     |      |  |   |    |  
|Ceded earned premiums                    |  | $    | (61 | )    |  | $ | (1 | )
|Ceded claim and claim adjustment expense |  |      | 93  |      |  |   |   |  
|Interest charges                         |  |      | (10 | )    |  |   |   |  
|                                         |  |      |     |      |  |   |    |  
|Pretax impact on operating results       |  | $    | 22  |      |  | $ | (1 | )
|                                         |  |      |     |      |  |   |    |  

The impact by operating segment of the 2002 Cover, Aggregate Cover and the CCC
Cover on pretax operating results was as follows:

Impact of 2002 Cover, Aggregate Cover and CCC Cover on Pretax Operating Results

|                                    |                                    |      |   |      |   |  |   |     |  
|----------------------------------- | ---------------------------------- | ---- | - | ---- | - |  | - | --- | -
|For the three months ended March 31 |                                    | 2002 |   | 2001
|                                    |                                    |      |   |     
|(In millions)                       |                                    |      |   |      |   |  |   |    
|                                    | Standard Lines                     |      | $ | (14  | ) |  | $ | (5  | )
|                                    | Specialty Lines                    |      |   | (2   | ) |  |   | (2  | )
|                                    | CNA Re                             |      |   | 22   |   |  |   |    |  
|                                    | Corporate and Other                |      |   |     |   |  |   | (3  | )
|                                    |                                    |      |   |      |   |  |   |     |  
|                                    | Pretax impact on operating results |      | $ | 6    |   |  | $ | (10 | )
|                                    |                                    |      |   |      |   |  |   |     |  

29



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

2001 Restructuring

In 2001, the Company finalized and approved two separate restructuring plans.
The first plan related to the Companys Information Technology operations (the
IT Plan). The second plan related to restructuring the property-casualty
segments and Life Operations, discontinuation of variable life and annuity
business and consolidation of real estate locations (the 2001 Plan).

IT Plan

The overall goal of the IT Plan was to improve technology for the underwriting
function and throughout the Company and to eliminate inefficiencies in the
deployment of IT resources. The changes facilitate a strong focus on
enterprise-wide system initiatives. The IT Plan had two main components, which
included the reorganization of IT resources into the Technology and Operations
Group with a structure based on centralized, functional roles and the
implementation of an integrated technology roadmap that includes common
architecture and platform standards that directly support the Companys
strategies.

In the first quarter of 2001, the Company incurred $6 million pretax of
restructuring and other related charges for the IT Plan related to employee
severance charges.

No restructuring and other related charges related to the IT Plan have been
incurred in 2002; however, payments were made in the first quarter of 2002
related to amounts accrued as of December 31, 2001. The following table
summarizes the remaining IT Plan accrual at March 31, 2002 and the activity in
that accrual during the first quarter of 2002. Approximately $5 million of the
remaining accrual is expected to be paid out during the remainder of 2002.

IT Plan Accrual

|                                   |  |               |    |       |  |       |   |  |  |   |    |  
|---------------------------------- |  | ------------- | -- | ----- |  | ----- | - |  |  | - | -- | -
|                                   |  | Employee      |    |       |  |       |   |  |  |  
|                                   |  | Termination   |    |       |  |       |   |  |  |  
|                                   |  | and Related   |    | Other |  |       |   | 
|                                   |  | Benefit Costs |    | Costs |  | Total
|                                   |  |               |    |       |  |      
|(In millions)                      |  |               |    |       |  |       |   |  |  |   |    |  
|Accrued costs at December 31, 2001 |  | $             | 10 |       |  | $     | 1 |  |  | $ | 11 |  
|Payments charged against liability |  |               | (1 | )     |  |       |  |  |  |   | (1 | )
|                                   |  |               |    |       |  |       |   |  |  |   |    |  
|Accrued costs at March 31, 2002    |  | $             | 9  |       |  | $     | 1 |  |  | $ | 10 |  
|                                   |  |               |    |       |  |       |   |  |  |   |    |  

The IT Plan is not expected to result in decreased operating expense in the
foreseeable future because savings from the workforce reduction will be used to
fund new technology-related initiatives. Employee termination and related
benefit payments will continue through 2004 due to employment contract
obligations.

2001 Plan

The overall goal of the 2001 Plan is to create a simplified and leaner
organization for customers and business partners. The major components of the
plan include a reduction in the number of strategic business units (SBUs) in
the property-casualty operations, changes in the strategic focus of the Life
Operations and consolidation of real estate locations. The reduction in the
number of property-casualty SBUs resulted in consolidation of SBU functions,
including underwriting, claims, marketing and finance. The strategic changes
in Life Operations include a decision to discontinue writing variable life and
annuity business.

30



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

No restructuring and other related charges related to the 2001 Plan were
incurred in 2002; however, payments were made in the first quarter of 2002
related to amounts accrued as of December 31, 2001. The following table
summarizes the remaining 2001 Plan accrual as of March 31, 2002 and the
activity in that accrual during the first quarter of 2002. Approximately $29 million of the remaining accrual is expected to be paid out during the
remainder of 2002.

2001 Plan Accrual

|                                   |  |               |     |             |  |          |    |       |  |   |     |   |  |   |     |  
|---------------------------------- |  | ------------- | --- | ----------- |  | -------- | -- | ----- |  | - | --- | - |  | - | --- | -
|                                   |  | Employee      |     |             |  |          |    |       |  |   |     |   |  |  
|                                   |  | Termination   |     | Lease       |  | Impaired |    |       |  |  
|                                   |  | and Related   |     | Termination |  | Asset    |    |       |  |  
|                                   |  | Benefit Costs |     | Costs       |  | Charges  |    | Total
|                                   |  |               |     |             |  |          |    |      
|(In millions)                      |  |               |     |             |  |          |    |       |  |   |     |   |  |   |     |  
|Accrued costs at December 31, 2001 |  | $             | 66  |             |  | $        | 56 |       |  | $ | 30  |   |  | $ | 152 |  
|Costs that did not require cash    |  |               |    |             |  |          |   |       |  |   | (25 | ) |  |   | (25 | )
|Payments charged against liability |  |               | (34 | )           |  |          | (6 | )     |  |   |    |   |  |   | (40 | )
|                                   |  |               |     |             |  |          |    |       |  |   |     |   |  |   |     |  
|Accrued costs at March 31, 2002    |  | $             | 32  |             |  | $        | 50 |       |  | $ | 5   |   |  | $ | 87  |  
|                                   |  |               |     |             |  |          |    |       |  |   |     |   |  |   |     |  

Terrorism Exposure

CNA and the insurance industry incurred substantial losses related to the
tragic events of September 11, 2001. For the most part, the Company believes
the industry was able to absorb the loss of capital from these losses, but the
capacity to withstand the effect of any additional terrorism events was
significantly diminished. The public debate following September 11 centered on
the role, if any, the U.S. federal government should play in providing a
terrorism backstop for the industry. Several legislative proposals were
introduced, but as yet, Congress has not enacted any of the proposed solutions.

Without any federal backstop in place, CNAs businesses are exposed to losses
arising from terrorism events. The Company is attempting to mitigate this
exposure through its underwriting practices, policy terms and conditions, and
use of reinsurance.

While the unexpired portion of the Companys current reinsurance program placed
prior to September 11, 2001 generally provides coverage for terrorism events,
the Company expects that future property-casualty and certain group life and
accident reinsurance renewals will either exclude coverage or be significantly
limited with respect to terrorism events. The Company does not expect any
terrorism exclusion to be included in future individual life reinsurance
renewals.

The Company is generally including a terrorism exclusion or sub-limit in its
primary and reinsurance assumed policy forms and contracts for large property
risks in selected geographic areas. General liability and commercial auto
policies for large commercial customers also generally exclude terrorism where
permissible by law. The primary property and casualty policy forms applicable
to new and renewal policies for small and middle market commercial customers
will generally include a terrorism exclusion; however, these policy forms have
not yet been approved in all states. Notwithstanding the policy exclusions
described in this paragraph, the Company has decided to effectively remove the
terrorism exclusion for both property and casualty coverage on policies for
small and middle market commercial customers and is currently sending out
notices accordingly. The Company expects that the exclusion will be removed as
to all such policies until at least September of 2002. The Company is
generally prohibited from excluding terrorism exposure from its primary workers
compensation, individual life and group life and health policies.

31



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

Standard Lines

The following table summarizes key components of operating results for Standard
Lines.

