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, 2001   
Commission File Number 1-5823 __________________________  CNA FINANCIAL CORPORATION (Exact name of registrant as specified in its charter)  Delaware
  36-6169860(State
  or other jurisdiction of
  (I.R.S.
  Employerincorporation
  or organization)
  Identification
  No.)CNA PlazaChicago,
  Illinois
  60685(Address
  of principal executive offices)
  (Zip
  Code)
  (312)
822-5000(Registrant's
telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YesTNo£  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 April 30, 2001Common
  Stock, Par value $2.50
  183,264,248
   CNA
FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS



(In millions, except share data)
  (Unaudited)March 31,
  December 31,2001
  2000Assets:Investments:Fixed maturity securities available-for-sale (amortized cost of
  $26,541 and $26,579)
  $26,885
  $26,652Equity securities available-for-sale (cost
  of $1,164 and $1,175)
  2,368
  2,412Mortgage loans and real estate (less accumulated depreciation of $1
  and $1)
  26
  26Policy loans
  193
  193Other invested assets
  1,383
  1,116Short-term investments
  6,231
  4,723Total investments
  37,086
  35,122Cash
  and cash equivalents
  142
  163Receivables:Reinsurance
  9,537
  9,397Insurance
  5,078
  5,026Less
  allowance for doubtful accounts
  (317)
  (321)Accrued
  investment income
  377
  404Receivables for securities sold
  1,099
  424Deferred acquisition costs
  2,436
  2,418Prepaid
  reinsurance premiums
  1,665
  1,445Federal
  income taxes recoverable (includes $0 and $25 due from Loews)
  -
  15Deferred income taxes
  446
  503Property and equipment at cost (less accumulated depreciation of $764
  and $802)
  519
  716Intangibles
  302
  317Other
  assets
  2,292
  2,152Separate account business
  3,886
  4,287Total assets
  $64,548
  $62,068Liabilities and Stockholders'
  Equity:Liabilities:Insurance reserves:Claim and claim adjustment expense
  $26,461
  $26,962Unearned premiums
  4,876
  4,821Future policy benefits
  6,827
  6,669Policyholders' funds
  590
  602Collateral
  on loaned securities and derivatives
  2,984
  1,308Payables for securities purchased
  1,146
  593Participating policyholders' equity
  140
  131Debt
  2,580
  2,729Federal
  income taxes payable (includes: $137 and $0 due to Loews)
  144
  -Other
  liabilities
  4,571
  4,102Separate account business
  3,886
  4,287Total liabilities
  54,205
  52,204Commitments and contingencies (Note E)Minority interest
  225
  217Stockholders' equity:Common
  stock ($2.50 par value; 500,000,000 shares authorized;185,525,907
  shares issued; and 183,264,248 and 183,263,873 sharesoutstanding
  at March 31, 2001 and December 31, 2000)
  464
  464Additional paid-in capital
  126
  126Retained earnings
  8,622
  8,327Accumulated other comprehensive income
  1,050
  873Treasury stock, at cost
  (71)
  (71)10,191
  9,719Notes
  receivable for the issuance of common stock
  (73)
  (72)Total stockholders' equity
  10,118
  9,647Total liabilities and stockholders' equity
  $64,548
  $62,068



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

CNA
FINANCIAL CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)



Three months ended March 31
  2001
  2000(In millions, except per share data)Revenues:Net
  earned premiums
  $2,531
  $2,770Net
  investment income
  517
  532Realized investment gains, net of participating policyholders'
  and minority interests
  371
  33Other
  revenues
  193
  156Total revenues
  3,612
  3,491Claims, Benefits and Expenses:Insurance claims and policyholders' benefits
  2,111
  2,343Amortization of deferred acquisition costs
  424
  393Other
  operating expenses
  487
  496Interest
  43
  52Total claims, benefits and expenses
  3,065
  3,284Income before income tax, minority interest and
  cumulative effect of a change in accounting principle
  547
  207Income tax expense
  (185)
  (60)Minority interest
  (6)
  (6)Income before cumulative effect of a change in
  accounting principle
  356
  141Cumulative effect of a change in accounting
  principle, net of tax of $33
  (61)
  -Net income
  $295
  $141Basic and Diluted Earnings Per
  Share:Income
  before cumulative effect of a change in accounting principle
  $1.95
  $0.76Cumulative effect of a change in accounting principle, net of tax
  (0.34)
  -Basic and diluted earnings per
  shareavailable to common stockholders
  $1.61
  $0.76Weighted average outstandingcommon stock and common stock equivalents
  183.3
  184.2



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

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



Three months ended March 31
  2001
  2000(In millions)Cash Flows used by Operating
  Activities:Net
  income
  $295
  $141Adjustments to reconcile net incometo net cash flows used by operating activities:Cumulative effect of change in accounting principle, net of tax
  61
  -Minority interest
  6
  6Deferred income tax provision
  19
  36Net
  realized investment gains
  (371)
  (33)Amortization of intangibles
  5
  6Amortization of bond discount
  (60)
  (59)Depreciation
  39
  40Changes in:Receivables, net
  (196)
  (1,281)Deferred acquisition costs
  (26)
  (117)Accrued investment income
  27
  28Federal income taxes recoverable/payable
  159
  167Prepaid reinsurance premiums
  (220)
  (126)Insurance reserves
  (266)
  917Other
  405
  (217)Total adjustments
  (418)
  (633)Net cash flows used by operating
  activities
  (123)
  (492)Cash Flows from Investing
  Activities:Purchases of fixed maturity securities
  (23,406)
  (7,885)Proceeds from fixed maturity securities:Sales
  16,882
  8,769Maturities, calls and redemptions
  6,657
  585Purchases of equity securities
  (312)
  (621)Proceeds from sales of equity securities
  291
  608Change
  in short-term investments
  (1,462)
  (2,314)Change
  in collateral on loaned securities and derivatives
  1,676
  1,554Change
  in other investments
  (307)
  46Purchases of property and equipment
  (38)
  (106)Sales
  of property and equipment
  258
  -Acquisitions, net of cash acquired
  6
  (11)Other,
  net
  27
  47Net cash flows from investing
  activities
  272
  672Cash Flows used by Financing
  Activities:Dividends paid to preferred stockholders
  -
  (1)Purchase of treasury stock
  -
  (30)Receipts from investment contracts credited to policyholder account
  balances
  1
  1Return
  of policyholder account balances on investment contracts
  (21)
  (38)Principal payments on debt
  (149)
  (7)Redemption of preferred stock
  -
  (79)Accrued
  interest on notes receivable for issuance of common stock
  (1)
  -Net cash flows used by financing
  activities
  (170)
  (154)Net change in cash and cash equivalents
  (21)
  26Cash and cash equivalents, beginning of year
  163
  153Cash and cash equivalents, end
  of period
  $142
  $179Supplemental Disclosures of Cash
  Flow Information:Cash
  paid (received):Interest
  $26
  $18Federal income taxes
  (9)
  (135)

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

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 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, 2001, Loews Corporation
(Loews) owned approximately 87% 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, but that is not required
for interim reporting purposes, 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, 2000 (incorporated by reference in Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 2000).

The interim financial data as of March 31,
2001 and for the three months ended March 31, 2001 and March 31, 2000 is
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 presentation followed in 2001.

During the first quarter of 2001, the Company
reclassified equity method income from limited partnership investments.  This income was previously classified in realized
investment gains, net of participating policyholders and minority interests
and is now classified in net investment income.  The after-tax impact of this reclassification on net operating
income was an increase of $24 million and $36 million for the three
months ended March 31, 2001 and 2000.

Net investment income and realized investment
gains, net of participating policyholders and minority interests is composed
of the following for the quarters ended March 31, 2001 and 2000.



