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UNITED STATESSECURITIES
 AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

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

For the Quarterly Period
 Ended September 30, 2002    Commission File Number 1-5823



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CNA FINANCIAL CORPORATION(Exact name of registrant
 as specified in its charter)



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



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

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

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

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



|Class                          | Outstanding
 at November 1, 2002
|------------------------------ | --------------------------------
|                               |                                 
|Common Stock,
 Par value $2.50 | 223,608,868                     



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TABLE OF CONTENTS



|                                            |                                                                                               |                                                                  |  |  |  |  |  | 
|------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|                                            | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                                            |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                                            |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)     
|                                            |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)     
|                                            |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|                                            | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                            | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                            | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION                  
|                                            | Item 1. Legal Proceedings                                                                    
|                                            | Item 5. Other Information                                                                    
|                                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                 
|Share Purchase Agreement                   
|Proforma Financial Statements and Footnotes



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CNA FINANCIAL CORPORATIONINDEX



|Part I.  | Financial
 Information: |                                                                                                                          
|-------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------
|         | Item 1.                 | Condensed
 Consolidated Financial Statements:                                                                            
|         |                         | Condensed
 Consolidated Balance Sheets at September 30, 2002 (Unaudited) and at December 31,
 2001                       
|         |                         | Condensed
 Consolidated Statements of Income for the Three and Nine Months Ended September
 30, 2002 and 2001 (Unaudited)
|         |                         | Condensed
 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002
 and 2001 (Unaudited)      
|         |                         | Notes to
 Condensed Consolidated Financial Statements                                                                    
|         | Item 2.                 | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                                   
|         | Item 3.                 | Quantitative
 and Qualitative Disclosures about Market Risk                                                              
|         | Item 4.                 | Controls
 and Procedures                                                                                                 
|Part II. | Other Information       |                                                                                                                          
|         | Item 1.                 | Legal Proceedings                                                                                                        
|         | Item 5.                 | Other Information                                                                                                        
|         | Item 6.                 | Exhibits
 and Reports on Form 8-K                                                                                        
|         | Signatures              |                                                                                                                          



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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                       | (Unaudited)September 30, 2002 |        | December 31, 2001
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ------ | -----------------
|(In millions, except share data)                                                                                                                                                                                                       |                               |        |                  
|Assets                                                                                                                                                                                                                                 |                               |        |                  
|Investments:                                                                                                                                                                                                                           |                               |        |                  
|Fixed maturity securities
 available-for-sale (amortized cost of $27,793 and $28,970)                                                                                                                                                  | $                             | 28,443 |                  
|Equity securities available-for-sale (cost of $918 and $1,168)                                                                                                                                                                         |                               | 932    |                  
|Mortgage loans and real estate (less accumulated depreciation of $54 and $1)                                                                                                                                                           |                               | 58     |                  
|Policy loans                                                                                                                                                                                                                           |                               | 182    |                  
|Other invested assets                                                                                                                                                                                                                  |                               | 1,380  |                  
|Short-term investments                                                                                                                                                                                                                 |                               | 5,185  |                  
|                                                                                                                                                                                                                                       |                               |        |                  
|Total investments                                                                                                                                                                                                                      |                               | 36,180 |                  
|Cash and cash equivalents                                                                                                                                                                                                              |                               | 259    |                  
|Receivables:                                                                                                                                                                                                                           |                               |        |                  
|Reinsurance                                                                                                                                                                                                                            |                               | 13,656 |                  
|Insurance                                                                                                                                                                                                                              |                               | 3,546  |                  
|Less allowance for doubtful accounts                                                                                                                                                                                                   |                               | (371   | )                
|Accrued investment income                                                                                                                                                                                                              |                               | 380    |                  
|Receivables for securities sold                                                                                                                                                                                                        |                               | 776    |                  
|Deferred acquisition costs                                                                                                                                                                                                             |                               | 2,548  |                  
|Prepaid reinsurance premiums                                                                                                                                                                                                           |                               | 1,417  |                  
|Federal income taxes recoverable (includes $0 and $617 due from Loews)                                                                                                                                                                 |                               |       |                  
|Deferred income taxes                                                                                                                                                                                                                  |                               | 679    |                  
|Property and equipment at cost (less accumulated depreciation of $761 and $797)                                                                                                                                                        |                               | 376    |                  
|Intangibles                                                                                                                                                                                                                            |                               | 183    |                  
|Other assets                                                                                                                                                                                                                           |                               | 2,292  |                  
|Separate account business                                                                                                                                                                                                              |                               | 3,147  |                  
|                                                                                                                                                                                                                                       |                               |        |                  
|Total assets                                                                                                                                                                                                                           | $                             | 65,068 |                  
|                                                                                                                                                                                                                                       |                               |        |                  
|Liabilities and Stockholders Equity                                                                                                                                                                                                   |                               |        |                  
|Liabilities:                                                                                                                                                                                                                           |                               |        |                  
|Insurance reserves:                                                                                                                                                                                                                    |                               |        |                  
|Claim and claim adjustment expense                                                                                                                                                                                                     | $                             | 29,725 |                  
|Unearned premiums                                                                                                                                                                                                                      |                               | 5,002  |                  
|Future policy benefits                                                                                                                                                                                                                 |                               | 7,286  |                  
|Policyholders funds                                                                                                                                                                                                                   |                               | 567    |                  
|Collateral on loaned securities and derivatives                                                                                                                                                                                        |                               | 1,007  |                  
|Payables for securities purchased                                                                                                                                                                                                      |                               | 836    |                  
|Participating policyholders funds                                                                                                                                                                                                     |                               | 127    |                  
|Debt                                                                                                                                                                                                                                   |                               | 2,549  |                  
|Reinsurance balances payable                                                                                                                                                                                                           |                               | 3,032  |                  
|Federal income taxes payable (includes $82 and $0 due to Loews)                                                                                                                                                                        |                               | 84     |                  
|Other liabilities                                                                                                                                                                                                                      |                               | 2,773  |                  
|Separate account business                                                                                                                                                                                                              |                               | 3,147  |                  
|                                                                                                                                                                                                                                       |                               |        |                  
|Total liabilities                                                                                                                                                                                                                      | $                             | 56,135 |                  
|                                                                                                                                                                                                                                       |                               |        |                  
|Commitments and contingencies (Note D, F, G, H, J and N)                                                                                                                                                                               |                               |        |                  
|Minority interest                                                                                                                                                                                                                      |                               | 233    |                  
|Stockholders equity:                                                                                                                                                                                                                  |                               |        |                  
|Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270
 shares issued at September 30, 2002 and December 31, 2001; and 223,608,868 and 223,596,861 shares
 outstanding at September 30, 2002 and December 31, 2001) |                               | 565    |                  
|Additional paid-in capital                                                                                                                                                                                                             |                               | 1,031  |                  
|Retained earnings                                                                                                                                                                                                                      |                               | 6,793  |                  
|Accumulated other comprehensive income                                                                                                                                                                                                 |                               | 451    |                  
|Treasury stock, at cost                                                                                                                                                                                                                |                               | (69    | )                
|                                                                                                                                                                                                                                       |                               |        |                  
|                                                                                                                                                                                                                                       |                               | 8,771  |                  
|Notes receivable for the issuance of common stock                                                                                                                                                                                      |                               | (71    | )                
|                                                                                                                                                                                                                                       |                               |        |                  
|Total stockholders equity                                                                                                                                                                                                             |                               | 8,700  |                  
|                                                                                                                                                                                                                                       |                               |        |                  
|Total liabilities and stockholders equity                                                                                                                                                                                             | $                             | 65,068 |                  
|                                                                                                                                                                                                                                       |                               |        |                  
|                                                                                                                                                                                                                                      
|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 |       | Nine Months
|-------------------------------------------------------------------------------------------------------------- | ------------ | ----- | -----------
|                                                                                                               |              |       |            
|Period ended September 30                                                                                      | 2002         |       | 2001       
|(In millions, except per share data)                                                                           |              |       |            
|Revenues                                                                                                       |              |       |            
|Net earned premiums                                                                                            | $            | 2,262 |            
|Net investment income                                                                                          |              | 364   |            
|Realized investment gains (losses), net of participating
 policyholders and minority interests                |              | 24    |            
|Other revenues                                                                                                 |              | 140   |            
|                                                                                                               |              |       |            
|Total revenues                                                                                                 |              | 2,790 |            
|                                                                                                               |              |       |            
|Claims, Benefits and Expenses                                                                                  |              |       |            
|Insurance claims and policyholders benefits                                                                   |              | 1,850 |            
|Amortization of deferred acquisition costs                                                                     |              | 448   |            
|Other operating expenses                                                                                       |              | 377   |            
|Restructuring and other related charges                                                                        |              |      |            
|Interest                                                                                                       |              | 37    |            
|                                                                                                               |              |       |            
|Total claims, benefits and expenses                                                                            |              | 2,712 |            
|                                                                                                               |              |       |            
|Income (loss) from continuing operations before income tax and minority interest                               |              | 78    |            
|Income tax (expense) benefit                                                                                   |              | (23   | )          
|Minority interest                                                                                              |              | (1    | )          
|                                                                                                               |              |       |            
|Income (loss) from continuing operations                                                                       |              | 54    |            
|Income (loss) from discontinued operations, net of tax of $0, $1, $9, and $1                                   |              |      |            
|                                                                                                               |              |       |            
|Income (loss) before cumulative effects of changes in accounting principles                                    |              | 54    |            
|Cumulative effects of changes in accounting principles,
 net of tax of $0, $0, $7, and $33                     |              |      |            
|                                                                                                               |              |       |            
|Net income (loss)                                                                                              | $            | 54    |            
|                                                                                                               |              |       |            
|Basic and Diluted Earnings (Loss) Per Share                                                                    |              |       |            
|Income (loss) from continuing operations                                                                       | $            | 0.24  |            
|Income (loss) from discontinued operations, net of tax                                                         |              |      |            
|                                                                                                               |              |       |            
|Income (loss) before cumulative effects of changes in accounting principles                                    |              | 0.24  |            
|Cumulative effects of changes in accounting principles, net of tax                                             |              |      |            
|                                                                                                               |              |       |            
|Basic and diluted earnings (loss) per share available to common stockholders                                   | $            | 0.24  |            
|                                                                                                               |              |       |            
|Weighted average outstanding common stock and common stock equivalents                                         |              | 223.6 |            
|                                                                                                               |              |       |            
|                                                                                                               |              |       |            
|                                                                                                              
|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)



|Nine months ended September 30                                                                                 | 2002 |          | 2001
|-------------------------------------------------------------------------------------------------------------- | ---- | -------- | ----
|(In millions)                                                                                                  |      |          |     
|                                                                                                              
|Cash Flows from Operating Activities                                                                           |      |          |     
|Net income (loss)                                                                                              | $    | 110      |     
|Adjustments to reconcile net income (loss) to net cash flows
 provided (used) by operating activities:         |      |          |     
|Cumulative effects of changes in accounting principles, net of tax                                             |      | 57       |     
|Loss on disposals of property and equipment                                                                    |      | 17       |     
|Minority interest                                                                                              |      | 11       |     
|Deferred income tax provision                                                                                  |      | (33      | )   
|Net realized investment losses (gains)                                                                         |      | 137      |     
|Realized loss from discontinued operations, net of tax                                                         |      | 37       |     
|Equity method income                                                                                           |      | 24       |     
|Amortization of intangibles                                                                                    |      |         |     
|Amortization of bond discount                                                                                  |      | (98      | )   
|Depreciation                                                                                                   |      | 74       |     
|Changes in:                                                                                                    |      |          |     
|Receivables, net                                                                                               |      | 647      |     
|Deferred acquisition costs                                                                                     |      | (130     | )   
|Accrued investment income                                                                                      |      | 2        |     
|Federal income taxes recoverable/payable                                                                       |      | 713      |     
|Prepaid reinsurance premiums                                                                                   |      | (196     | )   
|Reinsurance balances payable                                                                                   |      | 309      |     
|Insurance reserves                                                                                             |      | (664     | )   
|Other, net                                                                                                     |      | (210     | )   
|                                                                                                               |      |          |     
|Total adjustments                                                                                              |      | 697      |     
|                                                                                                               |      |          |     
|Net cash flows provided (used) by operating activities                                                         |      | 807      |     
|                                                                                                               |      |          |     
|Cash Flows from Investing Activities                                                                           |      |          |     
|Purchases of fixed maturity securities                                                                         |      | (49,577) |     
|Proceeds from fixed maturity securities:                                                                       |      |          |     
|Sales                                                                                                          |      | 48,195   |     
|Maturities, calls and redemptions                                                                              |      | 2,025    |     
|Purchases of equity securities                                                                                 |      | (646     | )   
|Proceeds from sales of equity securities                                                                       |      | 816      |     
|Change in short-term investments                                                                               |      | (1,394   | )   
|Change in collateral on loaned securities and derivatives                                                      |      | 84       |     
|Change in other investments                                                                                    |      | (146     | )   
|Purchases of property and equipment                                                                            |      | (61      | )   
|Sales of property and equipment                                                                                |      |         |     
|Dispositions                                                                                                   |      | 76       |     
|Other, net                                                                                                     |      | (8       | )   
|                                                                                                               |      |          |     
|Net cash flows (used) provided by investing activities                                                         |      | (636     | )   
|                                                                                                               |      |          |     
|Net Cash Flows from Financing Activities                                                                       |      |          |     
|Issuance of Common Stock                                                                                       |      |         |     
|Principal payments on debt                                                                                     |      | (84      | )   
|Proceeds from issuance of debt                                                                                 |      | 65       |     
|Return of policyholder account balances on investment contracts                                                |      | (36      | )   
|Receipts from investment contracts credited to policyholder account balances                                   |      |         |     
|Other                                                                                                          |      | 1        |     
|                                                                                                               |      |          |     
|Net cash flows (used) provided by financing activities                                                         |      | (54      | )   
|                                                                                                               |      |          |     
|Net change in cash and cash equivalents                                                                        |      | 117      |     
|Cash and cash equivalents, beginning of year                                                                   |      | 142      |     
|                                                                                                               |      |          |     
|Cash and cash equivalents, end of period                                                                       | $    | 259      |     
|                                                                                                               |      |          |     
|Supplemental Disclosures of Cash Flow Information:                                                             |      |          |     
|Cash paid (received):                                                                                          |      |          |     
|Interest                                                                                                       |      | 132      |     
|Federal income taxes                                                                                           |      | (627     | )   
|                                                                                                              
|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 the accounts of CNA Financial Corporation (CNAF) and its controlled
 subsidiaries, which include property and 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
 (CNAGLA)), collectively CNA or the Company. As of September 30, 2002, Loews Corporation
 (Loews) owned approximately 90% 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 September
 30, 2002 and 2001 and for the three and nine months ended September 30, 2002 and
 2001 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 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 changed 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 recorded in past business combinations, ceased upon adoption of SFAS 142,
 which for CNA was January 1, 2002. Net income for the nine months ended September
 30, 2002 does not include amortization expense on goodwill.