Operating Results

|                            |                                  |          |       |      |       |   |     |      |       |  
|--------------------------- | -------------------------------- | -------- | ----- | ---- | ----- | - | --- | ---- | ----- | -
|Three months ended March 31 |                                  | 2002     |       | 2001
|                            |                                  |          |       |     
|(In millions)               |                                  |          |       |      |       |   |     |     
|Net written premiums        |                                  | $        | 1,077 |      |       | $ | 895 |     
|Net earned premiums         |                                  |          | 1,010 |      |       |   | 858 |     
|Underwriting loss           |                                  |          | (108  | )    |       |   | (83 | )   
|Net investment income       |                                  |          | 102   |      |       |   | 162 |     
|Net operating income        |                                  |          | 9     |      |       |   | 65  |     
|Ratios:                     |                                  |          |       |      |       |   |     |     
|                            | Loss and loss adjustment expense |          |       | 77.2 | %     |   |     | 73.2 | %    
|                            | Expense                          |          |       | 31.9 |       |   |     | 33.8 |      
|                            | Dividend                         |          |       | 1.6  |       |   |     | 2.7  |      
|                            |                                  |          |       |      |       |   |     |     
|                            |                                  | Combined |       |      | 110.7 | % |     |      | 109.7 | %
|                            |                                  |          |       |      |       |   |     |     

Net operating income decreased $56 million for the first quarter of 2002 as
compared with the same period in 2001. This decrease is due primarily to a $39
million decrease in net investment income, including a decrease of $15 million
in limited partnership income, and a decline in net underwriting results.

The combined ratio increased 1.0 points for the first quarter of 2002 as
compared with the same period in 2001 and underwriting results declined by $25
million. This change is due to an increase in the loss ratio, partially offset
by decreases in the expense and dividend ratios. The loss ratio increased 4.0
points primarily as a result of a significantly reduced benefit from the use of
reinsurance in 2002, partially offset by strong improvement in gross current
accident year loss experience. The expense ratio decreased 1.9 points
primarily as a result of lower underwriting expenses resulting from decreased
staff levels due to the 2001 Plan, partially offset by increased acquisition
expenses. The dividend ratio decreased 1.1 points primarily as a result of
unfavorable development in dividend reserves in 2001.

Net written premiums increased $182 million for the first quarter of 2002 as
compared with the same period in 2001 as a result of strong rate increases, a
higher level of new business and lower ceded premiums. Net earned premiums
increased $152 million for the first quarter of 2002 as compared with the same
period in 2001, due primarily to the increases in net written premium noted
above.

Standard Lines achieved an average rate increase of 31% in the first quarter of
2002 for the contracts that renewed during the period and had a retention rate
of 66% for those contracts that were up for renewal.

32



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

Specialty Lines

The following table summarizes key components of operating results for
Specialty Lines.

Operating Results

|                            |                                  |          |     |      |       |   |     |      |       |  
|--------------------------- | -------------------------------- | -------- | --- | ---- | ----- | - | --- | ---- | ----- | -
|Three months ended March 31 |                                  | 2002     |     | 2001
|                            |                                  |          |     |     
|(In millions)               |                                  |          |     |      |       |   |     |     
|Net written premiums        |                                  | $        | 546 |      |       | $ | 417 |     
|Net earned premiums         |                                  |          | 514 |      |       |   | 458 |     
|Underwriting loss           |                                  |          | (21 | )    |       |   | (29 | )   
|Net investment income       |                                  |          | 61  |      |       |   | 92  |     
|Net operating income        |                                  |          | 35  |      |       |   | 43  |     
|Ratios:                     |                                  |          |     |      |       |   |     |     
|                            | Loss and loss adjustment expense |          |     | 71.3 | %     |   |     | 68.9 | %    
|                            | Expense                          |          |     | 32.6 |       |   |     | 37.3 |      
|                            | Dividend                         |          |     | 0.1  |       |   |     | 0.1  |      
|                            |                                  |          |     |      |       |   |     |     
|                            |                                  | Combined |     |      | 104.0 | % |     |      | 106.3 | %
|                            |                                  |          |     |      |       |   |     |     

Net operating income decreased $8 million for the first quarter of 2002 as
compared with the same period in 2001 due primarily to decreased net investment
income, partially offset by improved underwriting results and a non-recurring
currency translation gain on U.S. dollar denominated investments held by an
Argentinean subsidiary that is consolidated on a one quarter lag. The
Argentine government changed its local currency and required conversion of all
U.S. denominated investments to Argentine Pesos. This conversion resulted in a
translation gain of $18 million, which was partially offset by the write-off of
the goodwill of that entity in the amount of $10 million.

The combined ratio decreased 2.3 points for the first quarter of 2002 as
compared with the same period in 2001 and underwriting results improved by $8
million. This improvement is due to a decrease in the expense ratio, partially
offset by an increase in the loss ratio. The expense ratio decreased 4.7
points primarily as a result of lower underwriting expenses resulting from
decreased staff levels due to the 2001 Plan and other expense reduction
initiatives and an increased net earned premium base. The loss ratio increased
2.4 points due primarily to adverse prior year loss development in the marine
line of business and reduced benefit from the use of reinsurance in 2002.

Net written premiums increased $129 million for the first quarter of 2002 as
compared with the same period in 2001 due primarily to strong rate increases
and increased production, particularly in the architects and engineers, long
term care, and marine lines of business. Net earned premiums increased $56
million for the first quarter of 2002 as compared with the same period in 2001,
attributable primarily to the increases in net written premium noted above.

The non-medical and medical professional liability and financial products lines
of business achieved an average rate increase of 21% with a retention rate of
76% for the first quarter of 2002 for those contracts that were up for renewal.
CNA Global achieved an average rate increase of 18% across its businesses
during the first quarter of 2002 with a retention rate of 73%. Retention rates
above apply to Specialty Lines excluding the CNA Guaranty and Credit, Surety
and Warranty businesses.

33



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

CNA Re

The following table summarizes key components of operating results for CNA Re.

Operating Results

|                                 |  |      |      |      |  |   |       |  
|-------------------------------- |  | ---- | ---- | ---- |  | - | ----- | -
|Three months ended March 31      |  | 2002 |      | 2001
|                                 |  |      |      |     
|(In millions)                    |  |      |      |      |  |   |       |  
|Net written premiums             |  | $    | 167  |      |  | $ | 201   |  
|Net earned premiums              |  |      | 137  |      |  |   | 159   |  
|Underwriting income (loss)       |  |      | 25   |      |  |   | (23   | )
|Net investment income            |  |      | 34   |      |  |   | 48    |  
|Net operating income             |  |      | 41   |      |  |   | 18    |  
|Ratios:                          |  |      |      |      |  |   |       |  
|Loss and loss adjustment expense |  |      | 41.3 | %    |  |   | 75.1  | %
|Expense                          |  |      | 40.4 |      |  |   | 39.2  |  
|                                 |  |      |      |      |  |   |       |  
|Combined                         |  |      | 81.7 | %    |  |   | 114.3 | %
|                                 |  |      |      |      |  |   |       |  

Net operating income increased $23 million for the first quarter of 2002 as
compared with the same period in 2001 due to improved underwriting results
including an $18 million after-tax benefit from cessions to the CCC Cover in
2002, partially offset by a reduction in net investment income.

During the first quarter of 2002, CNA Re revised its estimate of premiums and
losses related to the WTC event. In estimating CNA Res WTC event losses, the
Company performed a treaty-by-treaty analysis of exposure. The Companys loss
estimate was based on a number of assumptions including the loss to the
industry, the loss to individual lines of business and the market share of CNA
Res cedants. Information now available has caused CNA Re to increase its
estimate of WTC event related premiums and losses on its property facultative
and property catastrophe business. The impact of increasing the estimate of
gross WTC event losses by $144 million was offset on a net of reinsurance basis
(before the impact of CCC Cover) by higher reinstatement premiums and a
reduction of return premiums.

The increase in WTC related losses in accident year 2001 increased the level of
losses ceded to the CCC Cover. Accordingly, CNA Re recognized an after-tax
benefit of $18 million in the first quarter of 2002 related to the additional
cessions to the CCC Cover.

The combined ratio improved 32.6 points for the first quarter of 2002 as
compared with the same period in 2001 and underwriting results improved $48
million. The improvement in the combined ratio is due to a decrease in the
loss ratio, partially offset by an increase in the expense ratio. The loss
ratio decreased 33.8 points, due primarily to a $32 million net underwriting
benefit related to the corporate aggregate reinsurance treaties and achieved
rate increases for several lines of business, most notably in the global
catastrophe and facultative business units. These improvements were partially
offset by additional premiums and losses recorded as a result of the
re-estimation of the WTC event as discussed above. The expense ratio increased
1.2 points due primarily to the reduced net earned premiums base.

Net written premiums decreased $34 million for the first quarter of 2002 as
compared with the same period in 2001 principally as a result of the decision
made in the third quarter of 2001 to cease new business writings in CNA Res
U.K. subsidiary. Net earned premiums decreased $22 million for the first
quarter of 2002 as compared with the same period in 2001 attributable primarily
to the decreases in net written premiums noted above.

34



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

During 2001 the Company announced its intention to sell the U.K. subsidiary of
CNA Re. The planned sale is subject to regulatory approval and is anticipated
to be completed in 2002.

Group Operations

The following table summarizes key components of operating results for Group
Operations.