Net Investment Income and
  Realized Investment Gains,Net of Participating Policyholders' and Minority InterestsThree months ended March 31
  2001
  2000(In millions)Fixed maturity securities
  $451
  $439Short-term investments
  42
  32Limited partnerships
  36
  56Other
  4
  19Gross investment income
  533
  546Investment expense
  (16)
  (14)Net investment income
  $517
  $532Realized investment gains, net of participating
  policyholders' and minority interests
  $371
  $33

Note B.  Accounting
Pronouncements

In the first quarter of 2001, the Company
adopted the Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities and Statement of Financial Accounting Standards No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities
(collectively referred to as SFAS 133). 
The Companys initial adoption of SFAS 133 did not have a significant
impact on the equity of the Company; however, adoption of SFAS 133 resulted in
an after-tax decrease to first quarter 2001 earnings of $61 million. Of
this transition amount, approximately $58 million related to investments
and investment-related derivatives. 
Because the Company already carried its investment and
investment-related derivatives at fair value through other comprehensive
income, there was an equal and offsetting favorable adjustment of
$58 million to stockholders equity (accumulated other comprehensive
income).  See Note D for a complete
discussion of the Companys adoption of these accounting pronouncements.

On January 1, 2001, the Company adopted the
Codification of Statutory Accounting Principles (Codification) for preparing
its statutory-basis financial statements. 
Codification, which is intended to standardize regulatory accounting and
reporting to state insurance departments, was effective
January 1, 2001.  However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices.  The
states in which CNAFs insurance subsidiaries conduct business required
adoption of Codification (with certain modifications) for the preparation of
statutory-basis financial statements effective January 1, 2001.  The Companys adoption of Codification, as
modified, resulted in an increase in statutory capital and surplus as of
January 1, 2001 of approximately $175 million, which primarily
relates to deferred tax assets, partially offset by insurance-related
assessments and pension-related liabilities.

Additionally, CNAs property-casualty
companies implemented a change, effective January 1, 2001, in the
timing of recording written premiums for policies with future effective
dates.  This change was made in
conjunction with changes required by Codification related to the recording of
written premiums.  The effect of this
change was to reduce net written premiums by $113 million for the three
months ended March 31, 2001.  This
change has no impact on net earned premiums or net income.

Note C.  Earnings Per
Share

Earnings per share applicable to common stock
are based on weighted average outstanding shares, retroactively adjusted for
all stock splits.  The computation of
earnings per share was as follows.



Earnings Per ShareThree months ended March 31
  2001
  2000(In millions, except per share amounts)Net income
  $295
  $141Less preferred dividends
  -
  (1)Net income applicable to common stock
  295
  140Weighted average outstanding common stock and
  common stock equivalents
  183.3
  184.2Basic and diluted earnings per
  share available to common stockholders
  $1.61
  $0.76

Note D.  Derivative
Financial Instruments

As discussed in Note B, effective in 2001,
the Company accounts for derivatives and hedging in accordance with 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, swaptions, 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.

SFAS 133 requires that all derivatives
be recorded in the balance sheet at fair value.  If certain conditions are met, a derivative may be specifically
designated as a hedge of exposures to changes in fair value, cash flows or
foreign currency exchange rates.  The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the nature of any hedge designation
thereon.  The Companys accounting for
changes in the fair value of general account derivatives is as follows:

Nature
  of Hedge Designation
  Derivatives
  Change in Fair Value Reflected In:No
  hedge designation
  Realized
  investment gains.Fair
  value
  Realized
  investment gains, along with the change in fair value of the hedged asset or
  liability.Cash
  flow
  Other
  comprehensive income, with subsequent reclassification to earnings when the
  hedged transaction, asset or liability impacts earnings.Foreign
  currency
  Consistent
  with fair value or cash flow above, depending on the nature of the hedging
  relationship.Changes in the fair value of derivatives held
in the separate accounts are reflected in separate account earnings.  Because separate account investments are
generally carried at fair value with changes therein reflected in separate
account earnings, hedge accounting is generally not applicable to separate
account derivatives.

Use of
Derivatives

CNA uses investment derivatives in the normal
course of business, primarily to reduce its exposure to market risk
(principally interest rate risk, equity stock price risk and foreign currency
risk) stemming from various assets and liabilities.  The Companys principal objective under such market risk
strategies is to achieve the desired reduction in economic risk, even if the
position will not receive hedge accounting treatment.  The Company may also use derivatives for purposes of income
enhancement, primarily via the sale of covered call options.

The Companys use of derivatives is limited
by statutes and regulations promulgated by the various regulatory bodies to
which it is subject, and by its own derivative policy.  The derivative policy limits which personnel
are authorized to initiate derivative transactions.  The policy prohibits the use of derivatives with a maturity
greater than eighteen months, unless the derivative is matched with assets or
liabilities having a longer maturity. 
The policy prohibits the use of derivatives containing greater than
one-to-one leverage with respect to changes in the underlying price, rate or
index.  Also, the policy prohibits the
use of borrowed funds, including funds obtained through repurchase
transactions, to engage in derivative transactions.

Credit exposure associated with
non-performance by the counterparties to derivative instruments is generally
limited to the gross fair value of the asset related to the instruments
recognized in the condensed consolidated balance sheets.  The Company mitigates the risk of
non-performance by using multiple counterparties and by monitoring their
creditworthiness.  The Company generally
requires collateral from its derivative investment counterparties depending on
the amount of the exposure and the credit rating of the counterparty.



Risk Management
Strategies Regarding Market Risk

The Company has exposure to economic losses
due to interest rate risk arising from changes in the level of, or volatility
of, interest rates.  The Company attempts
to mitigate its exposure to interest rate risk through active portfolio
management, which includes rebalancing its existing portfolios or assets and
liabilities, as well as changing the characteristics of investments to be
purchased or sold in the future.  In
addition, various derivative financial instruments are used to modify the
interest rate risk exposures of certain assets and liabilities.  These strategies include the use of interest
rate swaps, interest rate caps and floors, options, futures, forwards, and
commitments to purchase securities. 
These instruments are generally used to lock in interest rates or
unrealized gains, to shorten or lengthen durations of fixed maturity securities
or investment contracts, or to hedge (on an economic basis) interest rate risks
associated with investments, variable rate debt and life insurance
liabilities.  As of the adoption date
and March 31, 2001, none of the Companys holdings of these types of
instruments have been designated as hedges of specific assets or liabilities,
and therefore do not currently qualify for hedge accounting under GAAP.

The Company is exposed to equity price risk
as a result of its investment in equity securities and equity derivatives.  Equity price risk results from changes in
the level or volatility of equity prices, which affect the value of equity
securities, or instruments which derive their value from such securities.  CNA attempts to mitigate its exposure to
such risks by limiting its investment in any one security or index.  The Company may also manage this risk by
utilizing instruments such as options, swaps, futures and collars to protect
appreciation in securities held.  CNA
uses derivatives in one of its separate accounts to mitigate equity price risk
associated with its indexed group annuity contracts by purchasing Standard
& Poor's 500® (S&P 500®) index futures contracts in a notional amount
equal to the contractholder liability, which is calculated using the S&P
500® rate of return.

Foreign exchange rate risk arises from the possibility
that changes in foreign currency exchange rates will impact the value of
financial instruments denominated in a foreign currency.  The Companys foreign transactions are
primarily denominated in Canadian Dollars, British Pounds and Euros.  The Company manages this risk via
asset/liability matching and through the use of foreign currency futures and/or
forwards.  As of the adoption date and
March 31, 2001, none of the Companys holdings of foreign currency derivatives
have been designated as hedges of specific assets or liabilities, and therefore
do not currently qualify for hedge accounting under GAAP.



Derivative
Holdings

A summary of the aggregate contractual or
notional amounts and estimated fair values related to derivative financial
instruments follows.  The contractual or
notional amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these instruments.  Interest
rates, equity prices and foreign currency exchange rates affect the fair value
of derivatives.  The fair values
generally represent the estimated amounts that CNA would expect to receive or
pay upon termination of the contracts at the reporting date.  Dealer quotes are available for substantially
all of CNA's derivatives.  For
derivative instruments not actively traded, fair values are estimated using
values obtained from independent pricing services, costs to settle or quoted
market prices of comparable instruments.