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

Had the Company not amortized
 goodwill in 2001, net income and the related basic and diluted
 earnings per share amounts would have been as follows:



|Pro Forma Effect of SFAS 142 on 2001 Results                                                    |  |              |      |                  
|----------------------------------------------------------------------------------------------- |  | ------------ | ---- | -----------------
|                                                                                                |  | Three Months |      | Nine Months      
|                                                                                                |  |              |      |                  
|Period ended September 30, 2001                                                                 |  | NetIncome    |      | EarningsPer Share
|(In millions, except per share amounts)                                                         |  |              |      |                  
|                                                                                                |  |              |      |                  
|Results as reported in prior year                                                               |  | $            | (155 | )                
|Add goodwill amortization, after-tax                                                            |  |              | 3    |                  
|                                                                                                |  |              |      |                  
|Adjusted reported results to include the impact of the non-amortization
 provisions of SFAS 142 |  | $            | (152 | )                
|                                                                                                |  |              |      |                  

During the third quarter
 of 2002, the Company completed its initial goodwill impairment testing and recorded
 a $64 million pretax ($57 million after-tax) impairment charge. In accordance with
 SFAS 142, the impairment charge, which primarily relates to Specialty Lines and Life
 Operations, was recorded as a cumulative effect of a change in accounting principle
 as of January 1, 2002. Any impairment losses incurred after the initial application of
 this standard will be reported in operating results.

The impact of the goodwill impairment
 charge on net income and the related basic and diluted per share amounts, for the three
 months ended March 31, 2002 and the six months ended June 30, 2002, is
 presented in the table below.



|Restatement of 2002 Prior Period Results in Accordance with SFAS 142
|--------------------------------------------------------------------
|                                                                    
|                                                                    
|                                                                    
|(In millions, except per share amounts)                             
|Results as reported in prior periods                                
|Less cumulative effect of adopting SFAS 142, net of tax             
|                                                                    
|Results as restated                                                 
|                                                                    

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 (SFAS 121).
 Effective January 1, 2002, CNA adopted SFAS 144 for impairments of long-lived assets and for
 long-lived assets to be disposed of on or after January 1, 2002. Certain operations identified for
 sale prior to January 1, 2002 continue to be accounted for under the provisions of SFAS 121.
 The adoption of SFAS 144 did not have a significant impact on the net income (loss) or equity of
 the Company; however, it did impact the income statement presentation of certain operations
 sold in 2002.

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

In June 2002,
 the FASB issued Statement of Financial Accounting Standards No. 146,
 Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146
 addresses financial accounting and reporting for costs associated with exit or disposal activities
 and supercedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
 Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
 Costs Incurred in a Restructuring) (EITF 94-3). CNA adopted the provisions of SFAS 146 for all
 disposal activities initiated after June 30, 2002. The adoption of SFAS 146 did not have a
 significant impact on the results of operations or equity of the Company.

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 (Loss) Per Share                                                                           
|----------------------------------------------------------------------------------------------------
|                                                                                                    
|                                                                                                    
|Period ended September 30                                                                           
|(In millions, except per share amounts)                                                             
|Net income (loss) applicable to common stock                                                        
|                                                                                                    
|Weighted average outstanding common stock
 and common stock equivalents                             
|Effect of dilutive securities, employee stock options                                               
|                                                                                                    
|Adjusted weighted average outstanding common stock and common stock equivalents assuming conversions
|                                                                                                    
|Basic and diluted earnings (loss) per share available to common stockholders                        
|                                                                                                    

Note D. Investments

Invested
 assets are exposed to various risks, such as interest rate, market and credit. Due to
 the level of risk associated with invested assets and the level of uncertainty related to changes
 in the value of these assets, it is possible that changes in risks in the near term would materially
 affect the amounts reported in the Condensed Consolidated Balance Sheets and Condensed
 Consolidated Statements of Operations.

The Company
 classifies its fixed maturity securities (bonds and redeemable preferred stocks)
 and its equity securities as available-for-sale, and as such, they are carried at fair value. The
 amortized cost of fixed maturity securities is adjusted for amortization of premiums and
 accretion of discounts to maturity, which are included in net investment income. Changes in fair
 value are reported as a component of other comprehensive income. Investments are written
 down to estimated net realizable values and losses are recognized in income when a decline in
 value is determined to be other than temporary.

For asset-backed
 securities included in fixed maturity securities, the Company recognizes
 income using a constant effective yield based on anticipated prepayments and the estimated
 economic life of the securities. When estimates of prepayments change, the effective yield is
 recalculated to reflect actual payments to date and anticipated future payments. The net
 investment in the securities is adjusted to the amount that would have existed had the new

6



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

effective yield been applied since the acquisition
 of the securities. Such adjustments are reflected in net investment income.

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

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, typically reflecting a reporting lag of up to three months,
 with changes in fair value reported in net investment income. Fair value of the
 Companys limited partnership investments 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 $1,334 million and
 $1,307 million as of September 30, 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 the partnerships management, who 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.

As of September 30, 2002, the Company had
 committed approximately $157 million for future capital calls from various third-party
 limited partnership investments in exchange for an ownership interest in the related
 partnership.

Realized investment losses for the three
 and nine months ended September 30, 2002, included $222 million and $533 million
 pretax of impairment losses as compared with $41 million and $124 million of pretax
 impairment losses for the same periods in 2001.

The impairment losses recorded in 2002 and
 2001 were primarily the result of the continued deterioration in the bond and equity
 markets and the effects on such markets due to the overall slowing of the economy.
 These impairment losses were related principally to corporate bonds in the taxable
 securities asset class of fixed maturity securities and in equity securities.

For the three months ended September 30,
 2002, the impairment losses related primarily to corporate bonds in the communications
 sector of the market and equities in the financial industry sector. On an aggregate
 basis these impairment losses were more than offset by the realized gains in the
 overall investment portfolio.

For the three months ended September 30,
 2001, the impairment losses related to corporate bonds primarily in the internet
 communications sector of the market.

7



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##### Table of Contents



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

For the nine months ended September 30,
 2002, the impairment losses included $129 million related to debt securities issued
 by WorldCom Inc., $74 million related to Adelphia Communications Corporation, and
 $57 million for AT&T Canada, all of which have recently filed for bankruptcy.
 The remainder of the impairment losses were primarily in the communications sectors.
 If the deterioration in this and other industry sectors continues in future periods
 and the Company continues to hold these securities, the Company is likely to have
 additional impairment losses in the future.

For the nine months ended September 30,
 2001 the impairment losses were primarily in corporate bonds and included $61 million
 related to the internet communications industry sector. The remainder of the impairment
 losses were primarily in the equities sector within the medical services industry.

Note E. Derivative Financial Instruments

Effective January 1, 2001, the Company accounts
 for derivatives and hedging activities in accordance with Statement of Financial
 Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
 Activities (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 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). The remainder of the transition adjustment
 is attributable to collateralized debt obligation products that are derivatives
 under SFAS 133.

8



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##### Table of Contents



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

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



|Derivative Financial Instruments Recognized (Losses) Gains 
|-----------------------------------------------------------
|                                                           
|                                                           
|Period ended September 30                                  
|(In millions)                                              
|General account                                            
|Swaps                                                      
|Interest rate caps                                         
|Futures sold, not yet purchased                            
|Forwards                                                   
|Commitments to purchase government and municipal securities
|Equity warrants                                            
|Collateralized debt obligation liabilities                 
|Options purchased                                          
|Options written                                            
|Options embedded in convertible debt securities            
|                                                           
|Total                                                      
|                                                           
|Separate accounts                                          
|Futures purchased                                          
|Futures sold, not yet purchased                            
|Commitments to purchase government and municipal securities
|Options purchased                                          
|Options written                                            
|                                                           
|Total                                                      
|                                                           

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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                           
|-----------------------------------------------------------
|                                                           
|                                                           
|September 30, 2002                                         
|(In millions)                                              
|General account                                            
|Swaps                                                      
|Interest rate caps                                         
|Futures sold, not yet purchased                            
|Forwards                                                   
|Equity warrants                                            
|Collateralized debt obligation liabilities                 
|Options purchased                                          
|Options embedded in convertible debt securities            
|                                                           
|Total                                                      
|                                                           
|Separate accounts                                          
|Futures purchased                                          
|Futures sold, not yet purchased                            
|Commitments to purchase government and municipal securities
|Options purchased                                          
|Options written                                            
|                                                           
|Total                                                      
|                                                           
|                                                           
|Derivative Financial Instruments                           
|                                                           
|                                                           
|December 31, 2001                                          
|(In millions)                                              
|                                                           
|General account                                            
|Swaps                                                      
|Interest rate caps                                         
|Futures sold, not yet purchased                            
|Forwards                                                   
|Commitments to purchase government and municipal securities
|Equity warrants                                            
|Collateralized debt obligation liabilities                 
|Options purchased                                          
|Options embedded in convertible debt securities            
|                                                           
|Total                                                      
|                                                           
|Separate accounts                                          
|Futures purchased                                          
|Futures sold, not yet purchased                            
|Commitments to purchase government and municipal securities
|Options purchased                                          
|Options written                                            
|                                                           
|Total                                                      
|                                                           

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

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

Fair Value Hedges

The Companys hedging activities primarily
 involve hedging interest rate and foreign currency exposures. The ineffective portion
 of fair value hedges resulted in realized losses of $2.5 million and $3 million
 for the three and nine month periods ended September 30, 2002, and $1 million and
 $0.5 million for the three and nine month periods ended September 30, 2001.

Note F. Legal Proceedings and Contingent
 Liabilities

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 portion of the
 premiums assumed under the IGI Program related to United States workers compensation
 carve-out business. Some of these premiums were received from John Hancock Financial
 Services, Inc. (John Hancock). CNA is aware that a number of reinsurers
 with workers compensation carve-out insurance exposure, including John Hancock,
 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 reduced. Moreover, based on information
 known at this time, CNA believes it has strong grounds to successfully challenge
 its alleged exposure on a substantial portion of its United States workers compensation
 carve-out business, including all purported exposure derived from John Hancock,
 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, other than that derived from John Hancock, and an estimate
 for recoverables from retrocessionaires. CNA has not established any reserve for
 any exposure derived from John Hancock because, as indicated, CNA believes the contract
 will be rescinded.

The Company is pursuing a number of loss
 mitigation strategies with respect to the entire IGI Program. Although the results
 of these various actions to date support the recorded reserves,

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

the estimate of ultimate losses is
 subject to considerable uncertainty due to the complexities described above. 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, although results of operations may be adversely affected.

California Wage and Hour Litigation

In Ernestine Samora, et al. v. CCC, Case
 No. BC 242487, Superior Court of California, County of Los Angeles, California and
 Brian Wenzel v. Galway Insurance Company, Superior Court of California, County of
 Orange No. BC01CC08868 (coordinated), two former CNA employees, filed lawsuits in
 Los Angeles Superior Court on behalf of purported classes of CNA employees asserting
 they worked hours for which they should have been compensated at a rate of 1 1/2
 times their base hourly wage over a four-year period. The cases were coordinated
 and an amended complaint was filed which alleges overtime claims under California
 law over a four year period. In June 2002, the Company filed a responsive pleading
 denying the material allegations of the amended complaint. The Company intends
 to defend this case vigorously. Due to the recent commencement of discovery and
 the uncertainty of how the courts may interpret California law as applied to the
 facts of these cases, the extent of losses beyond any amounts that may be accrued
 are not readily determinable at this time. Based on facts and circumstances presently
 known, however, in the opinion of management, the outcome will not materially affect
 the equity of the Company, although results of operations may be adversely affected.

Voluntary Market Premium Litigation

CNA, along with dozens of other insurance
 companies, is a defendant in sixteen purported class action cases brought by large
 policyholders, which generally allege that the defendants, as part of an industry-wide
 conspiracy, included improper charges in their retrospectively rated and other loss-sensitive
 insurance premiums. Fourteen lawsuits were brought as class actions in state courts
 and one in federal court. Among the claims asserted were violations of state antitrust
 laws, breach of contract, fraud and unjust enrichment. In two of the cases, the
 defendants won dismissals on motions and, in three others, class certification was
 denied after hearing. Plaintiffs voluntarily dismissed their claims in three states.
 In the federal court case, Sandwich Chef of Texas, Inc., et al. v. Reliance National
 Indemnity Insurance Company, et al., Civil Action No. H-98-1484, United States District
 Court for the Southern District of Texas, the district court certified a multi-state
 class. The U.S. Court of Appeals for the Fifth Circuit granted leave for an interlocutory
 appeal. Due to the uncertainty of how the courts may interpret state and federal
 law as applied to the facts of the cases, the extent of potential losses beyond
 any amounts that may be accrued are not readily determinable at this time. Based
 on facts and circumstances presently known, however, in the opinion of management
 the outcome will not materially affect the equity of the Company, although results
 of operations may be adversely affected.

Other Litigation

CNA and its subsidiaries are also parties
 to other litigation arising in the ordinary course of business. Based on the facts
 and circumstances currently known, such other litigation will not,

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

in the opinion
 of management, materially affect the results of operations or equity of CNA. See
 Note G for discussion of claims related to environmental pollution, asbestos and
 mass tort.

Note G. Claim and Claim Adjustment Expense
 Reserves

CNAs property and 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 results in the period that the need for such adjustments is determined.

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

During the third quarter of 2001, the Company
 experienced a severe catastrophe loss estimated at $468 million pretax, net of reinsurance,
 related to the September 11, 2001 World Trade Center disaster and related events
 (WTC event). The loss estimate is based on a total industry loss of $50 billion
 and includes all lines of insurance. The estimate takes into account CNAs
 substantial reinsurance agreements, including its catastrophe reinsurance program
 and corporate reinsurance programs. The Company has closely monitored reported
 losses as well as the collection of reinsurance on WTC event claims. Based on experience
 to date, the Company believes its recorded reserves are adequate.

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 available in the first quarter
 of 2002 resulted in CNA Re increasing 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 fully offset
 on a net of reinsurance basis (before the impact of the CCC Cover) by higher reinstatement
 premiums and a reduction of return premiums.

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

The following
 table provides managements estimate of pretax losses related to this catastrophe
 on a gross basis (before reinsurance) and a net basis (after reinsurance) by line of business.



|WTC Event Losses                                                                                               
|---------------------------------------------------------------------------------------------------------------
|Three and nine months ended September 30, 2001                                                                 
|(In millions)                                                                                                  
|Property and casualty reinsurance                                                                              
|Property                                                                                                       
|Workers compensation                                                                                           
|Airline hull                                                                                                   
|Commercial auto                                                                                                
|                                                                                                               
|Total property and casualty                                                                                    
|                                                                                                               
|Group                                                                                                          
|Life                                                                                                           
|                                                                                                               
|Total group and life                                                                                           
|                                                                                                               
|Total loss before corporate aggregate reinsurance
 treaties and reinstatement and additional premiums and other
|                                                                                                               
|Reinstatement and additional premiums and other                                                                
|Corporate aggregate reinsurance treaties                                                                       
|                                                                                                               
|Total                                                                                                          
|                                                                                                               

Environmental
 Pollution and Mass Tort and Asbestos Reserves (APMT)

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

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



|Environmental Pollution and Mass Tort and Asbestos
|--------------------------------------------------
|                                                  
|                                                  
|                                                  
|(In millions)                                     
|Gross reserves                                    
|Ceded reserves                                    
|                                                  
|Net reserves                                      
|                                                  

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

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

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. The vast majority of 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 nine 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 equity.

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 September 30, 2002 and December 31,
 2001, CNA carried approximately $526 million and $617 million of claim and claim
 adjustment expense reserves, net of reinsurance recoverables, for reported and unreported
 environmental pollution and mass tort claims. There was no environmental pollution
 and mass tort net development for the three and nine months ended September 30,
 2002 and the three months ended September 30, 2001. Unfavorable environmental pollution
 and mass tort development for the nine months ended September 30, 2001 amounted
 to $453 million. The Company paid environmental pollution-related claims and other
 mass tort related claims, net of reinsurance recoveries, of $91 million and $153
 million for the nine months ended September 30, 2002 and 2001.