Operating Results

|                            |  |      |     |      |  |   |     | 
|--------------------------- |  | ---- | --- | ---- |  | - | --- | 
|Three months ended March 31 |  | 2002 |     | 2001
|                            |  |      |     |     
|(In millions)               |  |      |     |      |  |   |     | 
|Net earned premiums         |  | $    | 938 |      |  | $ | 818 | 
|Net investment income       |  |      | 43  |      |  |   | 43  | 
|Net operating income        |  |      | 17  |      |  |   | 15  | 

Net operating income increased $2 million for the first quarter of 2002 as
compared with the same period in 2001. This increase is primarily attributable
to lower expenses in Group Benefits and diminished adverse effects from the
occupational accident and Group Reinsurance discontinued lines of business.

Net earned premiums increased $120 million for the first quarter of 2002 as
compared with the same period in 2001. This growth is due primarily to higher
premiums in the Federal Markets mail handlers benefit program resulting from
increased claim and cost containment fees. In addition there was growth in the
disability, life and accident and long term care lines of business and in the
Group Reinsurance business.

On April 16, 2002, the National Postal Mail Union informed CNA it had signed a
contract with First Health Corporation to become the new underwriter and
administrator of its health benefit plan effective January 1, 2003. CNA
received $2.2 billion of revenue and recorded $10 million of net operating
income from this contract in 2001. The loss of this contract is not
anticipated to have an adverse material impact on 2002 net operating income.

Life Operations

The following table summarizes key components of operating results for Life
Operations.

Operating Results

|                            |  |      |     |      |  |   |     | 
|--------------------------- |  | ---- | --- | ---- |  | - | --- | 
|Three months ended March 31 |  | 2002 |     | 2001
|                            |  |      |     |     
|(In millions)               |  |      |     |      |  |   |     | 
|Sales volume*               |  | $    | 467 |      |  | $ | 500 | 
|Net earned premiums         |  |      | 240 |      |  |   | 215 | 
|Net investment income       |  |      | 156 |      |  |   | 133 | 
|Net operating income        |  |      | 35  |      |  |   | 42  | 

*Sales volume is a cash-based measure that includes premiums and annuity
considerations, investment contract deposits and other sales activities that
are not reported as premiums under accounting principles generally accepted in
the United States of America (GAAP).

Net operating income decreased $7 million for the first quarter of 2002 as
compared with the same period in 2001. This decrease is due primarily to lower
operating results for the Index 500 product in Retirement Services because
results in the first quarter of 2001 were unusually
35CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continuedfavorable. In addition, unfavorable claims experience in Individual Life and
in the viatical line of business in 2002 was partially offset by improved net
investment income.Sales volume decreased $33 million for the first quarter of 2002 as compared
with the same period in 2001. Reduced sales in the variable products business,
which the company decided to exit in the fourth quarter of 2001, were partially
offset by increased sales in the Long Term Care and Individual Life businesses.
Net earned premiums increased $25 million for the first quarter of 2002 as
compared with the same period in 2001 attributable primarily to growth in the
Long Term Care and Individual Life businesses.Corporate and OtherThe following table summarizes key components of operating results for
Corporate and Other.Operating Results

|                            |  |      |     |      |  |   |     |  
|--------------------------- |  | ---- | --- | ---- |  | - | --- | -
|Three months ended March 31 |  | 2002 |     | 2001
|                            |  |      |     |     
|(In millions)               |  |      |     |      |  |   |     |  
|Net investment income       |  | $    | 30  |      |  | $ | 29  |  
|Total operating revenues    |  |      | 69  |      |  |   | 73  |  
|Net operating loss          |  |      | (26 | )    |  |   | (64 | )

Net operating results improved $38 million for the first quarter of 2002 as
compared with the same period in 2001. This improvement is due to $16 million
of adverse development related to APMT claims in the first quarter of 2001
compared to no development in the first quarter of 2002, reduced underwriting
expenses for e-Business initiatives, lower interest expense on corporate debt,
and the absence of $4 million of restructuring and other related charges that
occurred in the first quarter of 2001.

Total operating revenues decreased $4 million for the first quarter 2002 as
compared with the same period in 2001, primarily as a result of decreased
revenues for CNA UniSource.

In the second quarter of 2001, CNA planned the disposition of CNA UniSource, a
payroll processor and professional employer organization (PEO). After
exploring possible transactions to dispose of its PEO business, CNA UniSource
exited the PEO business as of March 31, 2002. As of that date, substantially
all existing PEO client contracts were terminated. All obligations related to
the PEO operation are being run off in an orderly manner and the associated
costs are included in continuing operations. The Company anticipates
additional operating losses from the PEO run-off for the remainder of 2002.
CNA UniSources payroll processing business, which has annual revenues of
approximately $16 million, remains designated as held for sale.

Environmental Pollution and Other Mass Tort and Asbestos Reserves (APMT)

CNAs property-casualty insurance subsidiaries have potential exposures related
to APMT claims.

Environmental pollution cleanup is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to cleanup. The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial interpretations in many cases have
expanded the scope of coverage and liability beyond the original intent of the

36



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

policies. The Comprehensive Environmental Response Compensation and Liability
Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern
the cleanup and restoration of toxic waste sites and formalize the concept of
legal liability for cleanup and restoration by Potentially Responsible
Parties (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay
for cleanup of waste sites if PRPs fail to do so, and to assign liability to
PRPs. The extent of liability to be allocated to a PRP is dependent upon a
variety of factors. Further, the number of waste sites subject to cleanup is
unknown. To date, approximately 1,500 cleanup sites have been identified by
the Environmental Protection Agency (EPA) and included on its National
Priorities List (NPL). State authorities have designated many cleanup sites as
well.

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

A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress during 2001 or the first three
months of 2002, and it is unclear what positions Congress or the administration
will take and what legislation, if any, will result in the future. If there is
legislation, and in some circumstances even if there is no legislation, the
federal role in environmental cleanup may be significantly reduced in favor of
state action. Substantial changes in the federal statute or the activity of
the EPA may cause states to reconsider their environmental cleanup statutes and
regulations. There can be no meaningful prediction of the pattern of
regulation that would result or the effect upon CNAs results of operations
and/or financial position.

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

As of March 31, 2002 and December 31, 2001, CNA carried approximately $584
million and $617 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims. There was no environmental pollution and other
mass tort net claim and claim adjustment expense reserve development for the
three months ended March 31, 2002. Unfavorable environmental pollution and
other mass tort development for the three months ended March 31, 2001 amounted
to $3 million.

CNAs property-casualty insurance subsidiaries also have exposure to
asbestos-related claims. Estimation of asbestos-related claim and claim
adjustment expense 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
and insureds, and additional factors such as missing policies and proof of
coverage. Furthermore, estimation of asbestos-related claims is difficult due
to, among other reasons, the proliferation of
37

CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

bankruptcy proceedings and attendant uncertainties, the targeting of a broader
range of businesses and entities as defendants, the uncertainty as to which
other insureds may be targeted in the future, and the uncertainties inherent in
predicting the number of future claims.

As of March 31, 2002 and December 31, 2001, CNA carried approximately $1,224
million and $1,204 million of net claim and claim adjustment expense reserves,
net of reinsurance recoverables, for reported and unreported asbestos-related
claims. There was no unfavorable asbestos net claim and claim adjustment
expense reserve development for the three months ended March 31, 2002.
Unfavorable asbestos net claim and claim adjustment expense reserve development
for the three months ended March 31, 2001 amounted to $21 million. CNA has
attempted to manage its asbestos-related exposures by aggressively resolving
older claims.

In addition, some asbestos-related defendants have asserted that their claims
for insurance are not subject to aggregate limits on coverage. CNA currently
has such claims from a number of insureds. Some of these claims involve
insureds facing exhaustion of products liability aggregate limits in their
policies, who have asserted that their asbestos-related claims fall within
so-called non-products liability coverage contained within their policies
rather than products liability coverage, and that the claimed non-products
coverage is not subject to any aggregate limit. It is difficult to predict the
ultimate size of any of the claims for coverage not subject to aggregate limits
or predict to what extent, if any, the attempts to assert non-products claims
outside the products liability aggregate will succeed.

Due to the uncertainties created by volatility in claim numbers and settlement
demands, the effect of bankruptcies, the extent to which non-impaired claimants
can be precluded from making claims and the efforts by insureds to obtain
coverage not subject to aggregate limits, the ultimate liability of CNA for
asbestos-related claims may vary substantially from the amount currently
recorded. Other variables that will influence CNAs ultimate exposure to
asbestos-related claims will be medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix
of asbestos-related diseases presented and the possibility of legislative
reform. Adverse developments with respect to such matters discussed in this
paragraph could have a material adverse effect on CNAs results of operations
and/or financial condition.

The results of operations and financial condition of CNA in future years may
continue to be adversely affected by environmental pollution and other mass
tort and asbestos claim and claim adjustment expenses. Management will continue
to review and monitor these liabilities and make further adjustments, including
the potential for further reserve strengthening, as warranted.

38



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

Investments

The components of net investment income for the three months ended March 31,
2002 and 2001 are presented in the following table.