Derivative Financial InstrumentsMarch 31, 2001
  Contractual
  Notional
  Fair Value(In millions)
  Amount
  Asset
  (Liability)General Account:Total
  return swaps
  $270
  $-
  $(2)Interest rate caps
  500
  1
  -Commitments to purchase governmentand municipal securities
  343
  -
  -Futures
  sold, not yet purchased
  28
  -
  -Forwards
  114
  -Equity
  warrants
  15
  3
  -Collateralized debt obligation liabilities
  170
  -
  (16)Options
  purchased
  20
  1
  -Options
  written
  779
  -
  (4)Options
  embedded in convertible debt securities
  869
  161Options
  purchased - Global Crossing
  1,000
  944
  -Options
  written - Global Crossing
  1,256
  -
  (244)Total
  $5,364
  $1,110
  $(266)Separate Accounts:Futures
  purchased
  $821
  $6
  $-Futures
  sold, not yet purchased
  26
  -
  -Commitments to purchase governmentand municipal securities
  65
  1
  -Options
  purchased
  79
  -
  -Options
  written
  87
  -
  (1)Total
  $1,078
  $7
  $(1)

Immediately following adoption of SFAS 133 on
January 1, 2001, the Companys derivatives holdings were as follows.



Derivative Financial InstrumentsJanuary 1, 2001
  Contractual
  Notional
  Fair Value(In millions)
  Amount
  Asset
  (Liability)General Account:Total
  return swaps
  $5
  $-
  $-Interest rate caps
  500
  1
  -Futures
  sold, not yet purchased
  80
  -
  -Forwards
  13
  -
  -Equity
  warrants
  10
  4
  -Collateralized debt obligation liabilities
  170
  -
  (18)Options
  purchased
  18
  1
  -Options
  embedded in convertible debt securities
  845
  231
  -Options
  purchased - Global Crossing
  1,000
  664
  -Options
  written - Global Crossing
  1,256
  -
  (1)Total
  $3,897
  $901
  $(19)Separate Accounts:Futures
  purchased
  $996
  $-
  $(13)Futures
  sold, not yet purchased
  76
  -
  -Commitments
  to purchase governmentand
  municipal securities
  111
  1
  -Options
  purchased
  110
  -
  -Options
  written
  118
  -
  (1)Total
  $1,411
  $1
  $(14)

Collateralized debt obligations represent a
credit enhancement product that is typically structured in the form of a
swap.  The Company has determined that
this product is a derivative under SFAS 133.  The Company is no longer writing this product.  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 Hedge

As of the adoption date, and as of March 31,
2001, the Companys collar position related to its investment in Global
Crossing Ltd. (Global Crossing) common stock was the only derivative position
that has been designated as a hedge for accounting purposes.  The nature of the transition adjustment
related to this hedge was such that the $962 million unrealized gain that
existed on the Global Crossing common stock when the hedge was established has
been preserved in accumulated other comprehensive income.

The effectiveness of this hedge is measured
based on changes in the intrinsic value of the collar in relation to changes in
the fair value of the Global Crossing common stock.  Changes in the time value component of the collars fair value
are excluded from the hedge designation and measurement of effectiveness.  For the three months ended March 31, 2001,
the Global Crossing hedge was 100% effective. 
The change in the time value component of the collar was a pre-tax gain
of $21 million for the three months ended March 31, 2001, and
has been recorded as a realized investment gain in the condensed consolidated
statement of operations.

Note E.  Legal
Proceedings and Contingent Liabilities

Tobacco
Litigation

Four insurance subsidiaries of CNAF 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 a number of tobacco-related
claims (currently over 1,100 pending) asserted against Liggett over the past 20
years.  However, Liggett only began
submitting claims for coverage under the policies in January 2000.  CNA believes its coverage defenses are
strong.  Based on facts and
circumstances currently known, management believes that the ultimate outcome of
the pending litigation should not materially affect the financial condition or
results of operations 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 undertaken a review of the IGI
Program and, among other things, 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 liability will also be 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.  It is likely that certain
reinsurers will dispute their liabilities to CNA; however, the Company is
unable to predict the extent of such potential disputes at this time.  Legal actions could result, and the
resolution of any such actions could take years.

Based on the Companys review of the entire
IGI Program, 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 future 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 financial position or
results of operations of CNA.

Environmental
Pollution and Other Mass Tort and Asbestos Reserves

CNAs property-casualty insurance companies
have potential exposures related to environmental pollution and other mass tort
and asbestos 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
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 on 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) on its National Priorities List (NPL).  The addition of new cleanup sites to the NPL
has slowed in recent years.  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 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 2000, and it is
unclear what positions the 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.

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.

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 ReservesMarch 31, 2001
  December 31, 2000Environmental
  
  EnvironmentalPollution
  
  Pollutionand Other
  
  and Other(In millions)
  Mass Tort
  Asbestos
  Mass Tort
  AsbestosGross reserves
  $408
  $816
  $493
  $848Ceded reserves
  (132)
  (206)
  (146)
  (245)Net reserves
  $276
  $610
  $347
  $603

As of March 31, 2001 and December 31, 2000,
CNA carried approximately $276 million and $347 million of claim and
claim expense reserves, net of reinsurance recoverables, for reported and
unreported environmental pollution and other mass tort claims. Unfavorable environmental
pollution and other mass tort net claim and claim adjustment expense reserve
development for the three months ended March 31, 2001 amounted to
$3 million.  There was no
environmental pollution and other mass tort net claim and claim adjustment expense
reserve development for the three months ended March 31, 2000.

CNAs property-casualty insurance
subsidiaries also have exposure to asbestos claims.  Estimation of asbestos 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, missing
policies and proof of coverage.  CNA continues
to see a rise in asbestos-related claims volume in asbestos related claims and
believes that this phenomenon is driven by factors such as intensive
advertising campaigns by plaintiff lawyers and the emergence of new defendants
such as distributors of asbestos containing products.

As of March 31, 2001 and December 31, 2000,
CNA carried approximately $610 million and $603 million of net claim
and claim adjustment expense reserves, net of reinsurance recoverables, for
reported and unreported asbestos-related claims.  Unfavorable asbestos net claim and claim adjustment expense
reserve development for the three months ended March 31, 2001 and 2000 amounted
to $21 million and $27 million.

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

Note F.  Reinsurance

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



Components of Earned PremiumsThree months ended March 31
  Direct
  Assumed
  Ceded
  Net(In millions)2001Property-casualty
  $2,021
  $310
  $866
  $1,465Accident and health
  877
  56
  61
  872Life
  291
  77
  174
  194Total earned premiums
  $3,189
  $443
  $1,101
  $2,5312000Property-casualty
  $2,117
  $519
  $961
  $1,675Accident and health
  920
  63
  107
  876Life
  282
  58
  121
  219Total earned premiums
  $3,319
  $640
  $1,189
  $2,770

In 1999, the Company entered into an
aggregate excess-of-loss 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 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 with an aggregate limit of $1
billion.  The second section of the
Aggregate Cover, which is available for accident year 2001, provides coverage
up to $510 million of losses for a maximum premium of $310 million.  In the first quarter of 2001, the Company
triggered the coverage under the second section of the Aggregate Cover for the
2001 accident year.  As a result, the
Company ceded $42 million in premium and $39 million of loss and loss
adjustment expenses and recorded an interest charge of $6 million on the funds
withheld balance.

In 2001, the Company entered into a one-year
aggregate excess-of-loss 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). 
Ceded premiums in the amount of $1 million were recorded for the CCC
Cover.  The loss protection provided by
the CCC Cover has an aggregate limit of $750 million to $825 million depending
on premium volume.  The CCC Cover
provides continuous coverage in excess of the triggered coverage in the second
section of the Aggregate Cover discussed above.

Note G.  Debt

Debt is composed of the following
obligations.