CNAs property and 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

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

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 September 30, 2002 and December 31,
 2001, CNA carried approximately $1,216 million and $1,204 million of claim and claim
 adjustment expense reserves, net of reinsurance recoverables, for reported and unreported
 asbestos-related claims. There was no asbestos net claim and claim adjustment expense
 development for the three and nine months ended September 30, 2002 and the three
 months ended September 30, 2001. Unfavorable asbestos net claim and claim adjustment
 reserve development for the nine months ended September 30, 2001 amounted to $769
 million. The Company had a net $12 million receipt of cash related to asbestos in
 the first nine months of 2002 as reinsurance recoveries collected exceeded claim
 payments. The Company made asbestos-related claim payments, net of reinsurance recoveries,
 of $78 million for the nine months ended September 30, 2001.

In the past several years, CNA has experienced
 significant increases in claim counts for asbestos-related claims. The factors
 that led to these increases included, among other things, intensive advertising
 campaigns by lawyers for asbestos claimants, mass medical screening programs sponsored
 by plaintiff lawyers, and the addition of new defendants such as the distributors
 and installers of products containing asbestos. Currently, the majority of asbestos
 bodily injury claims are filed by persons exhibiting few, if any, disease symptoms.
 It is estimated that approximately 90% of the current non-malignant asbestos claimants
 do not meet the American Medical Associations definition of impairment. Some
 courts, including the federal district court responsible for pre-trial proceedings
 in all federal asbestos bodily injury actions, have ordered that so-called unimpaired
 claimants may not recover unless at some point the claimants condition
 worsens to the point of impairment.

Since 1982, at least sixty-two companies
 that mined asbestos, or manufactured or used asbestos-containing products, have
 filed for bankruptcy. Of these sixty-two companies, twenty-six companies have filed
 bankruptcy since January 1, 2000. This phenomenon has prompted plaintiff attorneys
 to file claims against companies that had only peripheral involvement with asbestos.
 Many of these defendants were users or distributors of asbestos-containing products,
 or manufacturers of products in which asbestos was encapsulated. These defendants
 include equipment manufacturers, brake, gasket, and sealant manufacturers, and general
 construction contractors. According to a comprehensive report on asbestos litigation
 recently released by the Rand Corporation, over 6,000 companies have been named
 as defendants in asbestos lawsuits, with 75 out of 83 different types of industries
 in the United States impacted by asbestos litigation. The study found that a typical
 claimant names 70 to 80 defendants, up from an average of 20 in the early years
 of asbestos litigation.

Some asbestos-related defendants have asserted
 that their claims for insurance are not subject to aggregate limits on coverage.
 CNA 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 purportedly 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. CNA is currently attempting to achieve settlements
 of several of

16



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

these claims for coverage
purportedly not subject to
 aggregate limits. Nevertheless, there can be no assurance any of these settlement
 efforts will be successful, or that any such claims can be settled on terms acceptable
 to CNA. 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
 equity.

Policyholders have also initiated litigation
 directly against CNA and other insurers. CNA has been named in Adams v. Aetna,
 Inc., et. al. (Circuit Court of Kanhwha County, West Virginia), a purported class
 action against CNA and other insurers, alleging that the defendants violated West
 Virginias Unfair Trade Practices Act in handling and resolving asbestos claims
 against their policyholders. In addition, lawsuits have been filed in Texas against
 CNA, and other insurers and non-insurer corporate defendants asserting liability
 for failing to warn of the dangers of asbestos. (Boson v. Union Carbide Corp.,
 et al. (District Court of Nueces County, Texas)). It is difficult to predict the
 outcome or financial exposure represented by this type of litigation in light of
 the broad nature of the relief requested and the novel theories asserted.

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, CNAs abilities to recover reinsurance, future court decisions
 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 equity.

CNA reviews each active asbestos account
 every six months to determine whether changes in reserves may be warranted. The
 Company considers input from its analyst professionals with direct responsibility
 for the claims, inside and outside counsel with responsibility for representation
 of the Company, and its actuarial staff. These professionals review, among many
 factors, the policyholders present and future exposures (including such factors
 as claims volume, disease mix, trial conditions, settlement demands and defense
 costs); the policies issued by CNA (including such factors as aggregate or per occurrence
 limits, whether the policy is primary, umbrella or excess, and the existence of
 policyholder retentions and/or deductibles); the existence of other insurance; and
 reinsurance arrangements.

The results of operations and equity of
 CNA in future years may be adversely affected by environmental pollution and 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.

Second Quarter 2001 Prior Year Reserve
 Strengthening

During the second quarter of 2001, the Company
 noted the continued emergence of adverse loss experience across several lines of
 business related to prior years, which are discussed in further detail below. The
 Company completed a number of reserve studies during the second quarter of 2001
 for many of its lines of business, including those in which these adverse trends
 were noted.

17



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##### Table of Contents



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

The
 second quarter 2001 prior year reserve strengthening and related items comprising the
 amounts noted above are detailed in the following table.



|Second Quarter 2001 Prior Year Reserve Strengthening                                                          
|--------------------------------------------------------------------------------------------------------------
|                                                                                                              
|(In millions)                                                                                                 
|Net reserve strengthening excluding the
 impact of the corporate aggregate reinsurance treaty:                
|APMT                                                                                                          
|Non-APMT                                                                                                      
|                                                                                                              
|Total                                                                                                         
|Pretax benefit from
 corporate aggregate reinsurance treaty on accident year 1999**                           
|Accrual for insurance-related assessments                                                                     
|                                                                                                              
|Net reserve strengthening and related accruals                                                                
|                                                                                                              
|Change in estimate of premium accruals                                                                        
|Reduction of related commission accruals                                                                      
|                                                                                                              
|Net premium and related accrual reductions                                                                    
|                                                                                                              
|Total second quarter 2001 reserve
 strengthening and related accruals                                         
|                                                                                                              
|** $500 million
 of ceded losses reduced by $230 million of ceded premiums and $47 million of interest charges

With respect
 to environmental and mass tort reserves, commencing in 2000 and continuing into
 the first and second quarters of 2001, CNA received a number of new reported claims, some of
 which involved declaratory judgment actions premised on court decisions purporting to expand
 insurance coverage for pollution claims. In these decisions, several courts adopted rules of
 insurance policy interpretation which established joint and several liability for insurers
 consecutively on a risk during a period of alleged property damage; and in other instances
 adopted interpretations of the absolute pollution exclusion, which weakened its effectiveness
 in most circumstances. In addition to receiving new claims and declaratory judgment actions
 premised upon these unfavorable legal precedents, these court decisions also impacted CNAs
 pending pollution and mass tort claims and coverage litigation. During the spring of 2001, CNA
 reviewed specific claims and litigation, as well as general trends, and concluded reserve
 strengthening in this area was warranted.

In the
 area of mass torts, several well-publicized verdicts arising out of bodily injury cases
 related to allegedly toxic mold led to a significant increase in mold-related claims in 2000 and
 the first half of 2001. CNAs reserve increase in the second quarter of 2001 was caused in part
 by this increased area of exposure.

With
 respect to other court cases and how they might affect our reserves and reasonable
 possible losses, the following should be noted. State and federal courts issue numerous
 decisions each year, which potentially impact losses and reserves in both a favorable and
 unfavorable manner. Examples of favorable developments include decisions to allocate
 defense and indemnity payments in a manner so as to limit carriers obligations to damages
 taking place during the effective dates of their policies; decisions holding that injuries occurring
 after asbestos operations are completed are subject to the completed operations aggregate

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

limits of the policies; and decisions ruling
 that carriers loss control inspections of their insureds premises do
 not give rise to a duty to warn third parties to the dangers of asbestos.

Examples of unfavorable developments include
 decisions limiting the application of the absolute pollution exclusion;
 and decisions holding carriers liable for defense and indemnity of asbestos and
 pollution claims on a joint and several basis.

Throughout 2000, and into 2001, CNA experienced
 significant increases in new asbestos bodily injury claims. In light of this development,
 CNA formed the view that payments for asbestos claims could be higher in future
 years than previously estimated. Moreover, in late 2000 through mid-2001, industry
 sources such as rating agencies and actuarial firms released analyses and studies
 commenting on the increase in claim volumes and other asbestos liability developments.
 For example, A.M. Best released a study in May 2001 increasing its ultimate asbestos
 reserve estimate 63% from $40 billion to $65 billion, citing an unfunded insurance
 industry reserve shortfall of $33 billion. In June 2001, Tillinghast raised its
 asbestos ultimate exposure from $55 billion to $65 billion for the insurance industry
 and its estimate of the ultimate asbestos liability for all industries was raised
 to $200 billion.

Also in the 2000 to 2001 time period, a
 number of significant asbestos defendants filed for bankruptcy, increasing the likelihood
 that excess layers of insurance coverage could be called upon to indemnify policyholders
 and creating the potential that novel legal doctrines could be employed which could
 accelerate the time when such indemnification payments could be due.

These developments led CNAs claims
 management to the conclusion that its asbestos reserves required strengthening.

The non-APMT adverse reserve development
 was the result of analyses of several lines of business. This development related
 principally to commercial insurance coverages including automobile liability and
 multiple-peril, as well as assumed reinsurance and healthcare-related coverages.
 A brief summary of these lines of business and the associated reserve development
 is discussed below.

Approximately $600 million of the adverse
 loss development is a result of several coverages provided to commercial entities.
 Reserve analyses performed during 2001 showed unexpected increases in the size
 of claims for several lines, including commercial automobile liability, general
 liability and the liability portion of commercial multiple-peril coverages. In
 addition, the number of commercial automobile liability claims was higher than expected
 and several state-specific factors resulted in higher than anticipated losses, including
 developments associated with commercial automobile liability coverage in Ohio and
 general liability coverage provided to contractors in New York.

The commercial automobile liability analysis
 indicated increased ultimate loss and allocated loss adjustment expense across several
 accident years due to higher paid and reported loss and allocated loss adjustment
 expense resulting from several factors. These factors include uninsured/underinsured
 motorists coverage in Ohio, a change in the rate at which the average claim size
 is increasing and a lack of improvement in the ratio of the number of claims per
 exposure unit, the frequency. First, Ohio courts have significantly broadened the
 population covered through the uninsured/underinsured motorists coverage.
 The broadening of the population covered by this portion of the policy, and the
 retrospective nature of this broadening of coverage, resulted in additional claims
 for older years. Second, in recent years, the average claim size had been increasing
 at less than a 2% annual rate. The most recent available data

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

indicates that the rate of increase is now
 closer to 8% with only a portion of this increase explainable by a change in mix
 of business. Finally, the review completed during the second quarter of 2001 indicated
 that the frequency for the 2000 accident year was 6% higher than 1999. Expectations
 were that the 2000 frequency would show an improvement from the 1999 level.

The analyses of general liability and the
 liability portion of commercial multiple-peril coverages showed several factors
 affecting these lines. Construction defect claims in California and a limited number
 of other states have had a significant impact. It was expected that the number
 of claims being reported and the average size of those claims would fall quickly
 due to the decrease in business exposed to those losses. However, the number of
 claims reported during the first six months of 2001 increased from the number of
 claims reported during the last six months of 2000. In addition to the effects
 of construction defect claims, the average claim associated with New York labor
 law has risen to more than $125,000 from less than $100,000, which was significantly
 greater than previously expected.

An analysis of assumed reinsurance business
 showed that the paid and reported losses for recent accident years were higher than
 expectations, which resulted in management recording net unfavorable development
 on prior year loss reserves of approximately $560 million. Because of the long
 and variable reporting pattern associated with assumed reinsurance as well as uncertainty
 regarding possible changes in the reporting methods of the ceding companies, the
 carried reserves for assumed reinsurance are based mainly on the pricing assumptions
 until experience emerges to show that the pricing assumptions are no longer valid.
 The reviews completed during the second quarter of 2001, including analysis at
 the individual treaty level, showed that the pricing assumptions were no longer
 appropriate. The classes of business with the most significant changes include
 excess of loss liability, professional liability and proportional and retrocessional
 property.

Approximately $320 million of adverse loss
 development was due to adverse experience in all other lines, primarily in coverages
 provided to healthcare-related entities. The level of paid and reported losses associated
 with coverages provided to national long-term care facilities were higher than expected.
 The long-term care facility business had traditionally been limited to local facilities.
 In recent years, the Company began to provide coverage to large chains of long-term
 care facilities. Original assumptions were that these chains would exhibit loss
 ratios similar to the local facilities. The most recent review of these large chains
 indicated an overall loss ratio in excess of 500% versus approximately 100% for
 the remaining business. In addition, the average size of claims resulting from coverages
 provided to physicians and institutions providing healthcare related services increased
 more than expected. The most recent review indicated that the average loss had
 increased to over $330,000. Prior to this review, the expectation for the average
 loss was approximately $250,000.

Concurrent with the Companys review
 of loss reserves, the Company completed comprehensive studies of estimated premium
 receivable accruals on retrospectively rated insurance policies and involuntary
 market facilities. These studies included ground-up reviews of retrospective premium
 accruals utilizing a more comprehensive database of retrospectively rated contracts.
 This review included application of the policy retrospective rating parameters
 to the revised estimate of ultimate loss ratio and consideration of actual interim
 cash settlement. This study resulted in a change in the estimated retrospective
 premiums receivable balances.

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

As a result of this review and changes in
 premiums associated with the change in estimates for loss reserves, the Company
 recorded a pretax reduction in premium accruals of $566 million. The effect on
 net earned premiums was $616 million offset by a reduction of accrued commissions
 of $50 million. The studies included the review of all such retrospectively rated
 insurance policies and the estimate of ultimate losses.

Approximately $188 million of this amount
 resulted from a change in estimate in premiums related to involuntary market facilities,
 which had an offsetting impact on net losses and therefore had no impact on the
 net operating results. Accruals for ceded premiums related to other reinsurance
 treaties increased $83 million due to the reserve strengthening. The remainder
 of the decrease in premium accruals relates to the change in estimate of the amount
 of retrospective premium receivables as discussed above.

Note H. 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 and casualty contracts, such as the corporate aggregate
 reinsurance 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 the cash remitted to the reinsurer for the reinsurers
 margin, or cost of the reinsurance contract, as ceded premiums. The remainder
 of the premiums ceded under the reinsurance contract is recorded as funds withheld
 liability. The Company is required to increase the funds withheld balance at stated
 interest crediting rates applied to the funds withheld balance or as otherwise specified
 under the terms of the contract. 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, which
 is included in other net investment income, was $53 million and $84 million for
 the three months ended September 30, 2002 and 2001 and $168 million and $206 million
 for the nine months ended September 30, 2002 and 2001. The amount subject to interest
 crediting rates on such contracts was $2,904 million and $2,724 million at September
 30, 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.

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

The
 ceding of insurance does not discharge the primary liability of the Company. Therefore, a
 credit exposure exists with respect to property and 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 
|------------------------------
|Nine months ended September 30
|(In millions)                 
|2002                          
|Property and casualty         
|Accident and health           
|Life                          
|                              
|Total earned premiums         
|                              
|2001                          
|Property and casualty         
|Accident and health           
|Life                          
|                              
|Total earned premiums         
|                              

For 2002,
 the Company has entered into an aggregate reinsurance treaty covering substantially
 all of the Companys property and 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 of ceded losses. 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% per annum, 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
 $2.5 million and $7.5 million was recorded for the 2002 Cover for the three and nine months
 ended September 30, 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, the
 Company has the right to elect to cede losses to the 2002 Cover when its recorded accident
 year losses exceed the attachment point. This election period expires March 31, 2004. If no
 losses are ceded by this date, the contract is considered to be commuted. If the Company
 elects to cede any losses to the 2002 Cover, it must continue to cede all losses subject to the
 terms of the contract. As of September 30, 2002, the Company has not
recorded any ceded losses
 related to this cover.