Net Investment Income

|                                                               |        |            |     |      |     |   |     |   |     | 
|-------------------------------------------------------------- | ------ | ---------- | --- | ---- | --- | - | --- | - | --- | 
|Three months ended March 31                                    |        | 2002       |     | 2001
|                                                               |        |            |     |     
|(In millions)                                                  |        |            |     |      |     |   |     |  
|Fixed maturity securities:                                     |        |            |     |      |     |   |     |  
|                                                               | Bonds: |            |     |      |     |   |     |   |    
|                                                               |        | Taxable    |     | $    | 414 |   |     | $ | 409 | 
|                                                               |        | Tax-exempt |     |      | 33  |   |     |   | 34  | 
|Limited partnerships                                           |        |            | 7   |      |     |   | 36  |  
|Short-term investments                                         |        |            | 16  |      |     |   | 42  |  
|Other, including interest on funds withheld and other deposits |        |            | (30 | )    |     |   | 2   |  
|                                                               |        |            |     |      |     |   |     |   |     | 
|Gross investment income                                        |        |            | 440 |      |     |   | 523 |  
|Investment expense                                             |        |            | (14 | )    |     |   | (16 | )
|                                                               |        |            |     |      |     |   |     |   |     | 
|Net investment income                                          |        | $          | 426 |      |     | $ | 507 |  
|                                                               |        |            |     |      |     |   |     |   |     | 

The Company experienced lower net investment income for the three months ended
March 31, 2002 as compared with the same period in 2001. The decrease was due
primarily to adverse results from a limited partnership, lower
portfolio yields and increased interest
costs on funds withheld and other deposits, which are described in
the Results of Operations. The
yield on the bond segment of the investment portfolio was 6.0% in the first
three months of 2002 as compared with 6.6% during the same period in 2001.

The components of net realized investment gains (losses) for the three months
ended March 31, 2002 and 2001 are presented in the following table.

Net Realized Investment Gains (Losses)

|                                                                 |                            |                                   |                                 |      |     |    |      |    |     |     |  | 
|---------------------------------------------------------------- | -------------------------- | --------------------------------- | ------------------------------- | ---- | --- | -- | ---- | -- | --- | --- |  | 
|Three months ended March 31                                      |                            | 2002                              |                                 | 2001
|                                                                 |                            |                                   |                                 |     
|(In millions)                                                    |                            |                                   |                                 |      |     |    |      |   
|Realized investment gains (losses):                              |                            |                                   |                                 |      |     |    |      |   
|                                                                 | Fixed maturity securities: |                                   |                                 |      |     |    |      |    |    
|                                                                 |                            | U.S. Government bonds             |                                 | $    | 5   |    |      | $  | 128 |    
|                                                                 |                            | Corporate and other taxable bonds |                                 |      | 9   |    |      |    | (8  | )  
|                                                                 |                            | Tax-exempt bonds                  |                                 |      | 2   |    |      |    | 53  |    
|                                                                 |                            | Asset-backed bonds                |                                 |      | 9   |    |      |    | 51  |    
|                                                                 |                            | Redeemable preferred stock        |                                 |      | (14 | )  |      |    |    |    
|                                                                 |                            |                                   |                                 |      |     |    |      |    |     |    
|                                                                 |                            |                                   | Total fixed maturity securities |      |     | 11 |      |    |     | 224 | 
|                                                                 | Equity securities          |                                   |                                 | 7    |     |    |      | 72 |    
|                                                                 | Derivative securities      |                                   |                                 | (21  | )   |    |      | (5 | )  
|                                                                 | Other invested assets      |                                   |                                 | 4    |     |    |      | 89 |    
|                                                                 |                            |                                   |                                 |      |     |    |      |    |     |    
|                                                                 |                            |                                   | Total realized investment gains |      |     | 1  |      |    |     | 380 | 
|Allocated to participating policyholders and minority interests |                            |                                   |                                |      |     |    | (9   | ) 
|Income tax benefit (expense)                                     |                            |                                   | 1                               |      |     |    | (134 | ) 
|                                                                 |                            |                                   |                                 |      |     |    |      |    |     |    
|Net realized investment gains                                    |                            | $                                 | 2                               |      |     | $  | 237  |   
|                                                                 |                            |                                   |                                 |      |     |    |      |    |     |    

Net realized investment gains decreased $235 million for the first quarter of
2002 compared with the same period in 2001. This change is due primarily to
decreased gains on the sales of fixed maturity securities and the absence of a
$58 million gain on the sale of the 180 Maiden Lane, New York, facility that
occurred in the first quarter of 2001.

39



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

A primary objective in the management of the fixed maturity portfolio is to
maximize total return relative to underlying liabilities and respective
liquidity needs. In achieving this goal, assets may be sold to take advantage
of market conditions or other investment opportunities or credit
considerations. This activity will produce realized gains and losses depending
on market conditions including interest rates.

Substantially all invested assets are marketable securities classified as
available-for-sale in the accompanying financial statements. Accordingly,
changes in fair value for these securities are reported in other comprehensive
income.

The following table presents the carrying values of the Companys investments
at March 31, 2002 and December 31, 2001, and the change in unrealized gains
(losses) of those securities included in other comprehensive income for the
three months ended March 31, 2002.

|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |      |  
|-------------------------------------------------------------------------- | --------------------------------------------------------------- | ---- | --------- | ------ | ------------ | ----- | -------- | ------ |  | - | ------------ | ---- | -
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   | Three Months
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   | Ended       
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   | March 31,   
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   | 2002        
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   | Change in   
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   | Unrealized  
|                                                                           |                                                                 |      | March 31, |        | December 31, |       | (Losses)
|General Account Investments                                                |                                                                 | 2002 |           | 2001   |              | Gains
|                                                                           |                                                                 |      |           |        |              |      
|(In millions)                                                              |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|Fixed maturity securities:                                                 |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|                                                                           | U.S. Treasury securities and obligations of government agencies |      | $         | 5,084  |              |       | $        | 5,081  |  |   | $            | (32  | )
|                                                                           | Asset-backed securities                                         |      |           | 8,227  |              |       |          | 7,723  |  |   |              | (124 | )
|                                                                           | Tax-exempt securities                                           |      |           | 3,088  |              |       |          | 2,720  |  |   |              | 1    |  
|                                                                           | Taxable securities                                              |      |           | 12,555 |              |       |          | 13,403 |  |   |              | (266 | )
|                                                                           | Redeemable preferred stock                                      |      |           | 52     |              |       |          | 48     |  |   |              | (3   | )
|                                                                           | Options embedded in convertible debt securities                 |      |           | 158    |              |       |          | 189    |  |   |              |     |  
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|Total fixed maturity securities                                            |                                                                 |      | 29,164    |        |              |       | 29,164   |        |  |   | (424         | )   
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|Equity securities:                                                         |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|                                                                           | Common stock                                                    |      |           | 881    |              |       |          | 996    |  |   |              | 30   |  
|                                                                           | Non-redeemable preferred stock                                  |      |           | 369    |              |       |          | 342    |  |   |              | (23  | )
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|Total equity securities                                                    |                                                                 |      | 1,250     |        |              |       | 1,338    |        |  |   | 7            |     
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|Short-term investments                                                     |                                                                 |      | 3,184     |        |              |       | 3,740    |        |  |   | (29          | )   
|Other investments                                                          |                                                                 |      | 1,616     |        |              |       | 1,584    |        |  |   |             |     
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|Total investments                                                          |                                                                 | $    | 35,214    |        |              | $     | 35,826   |        |  |   | (446         | )   
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|Separate account business and other                                        |                                                                 |      |           |        |              |       |          |        |  |   | (17          | )   
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |     
|Change in unrealized gains (losses) reported in other comprehensive income |                                                                 |      |           |        |              |       |          |        |  | $ | (463         | )   
|                                                                           |                                                                 |      |           |        |              |       |          |        |  |   |              |     

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

Investments in the general account had a total net unrealized loss of $101
million at March 31, 2002 compared with a net unrealized gain of $345 million
at December 31, 2001. The unrealized position at March 31, 2002 was composed
of a net unrealized loss of $230 million for fixed maturities, a net unrealized
loss of $48 million for short-term investments and a net unrealized gain of
$177 million for equity securities.

40



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

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

The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 92% of which were rated as investment grade at both March 31,
2002 and December 31, 2001. The following table summarizes the ratings of
CNAs general account bond portfolio at carrying value.