Debt
  March 31,
  December 31,(In millions)
  2001
  2000Variable rate debt:Commercial paper
  $500
  $627Credit
  facility - CNA Surety
  80
  100Senior notes:7.250%,
  due March 1, 2003
  133
  1336.250%,
  due November 15, 2003
  249
  2496.500%,
  due April 15, 2005
  491
  4916.750%,
  due November 15, 2006
  249
  2496.450%,
  due January 15, 2008
  149
  1496.600%,
  due December 15, 2008
  199
  1998.375%,
  due August 15, 2012
  68
  686.950%,
  due January 15, 2018
  148
  148Debenture, 7.250%, due November 15, 2023
  240
  240Capital leases, 8.000%-19.980%, due through
  December 31, 2011
  40
  40Other debt, 1.000% - 8.500%, due through 2019
  34
  36Total debt
  $2,580
  $2,729

Note H.  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 income are
shown below.

Comprehensive IncomeThree months ended March 31
  2001
  2000(In millions)Net income
  $295
  $141Other comprehensive income (loss):Change
  in unrealized gains/losses on general account investments:Holding gains arising during the period
  202
  78Less: unrealized gains at beginning of period included in realized
  gains during the period
  (60)
  (80)Net
  change in unrealized gains/losses on general account investments
  142
  (2)Net
  change in unrealized gains/losses on separate accounts and other
  19
  8Foreign currency translation adjustment
  4
  (2)Allocation
  to participating policyholders and minority interest
  (8)
  (6)Other comprehensive income (loss), before tax and
  cumulative effect of a change in accounting principle
  157
  (2)Deferred income tax expense related to other
  comprehensive income (loss)
  (38)
  (2)Other comprehensive income (loss), before
  cumulative effectof
  a change in accounting principle
  119
  (4)Cumulative effect of a change in accounting
  principle, net of tax
  58
  -Other comprehensive income (loss), net of tax and
  cumulative effectof
  a change in accounting principle
  177
  (4)Total comprehensive income
  $472
  $137

Note I.  Business
Segments

The Companys reportable segments are
strategic businesses that offer different types of products and services. The
Company has seven operating segments: Agency Market Operations, Specialty
Operations, CNA Re, Global Operations, Risk Management, Group Operations and
Life Operations.  In addition to these
seven operating segments, certain other activities are reported in a Corporate
and Other segment.

Corporate and Other segment results consist
of interest expense on corporate borrowings, eBusiness expenses, certain
run-off insurance operations, asbestos claims related to Fibreboard
Corporation, financial guarantee insurance contracts and certain non-insurance
operations.

All significant intercompany revenues and
expenses, as well as intercompany dividends, have been eliminated.  Risk Management intrasegment revenues and
expenses, amounting to $39 million and $41 million for the three
months ended March 31, 2001 and 2000, have been eliminated at the consolidated
level.


Segment ResultsThree months ended
  Agency
  
  
  
  RiskMarch 31, 2001
  Market
  Specialty
  
  Global
  Manage-
  Group
  Life
  Corporate
  Elimi-(In millions)
  Operations
  Operations
  CNA Re
  Operations
  ment
  Operations
  Operations
  and Other
  nations
  TotalNet earned premiums
  $731
  $174
  $159
  $285
  $129
  $818
  $248
  $1
  $(14)
  $2,531Claim, benefits and expenses
  819
  196
  182
  295
  155
  845
  373
  37
  (14)
  2,888Underwriting loss
  (88)
  (22)
  (23)
  (10)
  (26)
  (27)
  (125)
  (36)
  -
  (357)Net investment income
  140
  57
  48
  38
  41
  43
  143
  7
  -
  517Other revenues
  37
  8
  -
  24
  80
  5
  74
  7
  (42)
  193Other expenses
  33
  2
  -
  26
  76
  1
  27
  54
  (42)
  177Pre-tax
  operating income (loss)
  56
  41
  25
  26
  19
  20
  65
  (76)
  -
  176Income tax (expense) benefit
  (14)
  (11)
  (7)
  (7)
  (5)
  (5)
  (23)
  21
  -
  (51)Minority interest
  -
  -
  -
  (6)
  -
  -
  -
  -
  -
  (6)Net operating income (loss) excluding realized
  investmentgains
  42
  30
  18
  13
  14
  15
  42
  (55)
  -
  119Realized investment gains, net of tax,
  participating policy-holders'  and minority interests
  64
  25
  16
  8
  21
  4
  45
  54
  -
  237Cumulative effect of a change in accounting principle,
  net of tax
  (25)
  (12)
  (5)
  (3)
  (8)
  (1)
  (3)
  (4)
  -
  (61)Net income (loss)
  $81
  $43
  $29
  $18
  $27
  $18
  $84
  $(5)
  $-
  $295  Segment ResultsThree months ended
  Agency
  
  
  
  RiskMarch 31, 2000
  Market
  Specialty
  
  Global
  Manage-
  Group
  Life
  Corporate
  Elimi-(In millions)
  Operations
  Operations
  CNA Re
  Operations
  ment
  Operations
  Operations
  and Other
  nations
  TotalNet earned premiums
  $833
  $192
  $243
  $274
  $144
  $883
  $212
  $(1)
  $(10)
  $2,770Claim, benefits and expenses
  945
  195
  262
  272
  180
  903
  317
  31
  (10)
  3,095Underwriting (loss) gain
  (112)
  (3)
  (19)
  2
  (36)
  (20)
  (105)
  (32)
  -
  (325)Net investment income
  167
  58
  51
  36
  39
  36
  145
  -
  -
  532Other revenues
  30
  8
  -
  23
  80
  11
  48
  1
  (45)
  156Other expenses
  29
  4
  1
  26
  77
  13
  24
  60
  (45)
  189Pre-tax
  operating income (loss)
  56
  59
  31
  35
  6
  14
  64
  (91)
  -
  174Income tax (expense) benefit
  (13)
  (18)
  (10)
  (12)
  -
  (4)
  (21)
  30
  
  (48)Minority interest
  -
  -
  -
  (6)
  -
  -
  -
  -
  
  (6)Net operating income (loss) excluding realized
  investmentgains (losses)
  43
  41
  21
  17
  6
  10
  43
  (61)
  -
  120Realized investment gains (losses),net
  of tax, participating policy-holders'  and minority interests
  15
  6
  3
  3
  4
  2
  (8)
  (4)
  -
  21Net income (loss)
  $58
  $47
  $24
  $20
  $10
  $12
  $35
  $(65)
  $-
  $141

Note J.  Restructuring
and Other Related Charges

At December 31, 2000, the remaining accrued
restructuring and other related charges consisted of $7 million of lease
termination costs.  During the first
quarter of 2001, approximately $2 million of these accrued costs were
paid.

Note K.  Significant
Transactions

Individual Life
Reinsurance Transaction

Effective December 31, 2000, CNA completed a
transaction with Munich American Reassurance Company (MARC), whereby MARC
acquired CNA's individual life reinsurance business (CNA Life Re) via an
indemnity reinsurance agreement.  CNA
will continue to accept and retrocede business on existing CNA Life Re
contracts until such time that CNA and MARC are able to execute novations of
each of CNA Life Res assumed and retroceded reinsurance contracts.

MARC assumed approximately $294 million of
liabilities (primarily future policy benefits and claim reserves) and
approximately $209 million in assets (primarily uncollected premiums and
deferred policy acquisition costs).  
The net gain from the reinsurance transaction, which is subject to
certain post-closing adjustments, has been recorded as deferred revenue and
will be recognized in income over the next 12 to 18 months as CNA Life Res
assumed contracts are novated to MARC.

The CNA Life Re business contributed net
earned premiums of $49 million and pre-tax operating income of
$10 million for the three months ended March 31, 2000.

Note L.  Related Party
Transactions

CNA reimburses Loews, or pays directly to
Loews employees, approximately $14 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 2001 and 2000, CNA received a tax refund of $16 million and
$136 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 less than
$6 million on an annual basis.

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.

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.   Loews Corporation
(Loews) owns approximately 87% 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 20.