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 and 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 of ceded losses with an
 aggregate limit of $1 billion of ceded losses for the three year period. The ceded premiums are

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

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 commencing in 2006.

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 WTC event, the limit under this section was
 exhausted. Additionally, as a result of the significant reserve additions recorded in the second
 quarter of 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 aggregate limit on accident
 years 2000 and 2001 under the first section of the Aggregate Cover.

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



|Impact of Aggregate Cover on Pretax Operating Results
|-----------------------------------------------------
|                                                     
|                                                     
|Period ended September 30                            
|(In millions)                                        
|Ceded earned premiums                                
|Ceded claim and claim adjustment expense             
|Interest charges (included in net investment income) 
|                                                     
|Pretax impact on operating results                   
|                                                     

In 2001,
 the Company entered into a one-year aggregate reinsurance treaty related to the 2001
 accident year covering substantially all property and 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. The ceded premium related to full utilization of the
 $760 million of limit 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 $618
 million have been ceded under the CCC Cover through September 30, 2002.

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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     
|----------------------------------------------------
|                                                    
|                                                    
|Period ended September 30                           
|(In millions)                                       
|Ceded earned premiums                               
|Ceded claim and claim adjustment expense            
|Interest charges (included in net investment income)
|                                                    
|Pretax impact on operating results                  
|                                                    

Note I. Debt

Debt is composed of the following obligations.



|Debt                                                         
|-------------------------------------------------------------
|                                                             
|(In millions)                                                
|Variable rate debt:                                          
|Credit facility  CNAF, due April 29, 2002                   
|Credit facility  CNAF, due April 30, 2004                   
|Term loan due April 29, 2003                                 
|Credit facility  CNA Surety, due September 30, 2002         
|Credit facility  CNA Surety, due September 30, 2003         
|Term loan  CNA Surety, due September 30, 2005               
|Senior notes:                                                
|7.250%, face amount of $128, due March 1, 2003               
|6.250%, face amount of $248, due November 15, 2003           
|6.500%, face amount of $493, due April 15, 2005              
|6.750%, face amount of $250, due November 15, 2006           
|6.450%, face amount of $150, due January 15, 2008            
|6.600%, face amount of $200, due December 15, 2008           
|8.375%, face amount of $70, due August 15, 2012              
|6.950%, face amount of $150, due January 15, 2018            
|Debenture, 7.250%, face amount of $243, due November 15, 2023
|Capital leases, 8.000%-13.700%, due through December 31, 2011
|Other debt, 1.000%-8.500%, due through 2019                  
|                                                             
|Total debt                                                   
|                                                             

The Company
 pays a facility fee to the lenders for having funds available for loans under the
 three-year credit facility with an April 30, 2004 expiration date. The fee varies based on the
 long-term debt ratings of the Company. At September 30, 2002, the facility fee on the three-year
 component was 17.5 basis points.

The Company
 pays interest on any outstanding debt/borrowings under the one-year term loan
 and three-year 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
 60.0 basis points for the one-year term loan and LIBOR plus 57.5 basis points for the three-year
 facility. Further, if the Company has outstanding loans greater than 50% of the amounts
 available under the three-year facility, the Company also will pay a utilization fee of 12.5 basis
 points on such loans.

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

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 25.0 basis points. The applicable interest rate on the one-year term loan would
 increase from LIBOR plus 60.0 basis points to LIBOR plus 80.0 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 75.0 basis points. The utilization fee
 would remain unchanged on the three-year facility at 12.5 basis points.

On September 30, 2002, CNA Surety Corporation
 (CNA Surety), a 64% owned and consolidated subsidiary of CNA, entered into a $65
 million credit agreement with one bank, which consists of a $35 million 364-day
 revolving credit facility and a $30 million term loan. As of September 30, 2002,
 the facility was fully utilized. The credit agreement replaced a $130 million revolving
 credit facility that terminated September 30, 2002. Under the new agreement, CNA
 Surety pays a facility fee of 12.5 basis points, interest at LIBOR plus 45.0 basis
 points, and for utilization greater than 50% of the amount available to borrow an
 additional fee of 5.0 basis points. On the term loan, CNA Surety pays interest
 at LIBOR plus 62.5 basis points.

Under the former agreement, CNA Surety paid
 interest on outstanding borrowings based on, among other rates, LIBOR plus the applicable
 margin. The applicable margin was determined by the companys leverage ratio
 (debt to total capitalization). At the termination date of the facility, the applicable
 margin was 30.0 basis points, including the 10.0 basis point facility fee.

The terms of the agreement require the assumption
 by a second bank of $15 million of the credit risk by November 30, 2002 or CNA Surety
 will be required to repay $15 million to reduce the amount of the credit facility
 commitment from $35 million to $20 million. CNAF and CNA Surety have entered into
 an agreement whereby CNAF will lend CNA Surety the amount needed to repay its bank
 loans, if necessary (See Note P for additional information regarding this agreement).

The terms of CNAFs and CNA Suretys
 credit facilities require CNAF and CNA Surety to maintain certain financial
 ratios and combined property and casualty company statutory surplus levels. At
 September 30, 2002 and December 31, 2001, CNAF and CNA Surety were 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 September 30, 2002 there were approximately
 $282 million of outstanding letters of credit.

Note J. Commitments and Contingencies

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.

As of September 30, 2002, the Company is
 obligated to make future payments totaling $470 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: $27 million in 2002; $94 million in 2003; $75 million
 in 2004; $66 million in 2005; and $208 million in 2006 and beyond.

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

Additionally,
 the Company has entered into a limited number of guaranteed payment contracts,
 primarily relating to telecommunication services, amounting to approximately $25 million.
 Estimated future minimum purchases under these contracts are as follows: $4 million in 2002;
 $11 million in 2003; $8 million in 2004; and $2 million in 2005.

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 income (loss) are shown below.



|Comprehensive Income (Loss)                                                                              |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ------------ | ---- | ----------- |  | - | ---- | - |  | - | ---- | - |  | - | ------ | -
|                                                                                                         |  | Three Months |      | Nine Months
|                                                                                                         |  |              |      |            
|Period ended September 30                                                                                |  |              | 2002 |             |  |   | 2001 |   |  |   | 2002 |   |  |   | 2001   |  
|(In millions)                                                                                            |  |              |      |             |  |   |      |  
|Net income (loss)                                                                                        |  | $            | 54   |             |  | $ | (155 | ) |  | $ | 110  |   |  | $ | (1,622 | )
|                                                                                                         |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|Other comprehensive income (loss):                                                                       |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|Change in unrealized gains/losses on general account investments:                                        |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|Holding gains/losses arising during the period                                                           |  |              | 395  |             |  |   | 285  |   |  |   | 320  |   |  |   | 421    |  
|Less: unrealized gains at beginning of period included in realized gains during the period               |  |              | 41   |             |  |   | (16  | ) |  |   | (1   | ) |  |   | (1,139 | )
|                                                                                                         |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|Net change in unrealized gains/losses on general account investments                                     |  |              | 436  |             |  |   | 269  |   |  |   | 319  |   |  |   | (718   | )
|Net change in unrealized gains/losses on separate accounts and other                                     |  |              | 37   |             |  |   | 31   |   |  |   | 49   |   |  |   | 28     |  
|Foreign currency translation adjustment                                                                  |  |              | (23  | )           |  |   | (11  | ) |  |   | (30  | ) |  |   | (16    | )
|Allocation to participating policyholders and minority interests                                        |  |              | (12  | )           |  |   | (9   | ) |  |   | (9   | ) |  |   | (12    | )
|                                                                                                         |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|Other comprehensive income (loss), before tax and cumulative effect of
 a change in accounting principle |  |              | 438  |             |  |   | 280  |   |  |   | 329  |   |  |   | (718   | )
|Deferred income tax (expense) benefit related to other comprehensive income (loss)                       |  |              | (162 | )           |  |   | (104 | ) |  |   | (104 | ) |  |   | 249    |  
|                                                                                                         |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|Other comprehensive income (loss), before cumulative
 effect of a change in accounting principle         |  |              | 276  |             |  |   | 176  |   |  |   | 225  |   |  |   | (469   | )
|Cumulative effect of a change in accounting principle, net of tax of $0, $0, $0 and $31                  |  |              |     |             |  |   |     |   |  |   |     |   |  |   | 58     |  
|                                                                                                         |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|Other comprehensive income (loss), net of tax and cumulative effect of a change in
 accounting principle |  |              | 276  |             |  |   | 176  |   |  |   | 225  |   |  |   | (411   | )
|                                                                                                         |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  
|Total comprehensive income (loss)                                                                        |  | $            | 330  |             |  | $ | 21   |   |  | $ | 335  |   |  | $ | (2,033 | )
|                                                                                                         |  |              |      |             |  |   |      |   |  |   |      |   |  |   |        |  

During
 the second quarter of 2001, the Company sold its Global Crossing Ltd. common stock
 and the related hedge, which was entered into during early 2000, resulting in a pretax realized
 gain of $962 million, which was previously reflected as an unrealized gain in accumulated other
 comprehensive income.

26



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

Note L. Business Segments

CNA conducts its operations through five
 operating segments: Standard Lines, Specialty Lines and CNA Re (which comprise the
 property and 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 manages its operations
 and makes business decisions.

During the second quarter of 2002, Group
 Reinsurance, the business which assumes reinsurance from unaffiliated entities on
 group life, accident and health products as well as excess medical risk coverages
 for self-funded employers, was transferred from Group Operations to Corporate and
 Other to be included as part of run-off insurance operations. Also, CNA Trust,
 a limited-operations bank specializing in 401(k) plan administration, was transferred
 from Life Operations to Group Operations. Segment disclosures of prior periods
 have been restated to conform to the current period presentation.

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. The
 Corporate and Other segments results also include interest expense on corporate
 borrowings, eBusiness initiatives and CNA UniSource.

All significant intrasegment income and
 expenses have 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 $33
 million and $39 million for the three months ended September 30, 2002 and 2001,
 and $98 million and $116 million for the nine months ended September 30, 2002 and
 2001.

In the following four 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 interest), 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 net realized investment
 gains or losses, other than investment impairment 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.

27



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



|Three months endedSeptember 30, 2002                                                                    | StandardLines |       | SpecialtyLines |  | CNA Re |     | GroupOperations |  | LifeOperations |     | Corporateand Other |  | Elimi-nations |     | Total
|------------------------------------------------------------------------------------------------------- | ------------- | ----- | -------------- |  | ------ | --- | --------------- |  | -------------- | --- | ------------------ |  | ------------- | --- | -----
|(In millions)                                                                                           |               |       |                |  |        |     |                 |  |                |     |                    |  |               |     |      
|Revenues:                                                                                               |               |       |                |  |        |     |                 |  |                |     |                    |  |               |     |      
|Net earned premiums                                                                                     | $             | 988   |                |  | $      | 555 |                 |  | $              | 157 |                    |  | $             | 292 |      
|Net investment income                                                                                   |               | 66    |                |  |        | 50  |                 |  |                | 29  |                    |  |               | 44  |      
|Other revenues                                                                                          |               | 80    |                |  |        | 33  |                 |  |                | 1   |                    |  |               | 13  |      
|                                                                                                        |               |       |                |  |        |     |                 |  |                |     |                    |  |               |     |      
|Total operating revenues                                                                                |               | 1,134 |                |  |        | 638 |                 |  |                | 187 |                    |  |               | 349 |      
|Claims, benefits and expenses                                                                           |               | 980   |                |  |        | 727 |                 |  |                | 234 |                    |  |               | 310 |      
|                                                                                                        |               |       |                |  |        |     |                 |  |                |     |                    |  |               |     |      
|Operating income (loss) from continuing operations before income tax and minority interest              |               | 154   |                |  |        | (89 | )               |  |                | (47 | )                  |  |               | 39  |      
|Income tax (expense) benefit                                                                            |               | (47   | )              |  |        | 23  |                 |  |                | 20  |                    |  |               | (14 | )    
|Minority interest                                                                                       |               |      |                |  |        | (1  | )               |  |                |    |                    |  |               |    |      
|                                                                                                        |               |       |                |  |        |     |                 |  |                |     |                    |  |               |     |      
|Net operating income (loss) from continuing operations                                                  |               | 107   |                |  |        | (67 | )               |  |                | (27 | )                  |  |               | 25  |      
|Realized investment (losses) gains, net of tax
 and participating policyholders and minority interests |               | (19   | )              |  |        | (9  | )               |  |                | (1  | )                  |  |               | 7   |      
|                                                                                                        |               |       |                |  |        |     |                 |  |                |     |                    |  |               |     |      
|Net income (loss)                                                                                       | $             | 88    |                |  | $      | (76 | )               |  | $              | (28 | )                  |  | $             | 32  |      
|                                                                                                        |               |       |                |  |        |     |                 |  |                |     |                    |  |               |     |      

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



|Three
months endedSeptember 30, 2001                                                                    | StandardLines |     | SpecialtyLines |  | CNA Re |     | GroupOperations |  | LifeOperations |      | Corporateand Other |  | Elimi-nations |     | Total
|------------------------------------------------------------------------------------------------------- | ------------- | --- | -------------- |  | ------ | --- | --------------- |  | -------------- | ---- | ------------------ |  | ------------- | --- | -----
|(In millions)                                                                                           |               |     |                |  |        |     |                 |  |                |      |                    |  |               |     |      
|Revenues:                                                                                               |               |     |                |  |        |     |                 |  |                |      |                    |  |               |     |      
|Net earned premiums                                                                                     | $             | 739 |                |  | $      | 474 |                 |  | $              | 149  |                    |  | $             | 906 |      
|Net investment income                                                                                   |               | 112 |                |  |        | 75  |                 |  |                | 40   |                    |  |               | 40  |      
|Other revenues                                                                                          |               | 85  |                |  |        | 36  |                 |  |                | 3    |                    |  |               | 9   |      
|                                                                                                        |               |     |                |  |        |     |                 |  |                |      |                    |  |               |     |      
|Total operating revenues                                                                                |               | 936 |                |  |        | 585 |                 |  |                | 192  |                    |  |               | 955 |      
|Claims, benefits and expenses                                                                           |               | 922 |                |  |        | 518 |                 |  |                | 419  |                    |  |               | 985 |      
|                                                                                                        |               |     |                |  |        |     |                 |  |                |      |                    |  |               |     |      
|Operating income (loss) from continuing operations before income tax and minority interest              |               | 14  |                |  |        | 67  |                 |  |                | (227 | )                  |  |               | (30 | )    
|Income tax benefit (expense)                                                                            |               | 5   |                |  |        | (22 | )               |  |                | 81   |                    |  |               | 11  |      
|Minority interest                                                                                       |               |    |                |  |        | (6  | )               |  |                |     |                    |  |               |    |      
|                                                                                                        |               |     |                |  |        |     |                 |  |                |      |                    |  |               |     |      
|Net operating income (loss) from continuing operations                                                  |               | 19  |                |  |        | 39  |                 |  |                | (146 | )                  |  |               | (19 | )    
|Realized investment (losses) gains, net of tax
 and participating policyholders and minority interests |               | (11 | )              |  |        | (2  | )               |  |                | (4   | )                  |  |               | 9   |      
|Income from discontinued operations, net of tax of $0                                                   |               |    |                |  |        |    |                 |  |                |     |                    |  |               |    |      
|                                                                                                        |               |     |                |  |        |     |                 |  |                |      |                    |  |               |     |      
|Net income (loss)                                                                                       | $             | 8   |                |  | $      | 37  |                 |  | $              | (150 | )                  |  | $             | (10 | )    
|                                                                                                        |               |     |                |  |        |     |                 |  |                |      |                    |  |               |     |      