General Account Bond Ratings

|                                                 |  |           |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|------------------------------------------------ |  | --------- | ------ | - |  | ---- | --- | ------------ |  | - | ------ |  |  |  | --- | -
|                                                 |  | March 31, |        |   |  |      |     | December 31, |  |   |        | 
|                                                 |  | 2002      |        | % |  | 2001 |     | %           
|                                                 |  |           |        |   |  |      |     |             
|(In millions)                                    |  |           |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|U.S. Government and affiliated agency securities |  | $         | 5,575  |   |  |      | 19  | %            |  | $ | 5,715  |  |  |  | 20  | %
|Other AAA rated                                  |  |           | 9,854  |   |  |      | 34  |              |  |   | 9,204  |  |  |  | 32  |  
|AA and A rated                                   |  |           | 5,708  |   |  |      | 20  |              |  |   | 6,127  |  |  |  | 21  |  
|BBB rated                                        |  |           | 5,550  |   |  |      | 19  |              |  |   | 5,583  |  |  |  | 19  |  
|Below investment-grade                           |  |           | 2,425  |   |  |      | 8   |              |  |   | 2,487  |  |  |  | 8   |  
|                                                 |  |           |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|Total                                            |  | $         | 29,112 |   |  |      | 100 | %            |  | $ | 29,116 |  |  |  | 100 | %
|                                                 |  |           |        |   |  |      |     |              |  |   |        |  |  |  |     |  

Both at March 31, 2002 and December 31, 2001, approximately 98% of the general
account portfolio were U.S. Government agencies or were rated by Standard &
Poors (S&P) or Moodys Investors Service (Moodys). The remaining bonds were
rated by other rating agencies, outside brokers or Company management.

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

Included in CNAs general account fixed maturity securities at March 31, 2002
are $8,227 million of asset-backed securities, at fair value, consisting of
approximately 67% in collateralized mortgage obligations (CMOs), 11% in U.S.
Government agency issued pass-through certificates, 13% in corporate
asset-backed obligations and 9% in corporate mortgage-backed pass-through
certificates. The majority of CMOs held are actively traded in liquid markets
and are priced by broker-dealers.

41



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

Short-term investments at March 31, 2002 and December 31, 2001 consisted
primarily of commercial paper and money market funds. The carrying value of
the components of the general account short-term investment portfolio are
presented in the following table.

Short-term investments

|                             |  |           |       |              |  |   |       | 
|---------------------------- |  | --------- | ----- | ------------ |  | - | ----- | 
|                             |  | March 31, |       | December 31,
|                             |  | 2002      |       | 2001        
|                             |  |           |       |             
|(In millions)                |  |           |       |              |  |   |       | 
|Commercial paper             |  | $         | 1,716 |              |  | $ | 1,194 | 
|U.S. Treasury securities     |  |           |      |              |  |   | 175   | 
|Money market funds           |  |           | 695   |              |  |   | 1,641 | 
|Other                        |  |           | 773   |              |  |   | 730   | 
|                             |  |           |       |              |  |   |       | 
|Total short-term investments |  | $         | 3,184 |              |  | $ | 3,740 | 
|                             |  |           |       |              |  |   |       | 

CNA invests in certain derivative financial instruments primarily to reduce its
exposure to market risk (principally interest rate, equity price and foreign
currency risk). CNA considers the derivatives in its general account to be held
for purposes other than trading. Derivative securities are recorded at fair
value at the reporting date.

Most derivatives in separate accounts are held for trading purposes. The
Company uses these derivatives to mitigate market risk by purchasing Standard & Poors 500® (S&P 500®)
index futures in a notional amount equal to the contract liability relating to
Life Operations Index 500 guaranteed investment contract product.

Market Risk

Market risk is a broad term related to changes in the fair value of a financial
instrument. Discussions herein regarding market risk focus on only one element
of market risk - price risk. Price risk relates to changes in the level of
prices due to changes in interest rates, equity prices, foreign exchange rates
or other factors that relate to market volatility of the rate, index or price
underlying the financial instrument. The Companys primary market risk
exposures are due to changes in interest rates, although the Company has
certain exposures to changes in equity prices and foreign currency exchange
rates. The fair value of the financial instruments is adversely affected when
interest rates rise, equity markets decline and the dollar strengthens against
foreign currency.

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

For purposes of this disclosure, market risk sensitive instruments are divided
into two categories: (1) instruments entered into for trading purposes and (2)
instruments entered into for purposes other than trading. The Companys general
account market risk sensitive instruments presented are classified as held for
purposes other than trading.

42



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

Sensitivity Analysis

CNA monitors its sensitivity to interest rate risk by evaluating the change in
the value of financial assets and liabilities due to fluctuations in interest
rates. The evaluation is performed by applying an instantaneous change in
interest rates of varying magnitudes on a static balance sheet to determine the
effect such a change in rates would have on 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 change chosen
reflects the Companys view of changes that are reasonably possible over a
one-year period. The selection of the range of values chosen to represent
changes in interest rates should not be construed as the Companys prediction
of future market events, but rather an illustration of the impact of such
events.

The sensitivity analysis estimates the decline in the market value of the
Companys interest sensitive assets and liabilities that were held on March 31,
2002 and December 31, 2001 due to instantaneous parallel increases in the
period end yield curve of 100 and 150 basis points.

The sensitivity analysis also assumes an instantaneous 10% and 20% decline in
the foreign currency exchange rates versus the United States dollar from their
levels at March 31, 2002 and December 31, 2001, with all other variables held
constant.

Equity price risk was measured assuming an instantaneous 10% and 25% decline in
the S&P 500 Index (Index) from its level at March 31, 2002 and December 31,
2001 with all other variables held constant. The Companys equity holdings
were assumed to be highly and positively correlated with the Index. At March
31, 2002, a 10% and 25% decrease in the Index would result in a $394 million
and $986 million decrease compared to $366 million and $914 million decrease at
December 31, 2001, in the market rate of the Companys equity investments.

Of these amounts, under the 10% and 25% scenarios, $169 million and $423
million at March 31, 2002 and $163 million and $407 million at December 31,
2001 pertained to decreases in the market value of the separate account
investments. These decreases would substantially be offset by decreases in
related separate account liabilities to customers. Similarly, increases in the
market value of the separate account equity investments would also be offset by
increases in the same related separate account liabilities by the same
approximate amounts.

43



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

The following tables present the estimated effects on the market value of the
Companys financial instruments at March 31, 2002 and December 31, 2001, due to
an increase in interest rates of 100 basis points, a decline of 10% in foreign
currency exchange rates and a 10% decline in the Index.

|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | ------------------- | ------ | ------ | ------ | - | --- | --- | --- | - | ---- | ---- | ---- | -
|                                                          |                             |                         |        |           |        | Increase (Decrease)
|                                                          |                             |                         |        |           |        |                    
|Market Risk Scenario 1                                    |                             | Market                  |        | Interest  |        | Currency            |        | Equity
|March 31, 2002                                            |                             | Value                   |        | Rate Risk |        | Risk                |        | Risk  
|                                                          |                             |                         |        |           |        |                     |        |       
|(In millions)                                             |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|Held for Other Than Trading Purposes:                     |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|General account:                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         | $      | 29,164    |        |                     | $      | (1,612 | )      |   | $   | (43 | )   |   | $    | (47  | )   
|                                                          | Equity securities           |                         |        | 1,250     |        |                     |        |       |        |   |     | (29 | )   |   |      | (122 | )   
|                                                          | Short-term investments      |                         |        | 3,184     |        |                     |        | (2     | )      |   |     | (13 | )   |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 1,367     |        |                     |        | 54     |        |   |     |    |     |   |      | (56  | )   
|                                                          | Other invested assets       |                         |        | 247       |        |                     |        |       |        |   |     |    |     |   |      |     |     
|                                                          | Interest rate caps          |                         |        | 1         |        |                     |        | 2      |        |   |     |    |     |   |      |     |     
|                                                          | Interest rate swaps         |                         |        | 1         |        |                     |        | (6     | )      |   |     |    |     |   |      |     |     
|                                                          | Other derivative securities |                         |        |          |        |                     |        |       |        |   |     | 22  |     |   |      |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|                                                          |                             | Total general account   |        |           | 35,214 |                     |        |        | (1,564 | ) |     |     | (63 | ) |      |      | (225 | )
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Separate accounts:                                        |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 1,940     |        |                     |        | (113   | )      |   |     |    |     |   |      |     |     
|                                                          | Equity securities           |                         |        | 146       |        |                     |        |       |        |   |     |    |     |   |      | (15  | )   
|                                                          | Short-term investments      |                         |        | 105       |        |                     |        |       |        |   |     |    |     |   |      |     |     
|                                                          | Other invested assets       |                         |        | 538       |        |                     |        |       |        |   |     |    |     |   |      | (54  | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|                                                          |                             | Total separate accounts |        |           | 2,729  |                     |        |        | (113   | ) |     |     |    |   |      |      | (69  | )
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Total all securities held for other than trading purposes |                             |                         | 37,943 |           |        |                     | (1,677 | )      |        |   | (63 | )   |     |   | (294 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Held for Trading Purposes:                                |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|Separate accounts:                                        |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 261       |        |                     |        | (3     | )      |   |     |    |     |   |      | (9   | )   
|                                                          | Equity securities           |                         |        | 19        |        |                     |        |       |        |   |     |    |     |   |      | (2   | )   
|                                                          | Short-term investments      |                         |        | 270       |        |                     |        |       |        |   |     |    |     |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 352       |        |                     |        |       |        |   |     |    |     |   |      | (2   | )   
|                                                          | Equity indexed futures      |                         |        |          |        |                     |        | 2      |        |   |     |    |     |   |      | (87  | )   
|                                                          | Other derivative securities |                         |        |          |        |                     |        | (1     | )      |   |     |    |     |   |      |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Total all securities held for trading purposes            |                             |                         | 902    |           |        |                     | (2     | )      |        |   |    |     |     |   | (100 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Total all securities                                      |                             | $                       | 38,845 |           |        | $                   | (1,679 | )      |        | $ | (63 | )   |     | $ | (394 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Debt (carrying value)                                     |                             | $                       | 2,567  |           |        | $                   | (98    | )      |        | $ |    |     |     | $ |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     