CNA is one of the largest insurance
organizations in the United States and based on 1999 net written premiums, is
the eighth largest property-casualty company and the thirty-sixth largest life
insurance company.

CNA conducts its operations through seven
operating segments.  In addition to the
seven operating segments, certain other activities are reported in the
Corporate and Other segment.  These
operating segments reflect the way in which CNA distributes its products to the
marketplace and the way in which it manages operations and makes business
decisions.

Operating Results

The following table summarizes key components
of operating results for the three months ended March 31, 2001 and 2000.



Consolidated OperationsThree months ended March 31
  2001
  2000(In millions, except per share data)Revenues:Net
  earned premiums
  $2,531
  $2,770Net
  investment income
  517
  532Other
  revenues
  193
  156Total
  revenues
  3,241
  3,458Claims, benefits and expenses
  3,065
  3,284Operating income before income tax and minority interest
  176
  174Income tax expense
  (51)
  (48)Minority interest
  (6)
  (6)Net operating income
  119
  120Net realized investments gains, net of tax and
  minority interest
  237
  21Cumulative effect of a change in accounting
  principle, net of tax
  (61)
  -Net income
  $295
  $141Basic and diluted earnings per share:Net
  operating income
  $0.65
  $0.64Net
  realized investment gains, net of tax and minority interest
  1.30
  0.12Cumulative effect of a change in accounting principle, net of tax
  (0.34)
  -Basic and diluted earnings per
  share available to common stockholders
  $1.61
  $0.76Weighted average outstanding
  common stock and common stock equivalents
  183.3
  184.2

The following table summarizes net operating
income (loss) for the three months ended March 31, 2001 and 2000.

Net Operating Income (Loss) by
  SegmentThree months ended March 31
  2001
  2000(In millions)Agency Market Operations
  $42
  $43Specialty Operations
  30
  41CNA Re
  18
  21Global Operations
  13
  17Risk Management
  14
  6Group Operations
  15
  10Life Operations
  42
  43Corporate and Other
  (55)
  (61)Net operating income
  $119
  $120

Net earned premiums decreased $239 million,
or 9%, to $2,531 for the first three months of 2001 as compared with the same
period in 2000.  This decline is due to
a continued effort to re-underwrite the business and obtain adequate rates for
exposures underwritten, additional ceded premiums related to excess-of-loss reinsurance
treaties (See Note F to the Condensed Consolidated Financial Statements) and a
decline in net earned premiums in Group Operations, including the reduction of
earned premiums as a result of the sale of Life Reinsurance (See Note K to the
Condensed Consolidated Financial Statements for a discussion of this
transaction).

Net operating income was $119 million, or
$0.65 per share, for the first three months of 2001, compared with net
operating income of $120 million, or $0.64 per share, for the same period in
2000.   Net operating income decreased
$11 million for the property-casualty segments, offset by an increase of $5
million for Group Operations and a net operating loss decrease of $6 million
for the Corporate and Other segment. Excluding the $37 million (pre-tax) effect
of the non-recurring ceding commission included in 2000 related to the sale of
Personal Insurance to Allstate, underwriting results for the property-casualty
segments improved $36 million, most notably in Commercial Insurance.  Net operating income for Life Operations was
flat as improved earnings of the Index 500 product was offset by lower
investment income.

During the first quarter of 2001, the Company
reclassified equity method income from limited partnership investments.  This income was previously classified in
realized investment gains, net of tax and minority interest, and is now
classified in net investment income. 
The after-tax impact of this reclassification on net operating income was
$24 million and $36 million in the first three months of 2001 and 2000.



Effect of the Reclassification
  of Limited Partnership Income on Net Operating IncomeThree months ended March 31
  2001
  2000(In millions)Agency Market Operations
  $14
  $17Specialty Operations
  5
  6CNA Re
  3
  3Global Operations
  2
  2Risk Management
  4
  4Group Operations
  1
  2Life Operations
  (6)
  2Corporate and Other
  1
  -Total
  $24
  $36

Net operating income was adversely affected
by $6 million in the first quarter of 2001 by two aggregate excess-of-loss
reinsurance treaties.  See Note F of the
Condensed Consolidated Financial Statements for further discussion of
excess-of-loss reinsurance treaties.

Net income for the first quarter of 2001 was
$295 million, or $1.61 per share, compared with net income of $141 million, or
$0.76 per share, for the same period in 2000. Net realized gains increased $216
million primarily attributable to increased gains on the sales of fixed
maturity securities and real estate.  Also
included in net income for the first quarter of 2001 was the cumulative effect
of a change in accounting principle of $61 million related to the
implementation of Statement of Financial Accounting Standard (SFAS) 133, which
impacts the accounting for derivative instruments.  See Note D to the Condensed Consolidated Financial Statements for
a complete discussion of the Companys adoption of this accounting
pronouncement.

The CNA property-casualty companies
implemented a change, effective January 1, 2001, in the timing of recording
written premiums for policies with future effective dates.  This change was made in conjunction with
statutorily required changes in recording written premiums. The change in
timing of recording written premiums has no impact on net earned premiums or
net income.

The following table presents the effect of
the adjustments made to written premiums for the period ending March 31, 2001
for each of the Companys segments.



Adjustments to Net Written
  PremiumsFor the three months ended March
  31, 2001
  2001(In millions)Agency Market Operations
  $84Specialty Operations
  18CNA Re
  -Global Operations
  8Risk Management
  3Group Operations
  -Life Operations
  -Corporate and Other
  -Total
  $113Discussions of the results of operations from
the Companys segments follow.

Agency Market
Operations

Agency Market Operations builds on the
Companys long and successful relationship with the independent agency
distribution system to market a broad range of property-casualty insurance
products and services to small and middle market businesses.  Business products include workers
compensation, commercial packages, general liability, umbrella and commercial
auto, as well as a variety of creative risk management services. In addition,
Agency Market Operations includes a professional employer organization, CNA
UniSource, which provides various employer-related services.



Operating ResultsThree months ended March 31
  2001
  2000(In millions)Net written premiums
  $678
  $827Net earned premiums
  731
  833Underwriting loss
  (88)
  (112)Net operating income
  42
  43Ratios:Loss
  and loss adjustment expense
  75.3%
  81.4%Expense
  33.8
  29.8Dividend
  2.9
  2.2Combined
  112.0%
  113.4%

Net written premiums for Agency Market
Operations decreased $149 million, or 18%, to $678 million for the first
three months of 2001 as compared with the same period in 2000.  The decrease in net written premiums
includes $84 million related to the adjustment in net written premiums. Net
earned premiums decreased $102 million, or 12%, to $731 million for the first
three months of 2001 as compared with the same period in 2000. These decreases
are due to the continued effort to re-underwrite business and obtain adequate
rates for exposures underwritten Also, these premium declines are partially due
to $24 million in additional ceded premiums related to accident year 2001
excess-of-loss reinsurance treaties.  
See Note F to the Condensed Consolidated Financial Statements for discussion
of these reinsurance treaties.

The combined ratio improved 1.4 points to
112.0% for the three months ended March 31, 2001 as compared with 2000 and
underwriting results improved $24 million. 
The improvement in underwriting results and combined ratio was driven
principally by the loss ratio improvement of 6.1 points which reflects improved
current year loss experience, most notably in workers compensation and package
property lines within Commercial Insurance, as well as earned rate achievement
and re-underwriting efforts undertaken last year. The expense ratio increased
4.0 points due to the reduced net earned premium base in the current quarter.
However, operating expenses have decreased slightly in the first quarter of
2001 as compared with 2000. This net decrease is the result of lower expenses
throughout Agency Markets to more than offset the non-recurring ceding
commission included in 2000 of $37 million related to the sale of Personal
Insurance to Allstate. The dividend ratio increased 0.7 points due to adverse
development in dividend reserves in Commercial Insurance.  Net operating income was relatively flat for
the first three months of 2001 as compared with the same period in 2000 based
on decreased net investment income offset by improved underwriting results,
especially in Commercial Insurance.