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



|Nine months endedSeptember 30, 2002                                                                     | StandardLines |        | SpecialtyLines |  | CNA Re |       | GroupOperations |  | LifeOperations |       | Corporateand Other |  | Elimi-nations |       | Total
|------------------------------------------------------------------------------------------------------- | ------------- | ------ | -------------- |  | ------ | ----- | --------------- |  | -------------- | ----- | ------------------ |  | ------------- | ----- | -----
|(In millions)                                                                                           |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Revenues:                                                                                               |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Net earned premiums                                                                                     | $             | 3,024  |                |  | $      | 1,610 |                 |  | $              | 462   |                    |  | $             | 2,016 |      
|Net investment income                                                                                   |               | 299    |                |  |        | 189   |                 |  |                | 112   |                    |  |               | 127   |      
|Other revenues                                                                                          |               | 243    |                |  |        | 120   |                 |  |                | 2     |                    |  |               | 27    |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Total operating revenues                                                                                |               | 3,566  |                |  |        | 1,919 |                 |  |                | 576   |                    |  |               | 2,170 |      
|Claims, benefits and expenses                                                                           |               | 3,360  |                |  |        | 1,874 |                 |  |                | 525   |                    |  |               | 2,081 |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Operating income (loss) from continuing operations before income tax and minority interest              |               | 206    |                |  |        | 45    |                 |  |                | 51    |                    |  |               | 89    |      
|Income tax (expense) benefit                                                                            |               | (53    | )              |  |        | (24   | )               |  |                | (10   | )                  |  |               | (30   | )    
|Minority interest                                                                                       |               |       |                |  |        | (11   | )               |  |                |      |                    |  |               |      |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Net operating income (loss) from continuing operations                                                  |               | 153    |                |  |        | 10    |                 |  |                | 41    |                    |  |               | 59    |      
|Realized investment (losses) gains, net of tax
 and participating policyholders and minority interests |               | (34    | )              |  |        | (30   | )               |  |                | 3     |                    |  |               | 7     |      
|Loss from discontinued operations, net of tax of $9                                                     |               |       |                |  |        |      |                 |  |                |      |                    |  |               |      |      
|Cumulative effect of a change in accounting principle, net of tax of $7                                 |               |       |                |  |        | (48   | )               |  |                |      |                    |  |               |      |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Net income (loss)                                                                                       | $             | 119    |                |  | $      | (68   | )               |  | $              | 44    |                    |  | $             | 66    |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Receivables, net                                                                                        | $             | 6,777  |                |  | $      | 3,334 |                 |  | $              | 2,529 |                    |  | $             | 263   |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Insurance reserves                                                                                      | $             | 13,760 |                |  | $      | 7,609 |                 |  | $              | 5,151 |                    |  | $             | 1,894 |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      

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



|Nine
months endedSeptember 30, 2001                                                                     | StandardLines |        | SpecialtyLines |  | CNA Re |       | GroupOperations |  | LifeOperations |       | Corporateand Other |  | Elimi-nations |       | Total
|------------------------------------------------------------------------------------------------------- | ------------- | ------ | -------------- |  | ------ | ----- | --------------- |  | -------------- | ----- | ------------------ |  | ------------- | ----- | -----
|(In millions)                                                                                           |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Revenues:                                                                                               |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Net earned premiums                                                                                     | $             | 1,536  |                |  | $      | 1,387 |                 |  | $              | 452   |                    |  | $             | 2,524 |      
|Net investment income                                                                                   |               | 349    |                |  |        | 240   |                 |  |                | 129   |                    |  |               | 119   |      
|Other revenues                                                                                          |               | 255    |                |  |        | 85    |                 |  |                | 3     |                    |  |               | 28    |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Total operating revenues                                                                                |               | 2,140  |                |  |        | 1,712 |                 |  |                | 584   |                    |  |               | 2,671 |      
|Claims, benefits and expenses                                                                           |               | 2,927  |                |  |        | 2,020 |                 |  |                | 1,356 |                    |  |               | 2,661 |      
|Restructuring and other related charges                                                                 |               | 6      |                |  |        | 2     |                 |  |                |      |                    |  |               |      |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Operating (loss) income from continuing operations before income tax and minority interest              |               | (793   | )              |  |        | (310  | )               |  |                | (772  | )                  |  |               | 10    |      
|Income tax benefit (expense)                                                                            |               | 303    |                |  |        | 107   |                 |  |                | 275   |                    |  |               | 1     |      
|Minority interest                                                                                       |               |       |                |  |        | (18   | )               |  |                |      |                    |  |               |      |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Net operating (loss) income from continuing operations                                                  |               | (490   | )              |  |        | (221  | )               |  |                | (497  | )                  |  |               | 11    |      
|Realized investment gains (losses), net of tax
 and participating policyholders and minority interests |               | 400    |                |  |        | 148   |                 |  |                | (216  | )                  |  |               | 17    |      
|Income from discontinued operations, net of tax of $1                                                   |               |       |                |  |        |      |                 |  |                |      |                    |  |               |      |      
|Cumulative effect of a change in accounting principle, net of tax of $33                                |               | (30    | )              |  |        | (14   | )               |  |                | (5    | )                  |  |               | (1    | )    
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Net (loss) income                                                                                       | $             | (120   | )              |  | $      | (87   | )               |  | $              | (718  | )                  |  | $             | 27    |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Receivables, net                                                                                        | $             | 7,665  |                |  | $      | 2,424 |                 |  | $              | 2,497 |                    |  | $             | 1,024 |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      
|Insurance reserves                                                                                      | $             | 14,732 |                |  | $      | 6,579 |                 |  | $              | 5,196 |                    |  | $             | 2,482 |      
|                                                                                                        |               |        |                |  |        |       |                 |  |                |       |                    |  |               |       |      

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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 and 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 included common architecture and platform
 standards that directly support the Companys strategies.

For the nine months ended September 30,
 2001 the Company incurred $62 million pretax of restructuring and other related
 charges for the IT Plan primarily related to employee severance charges and the
 write-off of impaired assets. There were no charges recorded during the three months
 ended September 30, 2001.

No restructuring and other related charges
 related to the IT Plan have been incurred in 2002; however, payments were made during
 the nine months ended September 30, 2002 related to amounts accrued as of December
 31, 2001. The following table summarizes the remaining IT Plan accrual at September
 30, 2002 and the activity in that accrual since inception.

IT Plan Accrual



|                                           | Employee      |     |          |  |       |     |       |  |   |   |  |  |  
|------------------------------------------ | ------------- | --- | -------- |  | ----- | --- | ----- |  | - | - |  |  | -
|                                           | Termination   |     | Impaired |  |       |     |       |  |   |   | 
|                                           | and Related   |     | Asset    |  | Other |     |       |  |  
|                                           | Benefit Costs |     | Charges  |  | Costs |     | Total
|(In millions)                              |               |     |          |  |       |     |      
|IT Plan initial accrual                    | $             | 29  |          |  | $     | 32  |       |  | $ | 1 |  |  | $
|Costs that did not require cash in 2001    |               |    |          |  |       | (32 | )     |  |   |  |  |  |  
|Payments charged against liability in 2001 |               | (19 | )        |  |       |    |       |  |   |  |  |  |  
|                                           |               |     |          |  |       |     |       |  |   |   |  |  |  
|Accrued costs at December 31, 2001         |               | 10  |          |  |       |    |       |  |   | 1 |  |  |  
|Payments charged against liability in 2002 |               | (1  | )        |  |       |    |       |  |   |  |  |  |  
|                                           |               |     |          |  |       |     |       |  |   |   |  |  |  
|Accrued costs at September 30, 2002        | $             | 9   |          |  | $     |    |       |  | $ | 1 |  |  | $
|                                           |               |     |          |  |       |     |       |  |   |   |  |  |  

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

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

2001 Plan

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

No restructuring and other related charges
 related to the 2001 Plan have been incurred in 2002; however, payments were made
 during the nine months ended September 30, 2002 related to amounts accrued as of
 December 31, 2001. The following table summarizes the remaining 2001 Plan accrual
 as of September 30, 2002 and the activity in that accrual since inception.

2001 Plan Accrual



|                                           | Employee      |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |  
|------------------------------------------ | ------------- | --- | ----------- |  | -------- | --- | ----- |  | ----- | --- | - |  | - | --- | - |  | -
|                                           | Termination   |     | Lease       |  | Impaired |     |       |  |       |     |   |  |  
|                                           | and Related   |     | Termination |  | Asset    |     | Other |  |       |     |  
|                                           | Benefit Costs |     | Costs       |  | Charges  |     | Costs |  | Total
|(In millions)                              |               |     |             |  |          |     |       |  |      
|2001 Plan initial accrual                  | $             | 68  |             |  | $        | 56  |       |  | $     | 30  |   |  | $ | 35  |   |  | $
|Costs that did not require cash in 2001    |               |    |             |  |          |    |       |  |       |    |   |  |   | (35 | ) |  |  
|Payments charged against liability in 2001 |               | (2  | )           |  |          |    |       |  |       |    |   |  |   |    |   |  |  
|                                           |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |  
|Accrued costs at December 31, 2001         |               | 66  |             |  |          | 56  |       |  |       | 30  |   |  |   |    |   |  |  
|Costs that did not require cash in 2002    |               |    |             |  |          |    |       |  |       | (25 | ) |  |   |    |   |  |  
|Payments charged against liability in 2002 |               | (50 | )           |  |          | (11 | )     |  |       | (1  | ) |  |   |    |   |  |  
|                                           |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |  
|Accrued costs at September 30, 2002        | $             | 16  |             |  | $        | 45  |       |  | $     | 4   |   |  | $ |    |   |  | $
|                                           |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |  

Note N. Significant Transactions

National Postal Mail Handlers Union
 Contract Termination

During the second quarter of 2002, the Company
 announced the sale of the Claims Administration Corporation and the transfer of
 the National Postal Mail Handlers Union group benefits plan (the Mail Handlers
 Plan) to First Health Group Corporation, effective July 1, 2002. In the third
 quarter of 2002, the Company recognized a $5 million pretax realized loss on the
 sale of Claims Administration Corporation and $14 million pretax of non-recurring
 fee income related to the transfer of the Mail Handlers Plan.

The assets and liabilities of the Claims
 Administration Corporation and the Mail Handlers Plan were $352 million and $350
 million at December 31, 2001. The revenues of the Claims Administration Corporation
 and the Mail Handlers Plan were $3 million and $613 million for the three months
 ended September 30, 2002 and 2001 and $1,157 million and $1,663 million for the
 nine months ended September 30, 2002 and 2001.

Net operating income from the Claims Administration
 Corporation and the Mail Handlers Plan was $5 million, including the non-recurring
 fee income, and $3 million for the three months



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

ended September 30, 2002 and 2001 and $12
 million and $9 million for the nine months ended September 30, 2002 and 2001.

CNA Vida Disposition

In March of 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 2002.

CNA Vidas assets and liabilities at
 December 31, 2001 were $442 million and $337 million. CNA Vidas net earned
 premiums were $14 million for the three months ended September 30, 2001 and $24
 million and $63 million for the nine months ended September 30, 2002 and 2001.
 Net operating income was $5 million for the three months ended September 30, 2001
 and $2 million and $7 million for the nine months ended September 30, 2002 and 2001.
 CNA Vidas results of operations, including the loss on sale, are presented
 as discontinued operations in all periods presented.

Other Dispositions and Planned Dispositions
 of Certain Businesses

During the second quarter of 2001, the Company
 announced its intention to sell certain businesses. The assets being held for disposition
 included the U.K. subsidiaries of CNA Re (CNA Re U.K.) and certain other businesses.
 Based upon the impairment analyses performed at that time, the Company anticipated
 that it would realize losses in connection with those planned sales. In determining
 the anticipated loss from these sales, the Company estimated the net realizable
 value of each business being held for sale. An estimated after-tax loss of $320
 million was initially recorded in the second quarter of 2001. This loss was reported
 in other realized investment losses.

The Company continues to monitor the impairment
 losses recorded for these businesses and perform updated impairment analysis. Based
 on these analyses the impairment loss has been reduced by approximately $170 million,
 primarily because the net assets of the businesses had been significantly diminished
 by their operating losses, including adverse loss reserve development recognized
 by CNA Re U.K. in the fourth quarter of 2001.

In the fourth quarter of 2001, the Company
 sold certain businesses as planned. The realized after-tax loss applicable to these
 businesses recognized in the second quarter of 2001 was $38 million. Revenues of
 these businesses included in the three and nine months ended September 30, 2001
 totaled approximately $6 million and $28 million. These businesses contributed
 approximately $3 million of net operating income and $14 million of losses in the
 three and nine months ended September 30, 2001.

At September 30, 2002, CNA Re U.K. remained
 held for sale. On October 31, 2002, the Company completed the sale of CNA Re U.K.
 to Tawa U.K. Limited, a subsidiary of Artemis Group, a diversified French-based
 holding company. The sale includes business underwritten since inception by CNA
 Re U.K., except for certain risks retained by CCC as discussed below. In October,
 the sale was approved in the United Kingdom by the Financial Services Authority

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

(FSA) and by the Illinois Insurance Department.
 This sale does not impact CNA Res on-going U.S.-based operations.

CNA Re U.K. was sold for $1, subject to
 adjustments that are primarily driven by certain operating results and changes in
 interest rates between January 1, 2002 and October 31, 2002, and realized foreign
 currency losses recognized by CNA Re U.K. prior to December 31, 2002. CNAF has
 also committed to contribute up to $9.6 million to CNA Re U.K. over a four-year
 period beginning in 2010 should the FSA deem CNA Re U.K. to be undercapitalized.
 Due to the various components of the completion adjustments, which are initially
 prepared by the buyer, the final settlement cannot yet be determined. However,
 based upon information currently available to the Company,
management believes there will be a reduction in the previously
recognized impairment loss which will be reflected as a realized gain
when the completion adjustments are finalized.

Concurrent with the sale, several reinsurance
 agreements under which CCC had provided retrocessional protection to CNA Re U.K.
 will be terminated. As part of the sale, CNA Re U.K.s net exposure to all
 IGI Program liabilities will be ceded to CCC. Further, CCC will provide a $100 million
 stop loss cover attaching at carried reserves on CNA Re U.K.s 2001 underwriting
 year exposures for which CCC received premiums of $25 million.

The statutory surplus of CNA Re U.K., was
 below the required regulatory minimum surplus level at December 31, 2001. CCC contributed
 $120 million of capital on March 25, 2002 bringing the capital above the regulatory
 minimum.

CNA Re U.K. contributed revenues of approximately
 $14 million and $57 million for the three months ended September 30, 2002 and 2001,
 and $57 million and $220 million for the nine months ended September 30, 2002 and
 2001. CNA Re U.K. contributed net operating income of $9 million and net operating
 losses of $109 million for the three months ended September 30, 2002 and 2001 and
 income of $13 million and net operating losses of $176 million for the nine months
 ended September 30, 2002 and 2001. The assets and liabilities of CNA Re U.K., including
 the effects of planned concurrent transactions, were approximately
$2.7 billion
 and $2.7 billion as of September 30, 2002 and $2.9 billion and $2.9 billion as of
 December 31, 2001.