44



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | ------------------- | ------ | ------ | ------ | - | --- | --- | --- | - | ---- | ---- | ---- | -
|                                                          |                             |                         |        |           |        | Increase (Decrease)
|                                                          |                             |                         |        |           |        |                    
|Market Risk Scenario 1                                    |                             | Market                  |        | Interest  |        | Currency            |        | Equity
|December 31, 2001                                         |                             | Value                   |        | Rate Risk |        | Risk                |        | Risk  
|                                                          |                             |                         |        |           |        |                     |        |       
|(In millions)                                             |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|Held for Other Than Trading Purposes:                     |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|General account:                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         | $      | 29,164    |        |                     | $      | (1,500 | )      |   | $   | (38 | )   |   | $    | (20  | )   
|                                                          | Equity securities           |                         |        | 1,338     |        |                     |        |       |        |   |     | (23 | )   |   |      | (129 | )   
|                                                          | Short-term investments      |                         |        | 3,740     |        |                     |        | (1     | )      |   |     | (14 | )   |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 1,307     |        |                     |        | 51     |        |   |     |    |     |   |      | (54  | )   
|                                                          | Other invested assets       |                         |        | 258       |        |                     |        |       |        |   |     |    |     |   |      |     |     
|                                                          | Interest rate caps          |                         |        | 2         |        |                     |        | 2      |        |   |     |    |     |   |      |     |     
|                                                          | Interest rate swaps         |                         |        | 3         |        |                     |        | (9     | )      |   |     |    |     |   |      |     |     
|                                                          | Other derivative securities |                         |        | 14        |        |                     |        | (12    | )      |   |     | 18  |     |   |      |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|                                                          |                             | Total general account   |        |           | 35,826 |                     |        |        | (1,469 | ) |     |     | (57 | ) |      |      | (203 | )
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Separate accounts:                                        |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 2,039     |        |                     |        | (120   | )      |   |     |    |     |   |      |     |     
|                                                          | Equity securities           |                         |        | 149       |        |                     |        |       |        |   |     |    |     |   |      | (15  | )   
|                                                          | Short-term investments      |                         |        | 98        |        |                     |        |       |        |   |     |    |     |   |      |     |     
|                                                          | Other invested assets       |                         |        | 533       |        |                     |        |       |        |   |     |    |     |   |      | (53  | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|                                                          |                             | Total separate accounts |        |           | 2,819  |                     |        |        | (120   | ) |     |     |    |   |      |      | (68  | )
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Total all securities held for other than trading purposes |                             |                         | 38,645 |           |        |                     | (1,589 | )      |        |   | (57 | )   |     |   | (271 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Held for Trading Purposes:                                |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|Separate accounts:                                        |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 308       |        |                     |        | (5     | )      |   |     |    |     |   |      | (5   | )   
|                                                          | Equity securities           |                         |        | 12        |        |                     |        |       |        |   |     |    |     |   |      | (1   | )   
|                                                          | Short-term investments      |                         |        | 296       |        |                     |        |       |        |   |     |    |     |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 342       |        |                     |        |       |        |   |     |    |     |   |      | (2   | )   
|                                                          | Equity indexed futures      |                         |        |          |        |                     |        | 2      |        |   |     |    |     |   |      | (87  | )   
|                                                          | Other derivative securities |                         |        | 1         |        |                     |        | 1      |        |   |     |    |     |   |      |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Total all securities held for trading purposes            |                             |                         | 959    |           |        |                     | (2     | )      |        |   |    |     |     |   | (95  | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Total all securities                                      |                             | $                       | 39,604 |           |        | $                   | (1,591 | )      |        | $ | (57 | )   |     | $ | (366 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     
|Debt (carrying value)                                     |                             | $                       | 2,567  |           |        | $                   | (104   | )      |        | $ |    |     |     | $ |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |     |     |     |   |      |      |     

45



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

The following tables present the estimated effects on the market value of the
Companys financial instruments at March 31, 2002 and December 31, 2001, due to
an increase in interest rates of 150 basis points, a decline of 20% in foreign
currency exchange rates and a 25% decline in the Index.

|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | ------------------- | ------ | ------ | ------ | - | ---- | --- | ---- | - | ---- | ---- | ---- | -
|                                                          |                             |                         |        |           |        | Increase (Decrease)
|                                                          |                             |                         |        |           |        |                    
|Market Risk Scenario 2                                    |                             | Market                  |        | Interest  |        | Currency            |        | Equity
|March 31, 2002                                            |                             | Value                   |        | Rate Risk |        | Risk                |        | Risk  
|                                                          |                             |                         |        |           |        |                     |        |       
|(In millions)                                             |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|Held for Other Than Trading Purposes:                     |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|General account:                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|                                                          | Fixed maturity securities   |                         | $      | 29,164    |        |                     | $      | (2,429 | )      |   | $    | (85 | )    |   | $    | (117 | )   
|                                                          | Equity securities           |                         |        | 1,250     |        |                     |        |       |        |   |      | (58 | )    |   |      | (306 | )   
|                                                          | Short-term investments      |                         |        | 3,184     |        |                     |        | (2     | )      |   |      | (26 | )    |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 1,367     |        |                     |        | 81     |        |   |      |    |      |   |      | (140 | )   
|                                                          | Other invested assets       |                         |        | 247       |        |                     |        |       |        |   |      |    |      |   |      |     |     
|                                                          | Interest rate caps          |                         |        | 1         |        |                     |        | 3      |        |   |      |    |      |   |      |     |     
|                                                          | Interest rate swaps         |                         |        | 1         |        |                     |        | (9     | )      |   |      |    |      |   |      |     |     
|                                                          | Other derivative securities |                         |        |          |        |                     |        |       |        |   |      | 43  |      |   |      |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|                                                          |                             | Total general account   |        |           | 35,214 |                     |        |        | (2,356 | ) |      |     | (126 | ) |      |      | (563 | )
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Separate accounts:                                        |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 1,940     |        |                     |        | (168   | )      |   |      |    |      |   |      |     |     
|                                                          | Equity securities           |                         |        | 146       |        |                     |        |       |        |   |      |    |      |   |      | (37  | )   
|                                                          | Short-term investments      |                         |        | 105       |        |                     |        |       |        |   |      |    |      |   |      |     |     
|                                                          | Other invested assets       |                         |        | 538       |        |                     |        |       |        |   |      |    |      |   |      | (134 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|                                                          |                             | Total separate accounts |        |           | 2,729  |                     |        |        | (168   | ) |      |     |     |   |      |      | (171 | )
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Total all securities held for other than trading purposes |                             |                         | 37,943 |           |        |                     | (2,524 | )      |        |   | (126 | )   |      |   | (734 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Held for Trading Purposes:                                |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|Separate accounts:                                        |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 261       |        |                     |        | (4     | )      |   |      |    |      |   |      | (23  | )   
|                                                          | Equity securities           |                         |        | 19        |        |                     |        |       |        |   |      |    |      |   |      | (5   | )   
|                                                          | Short-term investments      |                         |        | 270       |        |                     |        |       |        |   |      |    |      |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 352       |        |                     |        |       |        |   |      |    |      |   |      | (6   | )   
|                                                          | Equity indexed futures      |                         |        |          |        |                     |        | 3      |        |   |      |    |      |   |      | (218 | )   
|                                                          | Other derivative securities |                         |        |          |        |                     |        | (2     | )      |   |      |    |      |   |      |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Total all securities held for trading purposes            |                             |                         | 902    |           |        |                     | (3     | )      |        |   |     |     |      |   | (252 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Total all securities                                      |                             | $                       | 38,845 |           |        | $                   | (2,527 | )      |        | $ | (126 | )   |      | $ | (986 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Debt (carrying value)                                     |                             | $                       | 2,567  |           |        | $                   | (142   | )      |        | $ |     |     |      | $ |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     