Commercial Insurance achieved a rate increase
of 16% for the first quarter of 2001 and a retention rate of 70%.

Specialty
Operations

Specialty Operations provides a broad array
of professional, financial and specialty property-casualty products and
services through a network of brokers, managing general underwriters and
independent agencies.  Specialty
Operations provides creative solutions for managing the risks of its clients,
including architects, engineers, lawyers, healthcare professionals, financial
intermediaries and corporate directors and officers.

Operating ResultsThree months ended March 31
  2001
  2000(In millions)Net written premiums
  $136
  $169Net earned premiums
  174
  192Underwriting loss
  (22)
  (3)Net operating income
  30
  41Ratios:Loss
  and loss adjustment expense
  84.5%
  77.6%Expense
  27.9
  24.1Combined
  112.4%
  101.7%

Net written premiums for Specialty Operations
declined $33 million, or 20%, to $136 million for the first three months of
2001 as compared with the same period in 2000. The decrease in net written
premiums includes $18 million related to the adjustment in written premiums.
Net earned premiums declined $18 million, or 9%, to $174 million for the first
three months of 2001 as compared with the same period in 2000.  These declines were primarily the result of
active decisions to renew only those accounts which meet current underwriting
guidelines supporting the ongoing commitment to underwriting discipline,
especially in the dental professionals and physicians products.

The combined ratio increased by 10.7 points
to 112.4% for the three months ended March 31, 2001 as compared with
the same period in 2000 and underwriting results declined by $19 million.
These declines relate to increases in both the loss and expense ratios.  Although, total net losses have decreased in
the first quarter of 2001 as compared with the same period in 2000, the loss
ratio increased 6.9 points due to a decreased benefit from the use of
reinsurance, partially offset by the re-underwriting actions described
above.  The expense ratio increased 3.8
points due to increased underwriting expenses. 
Net operating income declined to $30 million for the first three
months of 2001 as compared with $41 million in 2000 principally as a result of
the decline in underwriting results described above.

The non-medical professional liability book
achieved a single-digit rate increase for the first quarter of 2001 and a
retention rate of 85%. The medical professional liability book achieved a rate
increase of 18% and a retention rate of 72% for the first quarter of 2001.



CNA Re

CNA Re operates globally as a reinsurer in
the broker market, offering both treaty and facultative products.  CNA Res operations include the business of
CNA Reinsurance Company Limited (CNA Re U.K.), a United Kingdom based
reinsurance company, and United States operations based in Chicago.  While CNA Res primary product is
traditional treaty reinsurance, it also offers facultative and financial reinsurance.

Operating ResultsThree months ended March 31
  2001
  2000(In millions)Net written premiums
  $201
  $380Net earned premiums
  159
  243Underwriting loss
  (23)
  (19)Net operating income
  18
  21Ratios:Loss
  and loss adjustment expense
  75.1%
  70.2%Expense
  39.2
  37.7Combined
  114.3%
  107.9%

Net written premiums for CNA Re decreased
$179 million, or 47%, to $201 million for the first three months of 2001 as
compared with the same period in 2000. Net earned premiums decreased $84
million, or 35%, to $159 million for the first three months of 2001 as compared
with the same period in 2000.  These
declines reflect decisions made for 2001 not to renew contracts, including
multi-year contracts, that management believed did not meet its underwriting
profitability targets.  These contracts
included credit and bond, London market lineslip insurance and European
casualty facultative lines of business.

The combined ratio increased 6.4 points to
114.3% for the three months ended March 31, 2001 as compared with the same
period in 2000 and underwriting results declined $4 million.  Increases in both the loss and expense
ratios led to the unfavorable change in the combined ratio. The increase in the
loss ratio of 4.9 points was principally the result of favorable loss
development taken in 2000 that lowered the 2000 loss ratio.  Acquisition and underwriting expenses have
decreased in the first quarter of 2001 compared with the same period in 2000;
however, the expense ratio has increased due to a reduced net earned premium
base in the current quarter. Net operating income decreased $3 million for the
first three months of 2001 as compared with the same period in 2000 due to the
decline in underwriting results and net investment income.

For the January 1, 2001 renewal period CNA Re
continued to push forward its profitability objectives and was able to achieve
targeted rate increases; however, the retention rate was less than
expected.   The most significant
non-renewals occurred in the London operation as CNA Re management continues to
focus on underwriting excellence and profitability.

Global Operations

Global Operations provides products and
services to United States-based customers, customers expanding overseas and
foreign customers.  The major product
lines include marine, commercial and contract surety, warranty and specialty
products, as well as commercial property and casualty coverages.

Operating ResultsThree months ended March 31
  2001
  2000(In millions)Net written premiums
  $281
  $281Net earned premiums
  285
  274Underwriting (loss) gain
  (10)
  2Net operating income
  13
  17Ratios:Loss
  and loss adjustment expense
  60.5%
  56.7%Expense
  42.7
  42.4Dividend
  0.2
  0.2Combined
  103.4%
  99.3%

Net written premiums for Global Operations
remained flat at $281 million for the first three months of 2001 and the same
period in 2000. Net earned premiums increased $11 million, or 4%, to $285
million for the first three months of 2001 as compared with the same period in
2000. Both net written and net earned premiums were affected as a result of
growth in the commercial casualty and property lines in the European operations
and in the vehicle warranty line. Offsetting the growth in net written premiums
was $8 million related to the adjustment in net written premiums.  The increases in earned premiums were
partially offset by declines in the equipment maintenance warranty line of
business and increased ceded premiums in the surety lines.

The combined ratio increased 4.1 points to
103.4% for the three months ended March 31, 2001 as compared with the same
period in 2000 and underwriting results declined $12 million.  These declines were principally due to the
increase in the loss ratio.  The loss
ratio increase of 3.8 points is primarily attributable to adverse
experience in 2001 in the marine lines and adverse development in the surety
lines. Net operating income decreased $4 million for the quarter due to the
decline in underwriting results, partially offset by increased net investment
income.

Global Operations achieved single digit
average rate increases across its businesses during the first three months of
2001. Retention rates were in the high 80 percent range. Retention rates do not
apply to the Surety and Warranty businesses.

Risk Management

Risk Management serves the property-casualty
needs of large domestic commercial businesses, offering customized strategies
to address the management of business risks. 
Also, Risk Management, primarily through RSKCoSM, provides
total risk management services relating to claims, loss control, cost
management and information services to the commercial insurance marketplace.

Operating
Results

Three months ended March 31
  2001
  2000(In millions)Net written premiums
  $217
  $222Net earned premiums
  129
  144Underwriting loss
  (26)
  (36)Net operating income
  14
  6Ratios:Loss
  and loss adjustment expense
  84.7%
  91.6%Expense
  34.0
  33.7Dividend
  1.6
  -Combined
  120.3%
  125.3%

Net written premiums for Risk Management
decreased $5 million, or 2%, to $217 million for the first three months of 2001
as compared with the same period in 2000. Net earned premiums decreased $15
million, or 10%, to $129 million for the first quarter of 2001 as compared with
the same period in 2000. These declines were the result of a continued focus on
re-underwriting the book of business.

The combined ratio improved 5.0 points to
120.3% for the three months ended March 31, 2001 as compared with the same
period in 2000 and underwriting results improved $10 million. These
improvements are principally the result of improvement in the loss ratio.  The loss ratio improvement of 6.9 points is
a result of increased rate and improved loss experience in the casualty line,
partially offset by adverse loss experience in the property line.   Total operating expenses for Risk
Management have decreased in the first quarter of 2001 due to decreased
operating expenses in the casualty line of business; however, the expense ratio
increased 0.3 points due to the reduced net earned premium base.  Net operating income increased by
$8 million in the first quarter of 2001 as a result of the improved
underwriting results and increased earnings for RSKCoSM.

Risk Management continues to achieve double-digit
rate increases across its entire book of business in 2001 while maintaining
premium-weighted retention in the low 80% range.  Risk Management has realized increased success in attracting new
casualty business in the first quarter of 2001, writing 14 new accounts.  Risk Management has also launched an
initiative designed to significantly increase quality and improve net operating
income through the review and improvement of all activities that create, market
and support its products and services.