The businesses sold in 2002, excluding CNA
 Vida, Claims Administration Corporation and the Mail Handlers Plan, and those that
 continue to be held for disposition as of September 30, 2002, excluding CNA Re U.K.,
 contributed revenues of approximately $6 million and $28 million for the three months
 ended September 30, 2002 and 2001, and $35 million and $95 million for the nine
 months ended September 30, 2002 and 2001. Additionally, these businesses contributed
 net operating losses of $2 million and $2 million for the three months ended September
 30, 2002 and 2001 and $14 million and $12 million for the nine months ended September
 30, 2002 and 2001. The assets and liabilities of these businesses were approximately
 $96 million and $83 million as of September 30, 2002 and $126
million and $109
 million as of December 31, 2001. All anticipated sales are expected to be completed
 in 2002.

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##### Table of Contents



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

Note O. Discontinued Operations

CNA reports net assets of discontinued operations,
 which primarily consist of run-off 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               |               |      |              |  |   |      |  
|------------------------------------- | ------------- | ---- | ------------ |  | - | ---- | -
|                                      | September 30, |      | December 31,
|(In millions)                         | 2002          |      | 2001        
|                                      |               |      |             
|Total investments                     | $             | 471  |              |  | $ | 467  |  
|Other assets                          |               | 279  |              |  |   | 264  |  
|Insurance reserves                    |               | (424 | )            |  |   | (412 | )
|Other liabilities                     |               | (25  | )            |  |   | (25  | )
|                                      |               |      |              |  |   |      |  
|Net assets of discontinued operations | $             | 301  |              |  | $ | 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.
 Under a tax allocation agreement with Loews, during the first nine months of 2002,
 CNA received tax refunds of $639 million from Loews. During the first nine months
 of 2001, CNA paid Loews $111 million for income taxes.

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.

CNA previously sponsored a stock ownership
 plan whereby the Company financed the purchase of Company stock by certain officers,
 including executive officers. Interest charged on the principal amount of these
 outstanding stock purchase loans is generally equivalent to the long-term applicable
 federal rate, compounded semi-annually, in effect on the disbursement date of the
 loan. Loans made pursuant to the plan are generally full recourse with a ten year
 term and are secured by the stock purchased.

As of September 30, 2002, there were 21
 participants remaining in the plan, of whom seven are currently Company officers.
 The outstanding aggregate loan balance was $10 million for all participants who
 were officers as of September 30, 2002. Shares purchased with all loans outstanding
 under the plan totaled 1,640,358, or less than 1% of the Companys outstanding
 shares, as of September 30, 2002. The aggregate market value of all stock purchased
 with outstanding loans under the plan and held as collateral was $30 million below
 the unpaid aggregate loan balance as of September 30, 2002.

CCC provided an excess of loss reinsurance
 contract to the insurance subsidiaries of CNA Surety, over a period that expired
 on December 31, 2000 (the stop loss contract). The stop loss contract limits the
 net loss ratios for CNA 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

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##### Table of Contents



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

1997 through 2000 (the contractual
 loss ratio), the stop loss contract requires CCC to pay amounts equal to the amount,
 if any, by which CNA Suretys 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.
 There was no reinsurance balances payable under this stop loss contract as of September
 30, 2002 as all balances were paid during the first nine months of 2002. Reinsurance
 balances payable at December 31, 2001 was $22 million.

CNAF and CNA Surety have entered into an
 agreement whereby CNAF will lend CNA Surety the amount needed to repay its bank
 loans. If necessary, CNAF will lend CNA Surety up to a maximum of $16 million in
 order for CNA Surety to reduce the amount of the credit facility commitment from
 $35 million to $20 million and pay accrued but unpaid interest on the amount of
 the commitment reduction. Any amounts loaned by CNAF to CNA Surety must be repaid
 on or before February 28, 2003. (See Note I for additional information regarding
 the CNA Surety credit facility).

37



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##### Table of Contents



CNA FINANCIAL CORPORATION
ITEM 2. 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 (collectively CNA or the Company).
 CNA is one of the largest insurance organizations in the United States and, based
 on 2001 net written premiums, is the ninth largest property and casualty company
 and the 51st largest life insurance company.

As of September 30, 2002, Loews Corporation
 (Loews) owned approximately 90% 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 37 for the current period 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 and 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 manages its operations
 and makes business decisions.

During the second quarter of 2002, Group
 Reinsurance, the business which assumes reinsurance from unaffiliated entities on
 group life, accident and health products as well as excess medical risk coverages
 for self-funded employers, was transferred from Group Operations to Corporate and
 Other to be included as part of run-off insurance operations. Also, CNA Trust,
 a limited-operations bank specializing in 401(k) plan administration, was transferred
 from Life Operations to Group Operations. Segment disclosures of prior periods
 have been restated to conform to the current period presentation.

The consolidated operations for the three
 months and nine months ended September 30, 2001 were significantly impacted by the
 second quarter 2001 prior year reserve strengthening, the World Trade Center disaster
 and related events (WTC event), corporate aggregate reinsurance treaties and restructuring
 and other related charges. A discussion of these items, along with the Companys
 current terrorism exposure and description of reserves is presented before
 the Companys operating segment results.

The discussion of underwriting results and ratios reflect the underlying business
 results of CNAs property and casualty insurance subsidiaries. Underwriting
 results are net earned premiums less net incurred claims, the costs incurred to
 settle claims, acquisition expenses and underwriting expenses. Underwriting ratios
 are industry measures of property and casualty underwriting results. The loss ratio
 is the percentage of net incurred claim and claim adjustment expenses to net earned
 premiums. The expense ratio is the percentage of underwriting and acquisition expenses,
 including the amortization of deferred acquisition costs, to net earned premiums.
 The dividend ratio is the ratio of dividends incurred to net earned premiums.
 The combined ratio is the sum of the loss, expense and dividend ratios.

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##### Table of Contents



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

The following discussion of operating results
 focuses on net operating income (loss). 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 interest), 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 (loss), as defined above, is used in managements discussion
 of the results of operations because net realized investment gains or losses, other
 than investment impairment 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.

39



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##### Table of Contents



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

The following table summarizes key components of operating
 results for the three months and nine months ended September 30, 2002 and 2001.



|Consolidated Operations                                                                     |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|------------------------------------------------------------------------------------------- | ------------ | ----- | ----------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                            | Three Months |       | Nine Months
|                                                                                            |              |       |            
|Period ended September 30                                                                   | 2002         |       | 2001        |  | 2002 |       | 2001
|(In millions, except per share data)                                                        |              |       |             |  |      |       |     
|Operating revenues:                                                                         |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Net earned premiums                                                                         | $            | 2,262 |             |  | $    | 2,515 |      |  | $ | 7,925 |   |  | $ | 6,600  |  
|Net investment income                                                                       |              | 364   |             |  |      | 448   |      |  |   | 1,292 |   |  |   | 1,357  |  
|Other revenues                                                                              |              | 140   |             |  |      | 162   |      |  |   | 476   |   |  |   | 507    |  
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Total operating revenues                                                                    |              | 2,766 |             |  |      | 3,125 |      |  |   | 9,693 |   |  |   | 8,464  |  
|Claims, benefits and expenses                                                               |              | 2,712 |             |  |      | 3,365 |      |  |   | 9,265 |   |  |   | 11,647 |  
|Restructuring and other related charges                                                     |              |      |             |  |      |      |      |  |   |      |   |  |   | 62     |  
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Operating income (loss) from continuing operations before income
 tax and minority interest |              | 54    |             |  |      | (240  | )    |  |   | 428   |   |  |   | (3,245 | )
|Income tax (expense) benefit                                                                |              | (15   | )           |  |      | 86    |      |  |   | (128  | ) |  |   | 1,145  |  
|Minority interest                                                                           |              | (1    | )           |  |      | (6    | )    |  |   | (11   | ) |  |   | (18    | )
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Net operating income (loss) from continuing operations                                      |              | 38    |             |  |      | (160  | )    |  |   | 289   |   |  |   | (2,118 | )
|Realized investment gains (losses), net of tax and minority interest                        |              | 16    |             |  |      |      |      |  |   | (87   | ) |  |   | 549    |  
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Income (loss) from continuing operations                                                    |              | 54    |             |  |      | (160  | )    |  |   | 202   |   |  |   | (1,569 | )
|Income (loss) from discontinued operations, net of tax of $0, $1, $9 and $1                 |              |      |             |  |      | 5     |      |  |   | (35   | ) |  |   | 8      |  
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Income (loss) before cumulative effects of changes in accounting principles                 |              | 54    |             |  |      | (155  | )    |  |   | 167   |   |  |   | (1,561 | )
|Cumulative effects of changes in accounting principles, net of
 tax of $0, $0, $7 and $33   |              |      |             |  |      |      |      |  |   | (57   | ) |  |   | (61    | )
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Net income (loss)                                                                           | $            | 54    |             |  | $    | (155  | )    |  | $ | 110   |   |  | $ | (1,622 | )
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share:                                                |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Income (loss) from continuing operations                                                    | $            | 0.24  |             |  | $    | (0.86 | )    |  | $ | 0.91  |   |  | $ | (8.52  | )
|Income (loss) from discontinued operations, net of tax                                      |              |      |             |  |      | 0.02  |      |  |   | (0.16 | ) |  |   | 0.04   |  
|Income (loss) before cumulative effects of changes in accounting principles                 |              | 0.24  |             |  |      | (0.84 | )    |  |   | 0.75  |   |  |   | (8.48  | )
|Cumulative effects of changes in accounting principles, net of tax                          |              |      |             |  |      |      |      |  |   | (0.26 | ) |  |   | (0.33  | )
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per share available to common stockholders                | $            | 0.24  |             |  | $    | (0.84 | )    |  | $ | 0.49  |   |  | $ | (8.81  | )
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|Weighted average outstanding common stock and common stock equivalents                      |              | 223.6 |             |  |      | 185.5 |      |  |   | 223.6 |   |  |   | 184.0  |  
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  
|                                                                                            |              |       |             |  |      |       |      |  |   |       |   |  |   |        |  

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

The following table summarizes net operating
 results by segment for the three months and nine months ended September 30, 2002
 and 2001.

Net Operating Income (Loss) by Segment



|                            | Three Months |     | Nine Months
|--------------------------- | ------------ | --- | -----------
|                            |              |     |            
|Period ended September 30   | 2002         |     | 2001       
|(In millions)               |              |     |            
|Standard Lines              | $            | 107 |            
|Specialty Lines             |              | (67 | )          
|CNA Re                      |              | (27 | )          
|Group Operations            |              | 25  |            
|Life Operations             |              | 36  |            
|Corporate and Other         |              | (36 | )          
|                            |              |     |            
|Net operating income (loss) | $            | 38  |            
|                            |              |     |            

Net operating income was $38 million for
 the third quarter of 2002 as compared with a net operating loss of $160 million
 for the same period in 2001. The improvement in net operating results was due principally
 to after-tax losses from the WTC event of $304 million, net of the related corporate
 aggregate reinsurance treaty benefit, recorded in the third quarter of 2001. Excluding
 the impact of the WTC event, net operating results decreased $106 million due to
 lower net investment income, primarily from $60 million lower limited partnership
 income, and a reduced benefit from the use of reinsurance in 2002. These decreases
 were partially offset by improved operating results in Life Operations and Group
 Operations.

The third quarter 2002 results also include
 net prior year reserve releases in Standard Lines and net prior year reserve strengthening
 in Specialty Lines and CNA Re. These changes in estimates of prior year reserves,
 which resulted in net unfavorable reserve development, were not significantly higher
 than the third quarter of 2001. However, there were larger reserve changes affecting
 the individual property and casualty segments.

Net income was $54 million for the third
 quarter of 2002 as compared with a net loss of $155 million for the same period
 in 2001. Net realized investment gains for the third quarter of 2002 increased
 $16 million as compared with the same period in 2001. Income from discontinued
 operations, net of tax, of $5 million for the third quarter of 2001 relates to the
 operating results of Life Operations Chilean-based subsidiaries (CNA Vida),
 which was sold in the first quarter of 2002.

Net earned premiums decreased $253 million
 for the third quarter of 2002 as compared with the same period in 2001. Third quarter
 2001 net earned premiums were reduced by ceded premiums of $315 million related
 to the corporate aggregate reinsurance treaties, and were increased by reinstatement
 and additional premiums of $85 million related to the WTC event. Third quarter
 2001 net earned premiums also included $612 million of earned premium related to
 the National Postal Mail Handlers Union (the Mail Handlers Plan) group benefits
 plan, which was transferred to First Health Group Corporation, effective July 1,
 2002. Excluding these 2001 significant premium items, net earned premiums increased
 $129 million due primarily to strong rate increases and decreased use of reinsurance
 in the property and casualty segments.

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

Net operating income was $289 million for
 the nine months ended September 30, 2002 as compared with a net operating loss of
 $2,118 million for the same period in 2001. The net operating loss for the nine
 months ended September 30, 2001 was due principally to after-tax reserve strengthening
 of $2,079 million recorded in the second quarter of 2001 related to a change in
 estimate of prior year net loss reserves and retrospective premium accruals. Additionally,
 2001 results included WTC event losses of $304 million after-tax and restructuring
 and other related charges of $40 million after-tax. Excluding these 2001 significant
 items, 2002 net operating results decreased $16 million due primarily to lower net
 investment income and a reduced benefit from the use of reinsurance in 2002 partially
 offset by improved underwriting results in the property and casualty
segments.

Net income was $110 million for the nine
 months ended September 30, 2002 as compared with a net loss of $1,622 million for
 the same period in 2001. Net realized investment results for the nine months ended
 September 30, 2002 decreased $636 million as compared with the same period in 2001.
 See the discussion of realized investment losses in the Investments section of
 the Managements Discussion and Analysis of Financial Condition and Results
 of Operations (MD&A) for additional information. Loss from discontinued operations,
 net of tax, of $35 million for the nine months ended September 30, 2002 and income
 from discontinued operations of $8 million for the same period in 2001 related to
 the results of CNA Vida, which was sold in the first quarter of 2002. Net income
 for 2002 includes a charge of $57 million, net of tax, for the cumulative effect
 of a change in accounting principle for goodwill and indefinite-lived intangible
 assets. Net income for 2001 includes 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 $1,325 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Year-to-date 2001 net earned premiums were reduced by ceded premiums of $1,308
 million related to the corporate aggregate reinsurance treaties, additional ceded
 premiums and a change in estimate for retrospective premium accruals arising from
 the second quarter 2001 reserve strengthening and a change in estimate for involuntary
 market premium accruals, partially offset by reinstatement and additional premiums
 related to the WTC event. Excluding these 2001 significant premium items, net earned
 premiums increased $17 million due primarily to strong rate increases and decreased
 use of reinsurance partially offset by the transfer of the Mail Handlers Plan and
 additional ceded premiums recorded in 2002 for the corporate aggregate reinsurance
 treaties. The increases were also partially offset by decreased net earned premiums
 in CNA Res U.K. operations resulting from the decision made in the third quarter
 of 2001 to cease writing new and renewal business in CNA Re U.K.