46



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | ------------------- | ------ | ------ | ------ | - | ---- | --- | ---- | - | ---- | ---- | ---- | -
|                                                          |                             |                         |        |           |        | Increase (Decrease)
|                                                          |                             |                         |        |           |        |                    
|Market Risk Scenario 2                                    |                             | Market                  |        | Interest  |        | Currency            |        | Equity
|December 31, 2001                                         |                             | Value                   |        | Rate Risk |        | Risk                |        | Risk  
|                                                          |                             |                         |        |           |        |                     |        |       
|(In millions)                                             |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|Held for Other Than Trading Purposes:                     |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|General account:                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|                                                          | Fixed maturity securities   |                         | $      | 29,164    |        |                     | $      | (2,203 | )      |   | $    | (75 | )    |   | $    | (51  | )   
|                                                          | Equity securities           |                         |        | 1,338     |        |                     |        |       |        |   |      | (47 | )    |   |      | (322 | )   
|                                                          | Short-term investments      |                         |        | 3,740     |        |                     |        | (1     | )      |   |      | (28 | )    |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 1,307     |        |                     |        | 77     |        |   |      |    |      |   |      | (134 | )   
|                                                          | Other invested assets       |                         |        | 258       |        |                     |        |       |        |   |      |    |      |   |      |     |     
|                                                          | Interest rate caps          |                         |        | 2         |        |                     |        | 3      |        |   |      |    |      |   |      |     |     
|                                                          | Interest rate swaps         |                         |        | 3         |        |                     |        | (14    | )      |   |      |    |      |   |      |     |     
|                                                          | Other derivative securities |                         |        | 14        |        |                     |        | (17    | )      |   |      | 36  |      |   |      |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|                                                          |                             | Total general account   |        |           | 35,826 |                     |        |        | (2,155 | ) |      |     | (114 | ) |      |      | (507 | )
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Separate accounts:                                        |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 2,039     |        |                     |        | (176   | )      |   |      |    |      |   |      |     |     
|                                                          | Equity securities           |                         |        | 149       |        |                     |        |       |        |   |      |    |      |   |      | (37  | )   
|                                                          | Short-term investments      |                         |        | 98        |        |                     |        |       |        |   |      |    |      |   |      |     |     
|                                                          | Other invested assets       |                         |        | 533       |        |                     |        |       |        |   |      |    |      |   |      | (133 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|                                                          |                             | Total separate accounts |        |           | 2,819  |                     |        |        | (176   | ) |      |     |     |   |      |      | (170 | )
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Total all securities held for other than trading purposes |                             |                         | 38,645 |           |        |                     | (2,331 | )      |        |   | (114 | )   |      |   | (677 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Held for Trading Purposes:                                |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|Separate accounts:                                        |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 308       |        |                     |        | (7     | )      |   |      |    |      |   |      | (12  | )   
|                                                          | Equity securities           |                         |        | 12        |        |                     |        |       |        |   |      |    |      |   |      | (2   | )   
|                                                          | Short-term investments      |                         |        | 296       |        |                     |        |       |        |   |      |    |      |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 342       |        |                     |        |       |        |   |      |    |      |   |      | (6   | )   
|                                                          | Equity indexed futures      |                         |        |          |        |                     |        | 3      |        |   |      |    |      |   |      | (217 | )   
|                                                          | Other derivative securities |                         |        | 1         |        |                     |        | 2      |        |   |      |    |      |   |      |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Total all securities held for trading purposes            |                             |                         | 959    |           |        |                     | (2     | )      |        |   |     |     |      |   | (237 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Total all securities                                      |                             | $                       | 39,604 |           |        | $                   | (2,333 | )      |        | $ | (114 | )   |      | $ | (914 | )   
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     
|Debt (carrying value)                                     |                             | $                       | 2,567  |           |        | $                   | (151   | )      |        | $ |     |     |      | $ |     |     
|                                                          |                             |                         |        |           |        |                     |        |        |        |   |      |     |      |   |      |      |     

Liquidity and Capital Resources

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

For the three months ended March 31, 2002 net cash used in operating activities
was $78 million as compared with $180 million for the same period in 2001. The
improvement related primarily to increased premium receipts.

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

For the three months ended March 31, 2002, net cash inflows from investing
activities was $35 million as compared with $331 million for the same period in
2001. Cash inflows from investing activities for the three months ended March
31, 2001 included net sale proceeds of

47



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

$264 million related to the sale of the 180 Maiden Lane, New York, facility
effective January 30, 2001.

Cash flows from financing activities include proceeds from the issuance of debt
or equity securities, outflows for dividends or repayment of debt and outlays
to reacquire equity instruments. For the three months ended March 31, 2002, net
cash used in financing activities was $5 million as compared with $172 million
for the same period in 2001. Cash used in financing for the three months ended
March 31, 2001 included $149 million of principal payments on debt.

The Company is closely managing the cash flows related to claims and
reinsurance recoverables from the WTC event. It is anticipated that
significant claim payments will be made prior to receipt of the corresponding
reinsurance recoverables. The Company does not anticipate any liquidity
problems resulting from these payments. Approximately 41%, 39% and 17% of the
reinsurance recoverables on the estimated losses related to the WTC event are
from companies with S&P ratings of AAA, AA or A. As of May 3, 2002, the
Company has paid $294 million in claims and recovered $135 million from
reinsurers.

The Companys long-term debt and capital lease obligations are composed of the
following.

Debt

|                                                              |                               |   |           |     |              |   |       |     | 
|------------------------------------------------------------- | ----------------------------- | - | --------- | --- | ------------ | - | ----- | --- | 
|                                                              |                               |   | March 31, |     | December 31,
|                                                              |                               |   | 2002      |     | 2001        
|                                                              |                               |   |           |     |             
|(In millions)                                                 |                               |   |           |     |              |   |       |    
|Variable rate debt:                                           |                               |   |           |     |              |   |       |    
|                                                              | Credit facility  CNAF        |   | $         | 500 |              |   | $     | 500 | 
|                                                              | Credit facility  CNA Surety  |   |           | 75  |              |   |       | 75  | 
|Senior notes:                                                 |                               |   |           |     |              |   |       |    
|                                                              | 7.250%, due March 1, 2003     |   |           | 133 |              |   |       | 133 | 
|                                                              | 6.250%, due November 15, 2003 |   |           | 250 |              |   |       | 250 | 
|                                                              | 6.500%, due April 15, 2005    |   |           | 491 |              |   |       | 491 | 
|                                                              | 6.750%, due November 15, 2006 |   |           | 249 |              |   |       | 249 | 
|                                                              | 6.450%, due January 15, 2008  |   |           | 149 |              |   |       | 149 | 
|                                                              | 6.600%, due December 15, 2008 |   |           | 199 |              |   |       | 199 | 
|                                                              | 8.375%, due August 15, 2012   |   |           | 68  |              |   |       | 68  | 
|                                                              | 6.950%, due January 15, 2018  |   |           | 148 |              |   |       | 148 | 
|Debenture, 7.250%, due November 15, 2023  CNAF               |                               |   | 240       |     |              |   | 240   |    
|Capital leases, 8.000%-19.980%, due through December 31, 2011 |                               |   | 38        |     |              |   | 38    |    
|Other debt, 1.000%-8.500%, due through 2019                   |                               |   | 27        |     |              |   | 27    |    
|                                                              |                               |   |           |     |              |   |       |    
|Total debt                                                    |                               | $ | 2,567     |     |              | $ | 2,567 |    
|                                                              |                               |   |           |     |              |   |       |     | 

The Company has an existing shelf registration statement under which the
Company may issue an aggregate of $549 million of debt or equity securities, declared
effective by the Securities and Exchange Commission.

The Companys $500 million revolving credit facility is composed of two parts:
a $250 million 364-day component with an expiration date of April 29, 2002
(with an option enabling CNAF to convert borrowings into a one-year term loan)
and a $250 million three-year component with an April 30, 2004 expiration date.
The option to convert the 364-day facility to a one-year term loan was
exercised in April 2002. The term loan begins on April 29, 2002 and expires on
April 29, 2003.

The Company pays a facility fee to the lenders for having funds available for
loans under both components of the facility. The fee varies based on the
long-term debt ratings of the Company.

48



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

At March 31, 2002, the facility fee on the 364-day component was 15.0 basis
points and the facility fee on the three-year component was 17.5 basis points.
The facility fee paid to the lenders during the 364-day component commitment
period is not payable with respect to any period of time during which the
one-year term loan is in effect.

In addition to the facility fees, the Company pays interest on any outstanding
debt/borrowings under the facility based on a rate determined using the
long-term debt ratings of the Company. The interest rate is equal to the
London Interbank Offering Rate (LIBOR) plus 60 basis points for the 364-day
component and LIBOR plus 57.5 basis points for the three-year component.
Further, if the Company has outstanding loans greater than 50% of the amounts
available under the facility, the Company will also pay a utilization fee of
12.5 basis points on such loans.

A Moodys downgrade of the CNAF senior debt rating from Baa2 to Baa3 would
increase the facility fee on the three-year component of the facility from 17.5
basis points to 25 basis points. The applicable interest rate on the one-year
term loan would increase from LIBOR plus 60 basis points to LIBOR plus 80 basis
points and the applicable interest rate on the three-year facility component
would increase from LIBOR plus 57.5 basis points to LIBOR plus 75 basis points.
The utilization fee would remain unchanged on both components at 12.5 basis
points.

The terms of CNAs credit facility requires the Company to maintain certain
financial ratios and combined property-casualty company statutory surplus
levels. At March 31, 2002 and 2001, CNA was in compliance with all restrictive
debt covenants.

In the normal course of business, CNA has obtained letters of credit in favor
of various unaffiliated insurance companies, regulatory authorities and other
entities. At March 31, 2002 there were approximately $270 million of
outstanding letters of credit.