Group Operations

Group Operations provides a broad array of
group life and health insurance products and services to employers, affinity
groups and other entities that purchase insurance as a group.  Group Operations also provides health
insurance to federal employees, retirees and their families (Federal Markets);
managed care and self-funded medical excess insurance; medical provider network
management and administration services; and reinsurance for life and health
insurers.

Operating ResultsThree months ended March 31
  2001
  2000(In millions)Net earned premiums
  $818
  $883Net operating income
  15
  10

Net earned premiums for Group Operations
decreased $65 million, or 7%, to $818 million for the first three months
of 2001 as compared with the same period in 2000. Net earned premiums declined
$49 million as a result of the sale of the Life Reinsurance business on
December 31, 2000 and $37 million in group reinsurance as a result of
terminating contracts with unprofitable independent underwriting agencies. See
Note K of the Condensed Consolidated Financial Statements for a discussion of
the Life Reinsurance transaction. These declines were partially offset by
growth of $18 million in Group Benefits lines of business.

Net operating income increased by $5 million
in the first quarter of 2001 as compared with the same period in 2000. This
improvement is a result of exiting unprofitable lines of business and lower
expenses in Federal Markets which more than offset the sale of Life
Reinsurance.

Life Operations

Life Operations provides financial protection
to individuals through a full product line of term life insurance, universal
life insurance, long term care insurance, annuities and other products.  Life Operations also provides retirement
services products to institutions in the form of various investment products
and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers and various other independent life insurance consultants.

Operating ResultsThree months ended March 31
  2001
  2000(In millions)Sales volume*
  $609
  $1,018Net earned premiums
  248
  212Net operating income
  42
  43

*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).

Sales volume for Life Operations declined
$409 million, or 40%, to $609 million for the first three months of 2001 as
compared with the same period in 2000. 
Sales volume decreased primarily in institutional products and variable
annuity sales influenced in part by the decline in the stock market.  Sales to institutional markets tend to be
large case institutional markets sales, which can be sporadic, opportunistic
and sensitive to independent agency ratings, and as such can be volatile over
short periods. This decrease was partially offset by a growing in-force block
of business in Long Term Care products and increased international annuity
sales. Net earned premiums increased $36 million, or 17%, to $248 million for the
first three months of 2001 as compared with the same period in 2000. This
improvement is primarily attributable to the growing block of in-force business
and increased new sales in Long Term Care, improved sales of structured
settlements in the Retirement Services line and increased annuity sales
internationally.

Net operating income for the first three
months of 2001 was slightly lower than net operating income for the same period
in 2000.   This decrease was due to
decreased net investment income, partially offset by improved investment
performance in the Index 500 product sold to institutions and favorable results
in both the Individual Life and Long Term Care business.

Life Operations is continuing to develop and
bring new innovative products to the marketplace to take advantage of selected
opportunities. This coupled with a strong commitment to profitable growth
should generate increased sales in selected lines, such as Long Term Care,
throughout the year.

Corporate and
Other

The Corporate and Other segment results
consist of interest expense on corporate borrowings, certain run-off insurance
operations, asbestos claims related to Fibreboard Corporation (Fibreboard),
financial guarantee insurance contracts, and certain non-insurance operations,
including eBusiness initiatives.

Net operating losses decreased to $55 million
for the first three months of 2001 as compared with $61 million in the same
period during 2000.

Restructuring and Other Related Charges

On August 5, 1998, CNA announced estimates of
the financial implications of its initiatives to achieve world-class
performance.  World-class performance,
as defined by the Company, refers to the Companys intention to position each
of its strategic business units (SBU) as a market leader by sharpening its
focus on customers and employing new technology to work smarter and
faster.  In the third quarter of 1998,
the Company finalized and approved a plan to restructure its operations.  The restructuring plan focused on a gross
workforce reduction of approximately 4,500 employees resulting in a net
reduction of approximately 2,400 employees, the consolidation of certain
processing centers, the closing of various facilities and the exiting of
certain businesses.

At December 31, 2000, the remaining accrued
restructuring and other related charges consisted of $7 million of lease
termination costs.  During the first
quarter of 2001, approximately $2 million of these accrued costs were
paid.

Investments

The components of net investment income for
the three months ended March 31, 2001 and 2000 are presented in the following
table.

Net Investment IncomeThree months ended March 31
  2001
  2000Fixed maturity securities:Bonds:Taxable
  $417
  $381Tax-exempt
  34
  58Limited Partnerships
  36
  56Short-term investments
  42
  32Other
  4
  19533
  546Investment expenses
  (16)
  (14)Net investment income
  $517
  $532

During the first quarter of 2001, the Company
reclassified equity method income from limited partnership investments.  This income was previously classified in
realized investment gains, net of participating policyholders and minority
interests.  Effective in 2001, equity
method income from limited partnership investments is classified in net
investment income, as shown in the preceding table.  Income from limited partnership investments decreased $20 million
for the first quarter of 2001 compared with the same period in 2000.

The Company experienced lower net investment
income in the first three months of 2001 as compared with the same period in
2000 due to decreases in limited partnership income, partially offset by an
improved yield in the core bond and stock portfolios. The bond segment of the
investment portfolio yielded 6.6% in the first three months of 2001 as compared
with 6.4% during the same period in 2000.

The components of net realized investment
gains for the three months ended March 31, 2001 and 2000 are presented in the
following table.

Net Realized Investment GainsThree months ended March 31
  2001
  2000(In millions)Realized investment gains (losses):Fixed
  maturity securities:U.S.
  Government bonds
  $128
  $(26)Corporate and other taxable bonds
  (8)
  (25)Tax-exempt bonds
  53
  (26)Asset-backed bonds
  51
  (17)Total fixed maturity securities
  224
  (94)Equity
  securities
  72
  85Derivative securities
  (5)
  (2)Other
  invested assets
  89
  43Total realized investment gains
  380
  32Allocated to participating policyholders
  (9)
  1Income tax expense
  (134)
  (12)Net realized investment gains
  $237
  $21Net realized investment gains increased $216
million in the first three months of 2001 as compared with the same period in
2000.  This increase primarily relates
to gains resulting from sales of fixed maturity securities and the sale of a
New York real estate property of $55 million.

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 and tax 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, 2001 and
December 31, 2000, and the change in unrealized gains/(losses) of those
securities included in other comprehensive income for the three months ended
March 31, 2001.

General Account Investments
  
  
  Three MonthsEndedMarch 31, 2001Change inMarch 31,
  December 31,
  Unrealized(In millions)
  2001
  2000
  Gains/(Losses)Fixed maturity securities:U.S.
  Treasury securities and obligations of government agencies
  $7,225
  $5,298
  $(5)Asset-backed securities
  5,708
  7,623
  27Tax-exempt securities
  2,219
  3,349
  (32)Taxable
  securities
  11,677
  10,328
  252Redeemable preferred stocks
  56
  54
  -Total fixed maturity securities
  26,885
  26,652
  242Equity securities:Common
  stock
  2,157
  2,216
  (99)Non-redeemable preferred stock
  211
  196
  (1)Total equity securities
  2,368
  2,412
  (100)Short-term investments
  6,231
  4,723
  -Other investments
  1,602
  1,335
  -Total investments
  $37,086
  $35,122
  142Separate account business and other
  
  
  100Change in unrealized gains (losses) reported in
  other comprehensive income
  
  
  $242

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.

Total net unrealized gains of the general
account investments were $1,549 million at March 31, 2001 compared with $1,310
million at December 31, 2000.  The
unrealized position at March 31, 2001 was composed of an unrealized gain of
$345 million for fixed maturities, and an unrealized gain of $1,204 million for
equity securities.

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% and 93% of which are
rated as investment grade at March 31, 2001 and
December 31, 2000.  The
following table summarizes the ratings of CNAs general account bond portfolio
at carrying value.