The year-to-date 2001 net operating loss
 includes the following, which are described in more detail on the following pages.



| | In the third
 quarter of 2001, the Company recorded the estimated impact of the WTC event, which
 resulted in $1,648 million of pretax gross losses, and $468 million pretax net of
 reinsurance, net of the related corporate aggregate reinsurance treaties benefit.
 The after-tax estimated impact was $304 million, net of reinsurance, including
 the related corporate aggregate reinsurance treaties benefit. Further details of
 the WTC event are provided below as well as in the individual segment discussions
 of operations.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| | In the second
 quarter of 2001, the Company recorded an after-tax charge of $2.1 billion ($3.2
 billion pretax) related to a change in estimate of prior year net loss reserves
 and retrospective premium accruals. This amount included the impact of net reserve
 strengthening, the related increase in the accrual for insurance-related assessments
 and the ceded premiums and interest cost of the corporate aggregate reinsurance
 treaty that attached due to the reserve strengthening. Further details related
 to the reserve strengthening are discussed below as well as in the individual segment
 discussions of operations.                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | During the
 nine months ended September 30, 2001, the Company recorded ceded premiums, ceded
 losses and interest charges related to corporate aggregate reinsurance treaties
 in place for the 1999 through 2001 accident years. The discussion in the Reinsurance
 section below includes all premiums, losses and interest charges related to these
 treaties. However, in all other sections of the MD&A the applicable amounts
 ceded to these treaties as a result of the second quarter 2001 reserve strengthening
 and WTC event are included in the quantification of those significant items. The
 ceded premiums, ceded losses and interest charges related to the aggregate reinsurance
 treaties not related to these significant items are described as Core.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | During the
 nine months ended September 30, 2001, the Company recorded after-tax restructuring
 and other related charges of $40 million related to workforce reductions and asset
 write-offs resulting from changes in the Companys information technology organization,
 which is discussed in more detail below.                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Based upon the significance of the second
 quarter 2001 reserve strengthening, the WTC event and restructuring and other related
 charges, the underwriting impact of these items is discussed in the aggregate in
 the following sections. When the Company discusses its 2001 underwriting results
 and ratios for its property and casualty segments, the discussion will compare 2001
 underwriting results and ratios excluding the effect of these significant items.
 In the Companys previous filings, the discussion of 2001 underwriting results
 excluded the benefit from corporate aggregate reinsurance treaties for Core operations.
 During 2002, the Company has recorded benefits from corporate aggregate reinsurance
 treaties for Core operations, therefore the Company will no longer discuss the 2001
 underwriting results excluding this benefit in order to provide a comparable presentation.
 The following table provides the details by segment of 2001 underwriting results
 as reported and adjusted.

Underwriting Results by Segment



|                                                                                                                 |          |      |           |  |        |     |          |  |          |      |   |  | Property and
|---------------------------------------------------------------------------------------------------------------- | -------- | ---- | --------- |  | ------ | --- | -------- |  | -------- | ---- | - |  | ------------
|                                                                                                                 | Standard |      | Specialty |  |        |     |          |  | Casualty
|For the three months ended September 30, 2001                                                                    | Lines    |      | Lines     |  | CNA Re |     | Segments
|(In millions)                                                                                                    |          |      |           |  |        |     |         
|Underwriting loss, as reported                                                                                   | $        | (106 | )         |  | $      | (12 | )        |  | $        | (270 | ) |  | $           
|Underwriting impact of the WTC event net of
 the related benefit of the corporate aggregate reinsurance treaties |          | 68   |           |  |        | 18  |          |  |          | 263  |   |  |             
|                                                                                                                 |          |      |           |  |        |     |          |  |          |      |   |  |             
|Adjusted underwriting (loss) gain*                                                                               | $        | (38  | )         |  | $      | 6   |          |  | $        | (7   | ) |  | $           
|                                                                                                                 |          |      |           |  |        |     |          |  |          |      |   |  |             

*The 2001 adjusted underwriting loss excludes
 the impact of the WTC event net of the related benefit of corporate aggregate reinsurance
 treaties.

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

Underwriting Results by Segment



|                                                                                                                                           |          |        |   |           |  |        |      |          |  |          |      |   |  | Property and
|------------------------------------------------------------------------------------------------------------------------------------------ | -------- | ------ | - | --------- |  | ------ | ---- | -------- |  | -------- | ---- | - |  | ------------
|                                                                                                                                           | Standard |        |   | Specialty |  |        |      |          |  | Casualty
|For the nine months ended September 30, 2001                                                                                               | Lines    |        |   | Lines     |  | CNA Re |      | Segments
|(In millions)                                                                                                                              |          |        |   |           |  |        |      |         
|Underwriting loss, as reported                                                                                                             | $        | (1,165 | ) |           |  | $      | (543 | )        |  | $        | (904 | ) |  | $           
|Underwriting impact of second quarter 2001 reserve
 strengthening net of the related benefit of the corporate aggregate reinsurance treaty |          | 911    |   |           |  |        | 410  |          |  |          | 587  |   |  |             
|Underwriting impact of the WTC event net of the
 related benefit of the corporate aggregate reinsurance treaties                           |          | 68     |   |           |  |        | 18   |          |  |          | 263  |   |  |             
|Restructuring and other related charges                                                                                                    |          | 5      |   |           |  |        | 2    |          |  |          |     |   |  |             
|                                                                                                                                           |          |        |   |           |  |        |      |          |  |          |      |   |  |             
|Adjusted underwriting loss*                                                                                                                | $        | (181   | ) |           |  | $      | (113 | )        |  | $        | (54  | ) |  | $           
|                                                                                                                                           |          |        |   |           |  |        |      |          |  |          |      |   |  |             

*The 2001 adjusted underwriting loss excludes
 the impact of the second quarter 2001 reserve strengthening, the WTC event, both
 net of the related benefit of corporate aggregate reinsurance treaties, and restructuring
 and other related charges.

WTC Event

During the third quarter of 2001, the Company
 experienced a severe catastrophe loss estimated at $468 million pretax, net of reinsurance,
 related to the WTC event. The loss estimate is based on a total industry loss of
 $50 billion and includes all lines of insurance. The estimate takes into account
 CNAs substantial reinsurance agreements, including its catastrophe reinsurance
 program and corporate reinsurance programs. The Company has closely monitored reported
 losses as well as the collection of reinsurance on WTC event claims. Based on experience
 to-date, the Company believes its recorded reserves are adequate.

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 available in the first quarter
 of 2002 resulted in CNA Re increasing 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 fully offset
 on a net of reinsurance basis (before the impact of the CCC Cover) by higher reinstatement
 premiums and a reduction of return premiums.

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

The WTC event and related items comprising
 the amounts noted above are detailed by segment in the following table.

WTC Event



|                                    |              |       |             |  |         |     |             |  | Pretax    |     |           |  |       |     |  |  |  
|----------------------------------- | ------------ | ----- | ----------- |  | ------- | --- | ----------- |  | --------- | --- | --------- |  | ----- | --- |  |  | -
|                                    |              |       |             |  |         |     |             |  | Corporate |     |           |  |       |     |  |  |  
|                                    |              |       |             |  |         |     |             |  | Aggregate |     | Total     |  | Total
|For the three and nine months ended |              |       |             |  | Pretax  |     | Reinsurance |  | Pretax    |     | After-tax
|September 30, 2001                  | Gross Losses |       | Net Impact* |  | Benefit |     | Impact      |  | Impact   
|(In millions)                       |              |       |             |  |         |     |             |  |          
|Standard Lines                      | $            | 375   |             |  | $       | 185 |             |  | $         | 108 |           |  | $     | 77  |  |  | $
|Specialty Lines                     |              | 214   |             |  |         | 30  |             |  |           | 12  |           |  |       | 18  |  |  |  
|CNA Re                              |              | 662   |             |  |         | 410 |             |  |           | 139 |           |  |       | 271 |  |  |  
|Group Operations                    |              | 235   |             |  |         | 53  |             |  |           |    |           |  |       | 53  |  |  |  
|Life Operations                     |              | 75    |             |  |         | 22  |             |  |           |    |           |  |       | 22  |  |  |  
|Corporate and Other                 |              | 87    |             |  |         | 27  |             |  |           |    |           |  |       | 27  |  |  |  
|                                    |              |       |             |  |         |     |             |  |           |     |           |  |       |     |  |  |  
|Total                               | $            | 1,648 |             |  | $       | 727 |             |  | $         | 259 |           |  | $     | 468 |  |  | $
|                                    |              |       |             |  |         |     |             |  |           |     |           |  |       |     |  |  |  

*Pretax impact of the WTC event before the
 corporate aggregate reinsurance treaties. The pretax net impact includes $85 million
 of reinstatement and additional premiums.

Second Quarter 2001 Prior Year Reserve
 Strengthening

During the second quarter of 2001, the Company
 noted the continued emergence of adverse loss experience across several lines of
 business related to prior years, which are discussed in further detail below. The
 Company completed a number of reserve studies during the second quarter of 2001
 for many of its lines of business, including those in which these adverse trends
 were noted.

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

The second quarter 2001 prior year reserve
 strengthening and related items comprising the amounts noted above are detailed
 by segment in the following table.

Second Quarter 2001 Prior Year Reserve Strengthening



|                                                                                               | Standard |      | Specialty |  |        |     |           |  | Corporate |     |   |  |  
|---------------------------------------------------------------------------------------------- | -------- | ---- | --------- |  | ------ | --- | --------- |  | --------- | --- | - |  | -
|For the nine months ended September 30, 2001                                                   | Lines    |      | Lines     |  | CNA Re |     | and Other |  | Total    
|(In millions)                                                                                  |          |      |           |  |        |     |           |  |          
|Net reserve strengthening excluding the impact of
 the corporate aggregate reinsurance treaty: |          |      |           |  |        |     |           |  |           |     |   |  |  
|APMT                                                                                           | $        |     |           |  | $      |    |           |  | $         | 57  |   |  | $
|Non-APMT                                                                                       |          | 523  |           |  |        | 407 |           |  |           | 574 |   |  |  
|                                                                                               |          |      |           |  |        |     |           |  |           |     |   |  |  
|Total                                                                                          |          | 523  |           |  |        | 407 |           |  |           | 631 |   |  |  
|Pretax benefit from corporate aggregate reinsurance treaty
 on accident year 1999              |          | (197 | )         |  |        |    |           |  |           | (26 | ) |  |  
|Accrual for insurance-related assessments                                                      |          | 48   |           |  |        |    |           |  |           |    |   |  |  
|                                                                                               |          |      |           |  |        |     |           |  |           |     |   |  |  
|Net reserve strengthening and related accruals                                                 |          | 374  |           |  |        | 407 |           |  |           | 605 |   |  |  
|                                                                                               |          |      |           |  |        |     |           |  |           |     |   |  |  
|Change in estimate of premium accruals                                                         |          | 629  |           |  |        | 3   |           |  |           | (13 | ) |  |  
|Reduction of related commission accruals                                                       |          | (50  | )         |  |        |    |           |  |           |    |   |  |  
|                                                                                               |          |      |           |  |        |     |           |  |           |     |   |  |  
|Net premium and related accrual reductions                                                     |          | 579  |           |  |        | 3   |           |  |           | (13 | ) |  |  
|                                                                                               |          |      |           |  |        |     |           |  |           |     |   |  |  
|Total pretax second quarter 2001 reserve strengthening and
 other related accruals             | $        | 953  |           |  | $      | 410 |           |  | $         | 592 |   |  | $
|                                                                                               |          |      |           |  |        |     |           |  |           |     |   |  |  
|Total after-tax second quarter 2001 reserve strengthening and other related accruals           | $        | 619  |           |  | $      | 277 |           |  | $         | 384 |   |  | $
|                                                                                               |          |      |           |  |        |     |           |  |           |     |   |  |  

* $500 million of ceded losses reduced by
 $230 million of ceded premiums and $47 million of interest charges.

With respect to environmental and mass tort
 reserves, commencing in 2000 and continuing into the first and second quarters of
 2001, CNA received a number of new reported claims, some of which involved declaratory
 judgment actions premised on court decisions purporting to expand insurance coverage
 for pollution claims. In these decisions, several courts adopted rules of insurance
 policy interpretation which established joint and several liability for insurers
 consecutively on a risk during a period of alleged property damage; and in other
 instances adopted interpretations of the absolute pollution exclusion,
 which weakened its effectiveness in most circumstances. In addition to receiving
 new claims and declaratory judgment actions premised upon these unfavorable legal
 precedents, these court decisions also impacted CNAs pending pollution and
 mass tort claims and coverage litigation. During the spring of 2001, CNA reviewed
 specific claims and litigation, as well as general trends, and concluded reserve
 strengthening in this area was warranted.

In the area of mass torts, several well-publicized
 verdicts arising out of bodily injury cases related to allegedly toxic mold led
 to a significant increase in mold-related claims in 2000 and the first half of 2001.
 CNAs reserve increase in the second quarter of 2001 was caused in part by
 this increased area of exposure.

With respect to other court cases and how
 they might affect our reserves and reasonable possible losses, the following should
 be noted. State and federal courts issue numerous decisions each year, which potentially
 impact losses and reserves in both a favorable and unfavorable manner. Examples
 of favorable developments include decisions to allocate defense and indemnity payments
 in a manner so as to limit carriers obligations to damages taking place during
 the effective dates of their policies; decisions holding that injuries occurring

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

after asbestos operations are completed
 are subject to the completed operations aggregate limits of the policies; and decisions
 ruling that carriers loss control inspections of their insureds premises
 do not give rise to a duty to warn third parties to the dangers of asbestos.

Examples of unfavorable developments include
 decisions limiting the application of the absolute pollution exclusion;
 and decisions holding carriers liable for defense and indemnity of asbestos and
 pollution claims on a joint and several basis.

Throughout 2000, and into 2001, CNA experienced
 significant increases in new asbestos bodily injury claims. In light of this development,
 CNA formed the view that payments for asbestos claims could be higher in future
 years than previously estimated. Moreover, in late 2000 through mid-2001, industry
 sources such as rating agencies and actuarial firms released analyses and studies
 commenting on the increase in claim volumes and other asbestos liability developments.
 For example, A.M. Best released a study in May 2001 increasing its ultimate asbestos
 reserve estimate 63% from $40 billion to $65 billion, citing an unfunded insurance
 industry reserve shortfall of $33 billion. In June 2001, Tillinghast raised its
 asbestos ultimate exposure from $55 billion to $65 billion for the insurance industry
 and its estimate of the ultimate asbestos liability for all industries was raised
 to $200 billion.

Also in the 2000 to 2001 time period, a
 number of significant asbestos defendants filed for bankruptcy, increasing the likelihood
 that excess layers of insurance coverage could be called upon to indemnify policyholders
 and creating the potential that novel legal doctrines could be employed which could
 accelerate the time when such indemnification payments could be due.

These developments led CNAs claims
 management to the conclusion that its asbestos reserves required strengthening.

The non-APMT adverse reserve development
 was the result of analyses of several lines of business. This development related
 principally to commercial insurance coverages including automobile liability and
 multiple-peril, as well as assumed reinsurance and healthcare-related coverages.
 A brief summary of these lines of business and the associated reserve development
 is discussed below.

Approximately $600 million of the adverse
 loss development is a result of several coverages provided to commercial entities.
 Reserve analyses performed during 2001 showed unexpected increases in the size
 of claims for several lines, including commercial automobile liability, general
 liability and the liability portion of commercial multiple-peril coverages. In
 addition, the number of commercial automobile liability claims was higher than expected
 and several state-specific factors resulted in higher than anticipated losses, including
 developments associated with commercial automobile liability coverage in Ohio and
 general liability coverage provided to contractors in New York.