The Company has committed approximately $181 million to future capital calls
from various third-party limited partnership investments in exchange for an
ownership interest in the related partnerships.

The Company has a commitment to purchase a $100 million floating rate note
issued by the California Earthquake Authority in the event California
earthquake-related insurance losses exceed $4.9 billion prior to December 31,
2002.

The Company is obligated to future payments totaling $516 million for
non-cancelable operating leases expiring from 2002 through 2014 primarily for
office space and data processing, office and transportation equipment.
Estimated future minimum payments under these contracts are as follows: $81
million in 2002; $94 million in 2003; $74 million in 2004; $64 million in 2005;
and $203 million in 2006 and beyond.

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

49



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

The table below reflects ratings issued by A.M. Best, S&P, Moodys and Fitch as
of April 22, 2002 for the CCC Pool, the Continental Insurance Company (CIC)
Pool and the Continental Assurance Company (CAC) Pool. Also rated were CNAFs senior debt and commercial paper
and The Continental Corporation (Continental) senior debt.

|          |  |                    |    |          |  |                |    |        |    |            |    |        |  |              |    |       |    |      |  |      |  |  |  | 
|--------- |  | ------------------ | -- | -------- |  | -------------- | -- | ------ | -- | ---------- | -- | ------ |  | ------------ | -- | ----- | -- | ---- |  | ---- |  |  |  | 
|          |  |                    |    |          |  |                |    |        |    |            |    |        |  | Debt Ratings
|          |  |                    |    |          |  |                |    |        |    |            |    |        |  |             
|          |  | Insurance Ratings  |    | CNAF     |  |               
|          |  |                    |    |          |  | Continental   
|          |  | CCC Pool           |    | CAC Pool |  | CIC Pool       |    | Senior |    | Commercial |    | Senior
|          |  | Financial Strength |    | Debt     |  | Paper          |    | Debt  
|          |  |                    |    |          |  |                |    |       
|A.M. Best |  |                    | A  |          |  |                | A  |        |    |            | A  |        |  | BBB          |    | AMB-2 |    | BBB-
|Fitch     |  |                    | A  |          |  | AA-            |    |        | A  |            |    | BBB    |  | NR           |    | BBB  
|Moodys   |  |                    | A3 |          |  | A2 (Negative)* |    |        | A3 |            |    | Baa2   |  |              | P2 |       |    | Baa3
|S&P       |  |                    | A- |          |  |                | A+ |        |    |            | A- |        |  | BBB-         |    |       | A3 |      |  | BBB-

NR = Not Rated*     CAC and Valley Forge Life Insurance Company (VFL) are rated separately by
Moodys and both have an A2 rating.

On March 26, 2002, Fitch assigned an A stable insurer financial strength
rating for the CIC Pool, and a BBB rating for Continental senior debt. Prior
to this date both the CIC Pool and the Continental debt were not rated by
Fitch.

CCC has entered into an agreement, effective January 24, 2002, to guarantee the
policyholder obligations of CNA Insurance Company Limited, CNA Insurance
Company (Europe) Limited (CIE) and Maritime Insurance Company Limited
(Maritime) in order to preserve their S&P rating of A-. This agreement
remains in force until the earlier of December 2007, or such time as the
companies are informed in writing by S&P that the guarantee is no longer
required to maintain the rating for CIE and Maritime consistent with the rating
of CCC. This agreement received the approval of the Illinois Department of
Insurance (the Department) in April 2002. Upon receiving the Department
approval, S&P reaffirmed the above-mentioned companies rating of A- and
assigned a stable outlook.

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

Dividends from the CCC Pool are subject to the insurance holding company laws
of the State of Illinois, the domiciliary state of CCC. Under these laws,
ordinary dividends, or dividends that do not require prior approval of the
Department, may be paid only from earned surplus, which is calculated by
removing unrealized gains (which under statutory accounting includes cumulative
earnings of CCCs subsidiaries) from unassigned surplus. As of March 31, 2002,
CCC is in a negative earned surplus position. In February 2002, the Department
approved an extraordinary dividend in the amount of $117 million to be used to
fund CNAFs 2002 debt service requirements. Until CCC is in a positive earned
surplus position, all dividends require prior approval of the Department.

In addition, by agreement with the New Hampshire Insurance Department, as well
as certain other state insurance departments, dividend payments for the CIC
Pool are restricted to internal and external debt service requirements through
September 2003 up to a maximum of $85 million annually, without the prior
approval of the New Hampshire Insurance Department.

50



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued

Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 changes the accounting for goodwill and indefinite-lived
intangible assets from an amortization method to an impairment-only approach.
Amortization of goodwill and indefinite-lived intangible assets, including
goodwill recorded in past business combinations, ceased upon adoption of SFAS
142, which for CNA was January 1, 2002. As permitted by SFAS 142, the Company
will complete goodwill and other acquired intangible asset impairment tests in
2002. Goodwill and other intangible assets of $247 million, which is reflected on the March 31, 2002
Condensed Consolidated Balance Sheet, will be tested for impairment. Any resulting asset
impairments will be recorded as a cumulative effect
of a change in accounting principle as of January 1, 2002. If the provisions
of SFAS 142, regarding no longer amortizing goodwill and indefinite-lived
intangible assets, were applied to prior periods, net income for the first
three months of 2001 would have been $300 million and basic and diluted
earnings per share would have been $1.64 per share.

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Effective
January 1, 2002, CNA adopted this statement for all impairments of long-lived
assets and for long-lived assets to be disposed of occurring after January 1,
2002. The adoption of SFAS 144 did not have a significant impact on the net
income or financial position of the Company; however, it did impact the income
statement presentation of certain operations sold in 2002.

FORWARD LOOKING STATEMENTS

This quarterly report includes a number of statements which relate to
anticipated future events (forward-looking statements) rather than actual
present conditions or historical events. You can identify forward-looking
statements because generally they include words such as believes, expects,
intends, anticipates, estimates, and similar expressions. Forward-looking
statements in this quarterly report include expected losses in the Companys
insurance business, including losses for asbestos, environmental pollution and
other mass tort claims; the Companys expectations concerning its revenues,
earnings, expenses and investment activities; expected cost savings and other
results from the Companys restructuring activities; and expected proceeds and
terms of, and other matters concerning, the Companys planned disposition of
its U.K. reinsurance business; and the Companys proposed actions in response
to trends in its business.

Forward-looking statements, by their nature, are subject to a variety of
inherent risks and uncertainties that could cause actual results to differ
materially from the results projected. Many of these risks and uncertainties
cannot be controlled by the Company. Some examples of these risks and
uncertainties are:



| |  | general economic and business conditions;                                                                                                       
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | changes in financial markets such as fluctuations in interest rates,
credit conditions and currency, commodity and stock prices;                
| 
| |  | the effects of the Enron bankruptcy on energy and capital markets, and
on the markets for directors & officers and errors & omissions
coverages;

51



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##### 



CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continued



| |  | changes in foreign or domestic political, social and economic
conditions, including the possible occurrence of terrorist attacks;                                                                                           
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | regulatory initiatives and compliance with governmental regulations,
judicial decisions and rulings;                                                                                                                        
| 
| |  | regulatory limitations and restrictions upon the Company;                                                                                                                                                                   
| 
| |  | the impact of competitive products, policies and pricing and the
competitive environment in which the Company operates;                                                                                                     
| 
| |  | product and policy availability and demand and market responses,
including the effect of the absence of applicable terrorism
legislation on coverages;                                                                      
| 
| |  | development of claims and the impact on loss reserves;                                                                                                                                                                      
| 
| |  | the performance of reinsurance companies under reinsurance contracts
with the Company;                                                                                                                                      
| 
| |  | results of financing efforts;                                                                                                                                                                                               
| 
| |  | changes in the Companys composition of operation segments;                                                                                                                                                                 
| 
| |  | exposure to liabilities due to claims made by insured and others
relating to asbestos remediation and health-based asbestos
impairments, and exposure to liabilities for environmental pollution
and other mass tort claims;
| 
| |  | the sufficiency of the Companys loss reserves and the possibility of
future increases in reserves;                                                                                                                         
| 
| |  | the possibility of changes in the Companys ratings by ratings
agencies and changes in rating agency policies and practices; and                                                                                            
| 
| |  | the actual closing of contemplated transactions and agreements.                                                                                                                                                             

Any forward-looking statements made in this quarterly report are made by the
Company as of the date of this quarterly report. The Company does not have any
obligation to update or revise any forward-looking statement contained in this
quarterly report, even if the Companys expectations or any related events,
conditions or circumstances change.

52



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##### 



CNA FINANCIAL CORPORATION
Part II Other Information

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

None

(b)  Reports on Form 8-K:

On January 25, 2002, CNA Financial Corporation filed a report on Form 8-K
announcing its preliminary 2001 fourth quarter and year end results.

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: |  | May 10, 2002 |  | By: /s/
Robert V. Deutsch   
|      |  |              |  | Robert V. Deutsch           
|      |  |              |  | Executive Vice President and
|      |  |              |  | Chief Financial Officer     

53