General Account Bond Ratings
  March 31,
  
  December 31,2001
  %
  2000
  %U.S. Government and affiliated agency securities
  $8,488
  32%
  $8,689
  32%Other AAA rated
  6,473
  24
  7,120
  27AA and A rated
  5,573
  21
  5,954
  22BBB rated
  4,141
  15
  3,066
  12Below investment-grade
  2,154
  8
  1,769
  7Total
  $26,829
  100%
  $26,598
  100%

At March 31, 2001 and December 31, 2000,
approximately 99% and 98% of the general account portfolio are U.S. Government
agencies or were rated by Standard & Poors or Moodys Investors
Service.  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, 2001 are $5,708 million of asset-backed securities,
at fair value, consisting of approximately 43% in collateralized mortgage
obligations (CMOs), 31% in U.S. government agency issued pass-through
certificates, 20% in corporate asset-backed obligations and 6% in corporate
mortgage-backed pass-through certificates. The majority of CMOs held are
actively traded in liquid markets and are priced by broker-dealers.

Short-term investments at March 31, 2001 and
December 31, 2000 primarily consisted of commercial paper and money market
funds. The components of the general account short-term investment portfolio
are presented in the following table.

Short-term Investments
  March 31,
  December 31,(In millions)
  2001
  2000Commercial paper
  $4,074
  $3,291U.S. Treasury securities
  355
  383Money market funds
  1,467
  620Other
  335
  429Total short-term investments
  $6,231
  $4,723

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.

Certain Derivatives in separate accounts are
held for trading purposes.  The Company
uses these derivatives to mitigate market risk by purchasing S&P 500R
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 are 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.

The Companys market risk has not changed
materially since year-end and is therefore not discussed herein.  Please see the Annual Report for disclosures
related to market risk.

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, 2001,
net cash used in operating activities was $123 million as compared with $492
million for the same period in 2000. 
The improvement related primarily to decreased net outflows from
underwriting activities, including decreased paid losses, partially offset by
decreased Federal income tax refunds.

For the three months ended March 31, 2001,
net cash inflows from investment activities was $272 million as compared with
$672 million for the same period in 2000. 
Cash flows from investing activities were principally related to
purchases and sales of invested assets. 
Cash inflows decreased from the prior year as invested asset purchases
increased.

For the three months ended March 31, 2001,
net cash used in financing activities was $170 million as compared with
$154 million for the same period in 2000. 
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.

Effective January 30, 2001, the Company sold
the 180 Maiden Lane, New York, facility. 
The sale of this property provided additional liquidity to the Company
with net sale proceeds of $277 million.

As of April 30, 2001,
CNA replaced its $750 million revolving credit facility (the Prior Facility)
with a new $500 million revolving credit facility (the New Facility). No loans
were outstanding under either the Prior Facility or the New Facility. The Prior
Facility was scheduled to expire on May 10, 2001.  The New Facility is split into two parts, a $250 million component
with a 364-day expiration date (with an option by CNA to turn this part of the
New Facility into a one-year term loan) and a $250 million component with a
3-year expiration date. The Company pays a facility fee to the lenders of the
New Facility for having funds available for loans under both components.  The facility fee on the 364-day component is
12.5 basis points (which is the same as the fee on the expiring revolver) while
the fee on the 3-year component is 15 basis points.  In addition to the facility fees, if the Company borrows under the
New Facility, the Company at its current debt rating will pay an interest rate
on outstanding loans equal to the London Interbank Offering Rate (LIBOR) plus
50 basis points for the 364-day component and LIBOR plus 47.5 basis points for
the 3-year component.  If the Company
has outstanding loans equaling more than 50% of the amounts available under the
New Facility, the Company also will pay a utilization fee of 12.5 basis points
on such loans. The New Facility will be used for general corporate purposes including
supporting the commercial paper program. During the first three months of 2001,
CNA reduced its commercial paper borrowings by $127 million and letters of
credit by $161 million.

The table below reflects ratings issued by
A.M. Best, Standard and Poor's, Moody's and Fitch for the Continental Casualty
Company (CCC) Pool, the Continental Insurance Company (CIC) Pool and the
Continental Assurance Company (CAC) Pool. Also rated were CNAFs senior debt,
commercial paper and The Continental Corporations (Continental) senior debt.

Debt RatingsInsurance Ratings
  CNAF
  ContinentalCCC Pool
  CAC Pool
  CIC Pool
  Senior
  Commercial
  SeniorFinancial Strength
  Debt
  Paper
  DebtA. M. Best
  A
  A
  A-
  -
  -
  -Fitch
  AA-
  AA
  -
  A-
  -
  -Moody's
  A2
  A2*
  A3
  Baa1
  P2
  Baa2S&P
  A
  AA-
  A-
  BBB
  A2
  BBB-

* CAC and Valley Forge Life Insurance Company (VFL)
are rated separately by Moody's and both have an A2 rating.



Accounting Pronouncements

In the first quarter of 2001, the Company
adopted the Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities and Statement of Financial Accounting Standards No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities
(collectively referred to as SFAS 133). 
The Companys initial adoption of SFAS 133 did not have a significant
impact on the equity of the Company; however, adoption of SFAS 133 resulted in
an after-tax decrease to first quarter 2001 earnings of $61 million. Of
this transition amount, approximately $58 million related to investments
and investment-related derivatives. 
Because the Company already carried its investment and
investment-related derivatives at fair value through other comprehensive
income, there was an equal and offsetting favorable adjustment of
$58 million to stockholders equity (accumulated other comprehensive
income).  See Note D for a complete
discussion of the Companys adoption of these accounting pronouncements.

On January 1, 2001, the Company adopted the
Codification of Statutory Accounting Principles (Codification) for preparing
its statutory-basis financial statements. 
Codification, which is intended to standardize regulatory accounting and
reporting to state insurance departments, was effective
January 1, 2001.  However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices.  The
states in which CNAFs insurance subsidiaries conduct business required
adoption of Codification (with certain modifications) for the preparation of
statutory-basis financial statements effective January 1, 2001.  The Companys adoption of Codification, as
modified, resulted in an increase in statutory capital and surplus as of
January 1, 2001 of approximately $175 million, which primarily
relates to deferred tax assets, partially offset by insurance-related
assessments and pension-related liabilities.

Additionally, CNAs property-casualty
companies implemented a change, effective January 1, 2001, in the
timing of recording written premiums for policies with future effective
dates.  This change was made in
conjunction with changes required by Codification related to the recording of
written premiums. The change in timing of recording written premiums has no
impact on net earned premiums or net income.

Forward Looking Statements

The statements contained in this management
discussion and analysis that are not historical facts are forward-looking
statements.  When included in the
managements discussion and analysis, the words believes, expects,
intends, anticipates, estimates and analogous expressions are intended to
identify forward-looking statements. 
Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected.  Such risks and uncertainties
include, among others, the impact of competitive products, policies and
pricing; product and policy demand and market responses; development of claims
and claim trends and the effect on loss reserves; the performance of
reinsurance companies under reinsurance contracts with the Company; general
economic and business conditions; changes in financial markets (interest rate,
credit, currency, commodities and stocks); changes in foreign, political,
social and economic conditions; regulatory initiatives and compliance with
governmental regulations; judicial decisions and rulings; the effect on the
Company of changes in rating agency policies and practices; the results of
financing efforts; changes in the Company's composition of operating segments;
the actual closing of contemplated transactions; and agreements and various
other matters and risks (many of which are beyond the Companys control)
detailed in the Companys SEC filings. 
These forward-looking statements speak only as of the filing date of
this document.  The Company expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Companys expectations with regard thereto or any change in
events, conditions or circumstances on which any statement is based.


CNA FINANCIAL CORPORATION Part II Other Information  Item 6. Exhibits and Reports on Form 8-K  None 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 CORPORATIONDate:  May 3, 2001
  
  By:  /s/ ROBERT V. DEUTSCHRobert V. DeutschSenior Vice President andChief Financial Officer