The commercial automobile liability analysis
 indicated increased ultimate loss and allocated loss adjustment expense across several
 accident years due to higher paid and reported loss and allocated loss adjustment
 expense resulting from several factors. These factors include uninsured/underinsured
 motorists coverage in Ohio, a change in the rate at which the average claim size
 is increasing and a lack of improvement in the ratio of the number of claims per
 exposure unit, the frequency. First, Ohio courts have significantly broadened the
 population covered through the uninsured/underinsured motorists coverage.
 The broadening of the population covered by this portion of the policy, and the
 retrospective nature of this broadening of coverage, resulted in additional claims
 for older years. Second, in recent years, the average

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

claim size had been increasing at less than
 a 2% annual rate. The most recent available data indicates that the rate of increase
 is now closer to 8% with only a portion of this increase explainable by a change
 in mix of business. Finally, the review completed during the second quarter of 2001
 indicated that the frequency for the 2000 accident year was 6% higher than 1999.
 Expectations were that the 2000 frequency would show an improvement from the 1999
 level.

The analyses of general liability and the
 liability portion of commercial multiple-peril coverages showed several factors
 affecting these lines. Construction defect claims in California and a limited number
 of other states have had a significant impact. It was expected that the number
 of claims being reported and the average size of those claims would fall quickly
 due to the decrease in business exposed to those losses. However, the number of
 claims reported during the first six months of 2001 increased from the number of
 claims reported during the last six months of 2000. In addition to the effects
 of construction defect claims, the average claim associated with New York labor
 law has risen to more than $125,000 from less than $100,000, which was significantly
 greater than previously expected.

An analysis of assumed reinsurance business
 showed that the paid and reported losses for recent accident years were higher than
 expectations, which resulted in management recording net unfavorable development
 on prior year loss reserves of approximately $560 million. Because of the long
 and variable reporting pattern associated with assumed reinsurance as well as uncertainty
 regarding possible changes in the reporting methods of the ceding companies, the
 carried reserves for assumed reinsurance are based mainly on the pricing assumptions
 until experience emerges to show that the pricing assumptions are no longer valid.
 The reviews completed during the second quarter of 2001, including analysis at
 the individual treaty level, showed that the pricing assumptions were no longer
 appropriate. The classes of business with the most significant changes include
 excess of loss liability, professional liability and proportional and retrocessional
 property.

Approximately $320 million of adverse loss
 development was due to adverse experience in all other lines, primarily in coverages
 provided to healthcare-related entities. The level of paid and reported losses associated
 with coverages provided to national long-term care facilities were higher than expected.
 The long-term care facility business had traditionally been limited to local facilities.
 In recent years, the Company began to provide coverage to large chains of long-term
 care facilities. Original assumptions were that these chains would exhibit loss
 ratios similar to the local facilities. The most recent review of these large chains
 indicated an overall loss ratio in excess of 500% versus approximately 100% for
 the remaining business. In addition, the average size of claims resulting from coverages
 provided to physicians and institutions providing healthcare related services increased
 more than expected. The most recent review indicated that the average loss had
 increased to over $330,000. Prior to this review, the expectation for the average
 loss was approximately $250,000.

Concurrent with the Companys review
 of loss reserves, the Company completed comprehensive studies of estimated premium
 receivable accruals on retrospectively rated insurance policies and involuntary
 market facilities. These studies included ground-up reviews of retrospective premium
 accruals utilizing a more comprehensive database of retrospectively rated contracts.
 This review included application of the policy retrospective rating parameters
 to the revised estimate of ultimate loss ratio and consideration of actual interim
 cash settlement. This study resulted in a change in the estimated retrospective
 premiums receivable balances.

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

As a result of this review and changes in
 premiums associated with the change in estimates for loss reserves, the Company
 recorded a pretax reduction in premium accruals of $566 million. The effect on
 net earned premiums was $616 million offset by a reduction of accrued commissions
 of $50 million. The studies included the review of all such retrospectively rated
 insurance policies and the estimate of ultimate losses.

Approximately $188 million of this amount
 resulted from a change in estimate in premiums related to involuntary market facilities,
 which had an offsetting impact on net losses and therefore had no impact on the
 net operating results. Accruals for ceded premiums related to other reinsurance
 treaties increased $83 million due to the reserve strengthening. The remainder
 of the decrease in premium accruals relates to the change in estimate of the amount
 of retrospective premium receivables as discussed above.

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.

Amounts recoverable from reinsurers are
 estimated in a manner consistent with claim and claim adjustment expense reserves
 or future policy benefit reserves and are reported as a reinsurance receivable in
 the Condensed Consolidated Balance Sheets. The Company has a credit risk exposure
 with respect to these receivables and has established an estimated allowance for
 doubtful accounts. The allowance is recorded on the basis of periodic evaluations
 of balances due from reinsurers, reinsurer solvency, managements experience
 and current economic conditions.

In the event that a specific reinsurer is
 experiencing difficulties, the Company may engage in commutation discussions. The
 outcome of such discussions may result in a settlement that is less than the recoverable,
 net of the allowance for doubtful accounts, and could have an adverse material impact
 on the Companys results of operations and/or equity.

The Companys overall reinsurance program
 includes certain property and casualty contracts, such as the corporate aggregate
 reinsurance 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 the cash remitted to the reinsurer for the reinsurers
 margin, or cost of the reinsurance contract, as ceded premiums. The remainder
 of the premiums ceded under the reinsurance contract is recorded as a funds withheld
 liability. The Company is required to increase the funds withheld balance at stated
 interest crediting rates applied to the funds withheld balance or as otherwise specified
 under the terms of the contract. 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.

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

Interest cost on these contracts is credited
 during all periods in which a funds withheld liability exists. Interest cost, which
 is included in other net investment income, was $53 million and $84 million for
 the third quarter of 2002 and 2001 and $168 million and $206 million for the nine
 months ended September 30, 2002 and 2001. The amount subject to interest crediting
 rates on such contracts was $2,904 million and $2,724 million at September 30, 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.

For 2002, the Company has entered into an
 aggregate reinsurance treaty covering substantially all of the Companys property
 and 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 of ceded losses. 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% per annum, 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 $2.5 million and $7.5 million was recorded
 for the 2002 Cover for the three months and nine months ended September 30, 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, the Company has the right
 to elect to cede losses to the 2002 Cover when its recorded accident year losses
 exceed the attachment point. This election period expires March 31, 2004. If no
 losses are ceded by this date, the contract is considered to be commuted. If the
 Company elects to cede any losses to the 2002 Cover, it must continue to cede all
 losses subject to the terms of the contract. As of September 30, 2002, the Company
 has not recorded any ceded losses related to this cover.

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 and 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 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 commencing in 2006.

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 WTC event, the limit under this section was exhausted. Additionally,
 as a result of the significant reserve additions recorded in the second

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

quarter of 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 aggregate 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 |              |     |             |  |      |     |      |  |   |     |   |  |   |       |  
|------------------------------------------------------ | ------------ | --- | ----------- |  | ---- | --- | ---- |  | - | --- | - |  | - | ----- | -
|                                                       | Three Months |     | Nine Months
|                                                       |              |     |            
|Period ended September 30                              | 2002         |     | 2001        |  | 2002 |     | 2001
|(In millions)                                          |              |     |             |  |      |     |     
|Ceded earned premiums                                  | $            |    |             |  | $    | (83 | )    |  | $ |    |   |  | $ | (543  | )
|Ceded claim and claim adjustment expense               |              |    |             |  |      | 288 |      |  |   |    |   |  |   | 1,010 |  
|Interest charges (included in net investment income)   |              | (13 | )           |  |      | (11 | )    |  |   | (38 | ) |  |   | (70   | )
|                                                       |              |     |             |  |      |     |      |  |   |     |   |  |   |       |  
|Pretax impact on operating results                     | $            | (13 | )           |  | $    | 194 |      |  | $ | (38 | ) |  | $ | 397   |  
|                                                       |              |     |             |  |      |     |      |  |   |     |   |  |   |       |  

In 2001, the Company entered into a one-year
 aggregate reinsurance treaty related to the 2001 accident year covering substantially
 all property and 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. The ceded premium related to the full utilization of the $760
 million of limit 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 $618 million have been ceded under the CCC Cover
 through September 30, 2002.



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



|Impact of CCC Cover on Pretax Operating Results      |              |     |             |  |      |      |      |  |   |      |   |  |   |      |  
|---------------------------------------------------- | ------------ | --- | ----------- |  | ---- | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                     | Three Months |     | Nine Months
|                                                     |              |     |            
|Period ended September 30                            | 2002         |     | 2001        |  | 2002 |      | 2001
|(In millions)                                        |              |     |             |  |      |      |     
|Ceded earned premiums                                | $            | (39 | )           |  | $    | (232 | )    |  | $ | (100 | ) |  | $ | (234 | )
|Ceded claim and claim adjustment expense             |              | 55  |             |  |      | 427  |      |  |   | 148  |   |  |   | 427  |  
|Interest charges (included in net investment income) |              | (11 | )           |  |      | (15  | )    |  |   | (27  | ) |  |   | (15  | )
|                                                     |              |     |             |  |      |      |      |  |   |      |   |  |   |      |  
|Pretax impact on operating results                   | $            | 5   |             |  | $    | 180  |      |  | $ | 21   |   |  | $ | 178  |  
|                                                     |              |     |             |  |      |      |      |  |   |      |   |  |   |      |  

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 |              |     |             |  |      |     |      |  |   |     |   |  |   |     | 
|-------------------------------------------------------------------------------- | ------------ | --- | ----------- |  | ---- | --- | ---- |  | - | --- | - |  | - | --- | 
|                                                                                 | Three Months |     | Nine Months
|                                                                                 |              |     |            
|Period ended September 30                                                        | 2002         |     | 2001        |  | 2002 |     | 2001
|(In millions)                                                                    |              |     |             |  |      |     |     
|Standard Lines                                                                   | $            | (15 | )           |  | $    | 201 |      |  | $ | (43 | ) |  | $ | 383 | 
|Specialty Lines                                                                  |              | 8   |             |  |      | 32  |      |  |   | 3   |   |  |   | 26  | 
|CNA Re                                                                           |              | (3  | )           |  |      | 141 |      |  |   | 16  |   |  |   | 166 | 
|                                                                                 |              |     |             |  |      |     |      |  |   |     |   |  |   |     | 
|Pretax impact on operating results                                               | $            | (10 | )           |  | $    | 374 |      |  | $ | (24 | ) |  | $ | 575 | 
|                                                                                 |              |     |             |  |      |     |      |  |   |     |   |  |   |     | 

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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 and 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 facilitated 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 included common architecture and platform
 standards that directly support the Companys strategies.

For the nine months ended September 30,
 2001 the Company incurred $62 million pretax of restructuring and other related
 charges for the IT Plan, primarily related to employee severance charges and the
 write-off of impaired assets. There were no charges recorded during the three months
 ended September 30, 2001.

The following table summarizes the pretax
 effect of these costs on the Companys operating segments.



|Pretax Restructuring and Other Related Charges |        |    | 
|---------------------------------------------- | ------ | -- | 
|                                               | Nine  
|For the period ended September 30, 2001        | Months
|(In millions)                                  |       
|Standard Lines                                 | $      | 6  | 
|Specialty Lines                                |        | 2  | 
|CNA Re                                         |        |   | 
|Life Operations                                |        | 17 | 
|Corporate and Other                            |        | 37 | 
|                                               |        |    | 
|Total                                          | $      | 62 | 
|                                               |        |    | 

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

No restructuring and
 other related charges related to the IT Plan have been incurred in
 2002; however, payments were made during the nine months ended September
 30, 2002 related to amounts accrued as of December 31, 2001. The following
 table summarizes the remaining IT Plan accrual at September 30, 2002 and the
 activity in that accrual since inception.Approximately $5 million of the
 remaining accrual is expected to be paid during the remainder of 2002.

IT Plan Accrual



|                                           |  | Employee      |   |          |   |       |  |       |     |   |  |   |   | 
|------------------------------------------ |  | ------------- | - | -------- | - | ----- |  | ----- | --- | - |  | - | - | 
|                                           |  | Termination   |   | Impaired |   |       |  |       |     |   |  |  
|                                           |  | and Related   |   | Asset    |   | Other |  |       |     |  
|                                           |  | Benefit Costs |   | Charges  |   | Costs |  | Total
|(In millions)                              |  |               |   |          |   |       |  |      
|IT Plan initial accrual                    |  |               | $ | 29       |   |       |  | $     | 32  |   |  | $ | 1 | 
|Costs that did not require cash in 2001    |  |               |   |         |   |       |  |       | (32 | ) |  |   |  | 
|Payments charged against liability in 2001 |  |               |   | (19      | ) |       |  |       |    |   |  |   |  | 
|                                           |  |               |   |          |   |       |  |       |     |   |  |   |   | 
|Accrued costs at December 31, 2001         |  |               |   | 10       |   |       |  |       |    |   |  |   | 1 | 
|Payments charged against liability in 2002 |  |               |   | (1       | ) |       |  |       |    |   |  |   |  | 
|                                           |  |               |   |          |   |       |  |       |     |   |  |   |   | 
|Accrued costs at September 30, 2002        |  |               | $ | 9        |   |       |  | $     |    |   |  | $ | 1 | 
|                                           |  |               |   |          |   |       |  |       |     |   |  |   |   | 

The IT Plan is not
 expected to result in decreased operating expenses 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.

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

2001 Plan

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

No restructuring and other
 related charges related to the 2001 Plan have been incurred in 2002; however,
 payments were made during the nine months ended September 30, 2002 related to
 amounts accrued as of December 31, 2001. The following table summarizes the
 remaining 2001 Plan accrual as of September 30, 2002 and the activity in that
 accrual since inception. Approximately $29 million of the remaining accrual is
 expected to be paid during the remainder of 2002.

2001 Plan Accrual



|                                           |  | Employee      |   |             |   |          |  |       |     |       |  |   |     |   |  |   |     |  
|------------------------------------------ |  | ------------- | - | ----------- | - | -------- |  | ----- | --- | ----- |  | - | --- | - |  | - | --- | -
|                                           |  | Termination   |   | Lease       |   | Impaired |  |       |     |       |  |   |     |  
|                                           |  | and Related   |   | Termination |   | Asset    |  | Other |     |       |  |  
|                                           |  | Benefit Costs |   | Costs       |   | Charges  |  | Costs |     | Total
|(In millions)                              |  |               |   |             |   |          |  |       |     |      
|2001 Plan initial accrual                  |  |               | $ | 68          |   |          |  | $     | 56  |       |  | $ | 30  |   |  | $ | 35  |  
|Costs that did not require cash in 2001    |  |               |   |            |   |          |  |       |    |       |  |   |    |   |  |   | (35 | )
|Payments charged against liability in 2001 |  |               |   | (2          | ) |          |  |       |    |       |  |   |    |   |  |   |    |  
|                                           |  |               |   |             |   |          |  |       |     |       |  |   |     |   |  |   |     |  
|Accrued costs at December 31, 2001         |  |               |   | 66          |   |          |  |       | 56  |       |  |   | 30  |   |  |   |    |  
|Costs that did not require cash in 2002    |  |               |   |            |   |          |  |       |    |       |  |   | (25 | ) |  |   |    |  
|Payments charged against liability in 2002 |  |               |   | (50         | ) |          |  |       | (11 | )     |  |   | (1  | ) |  |   |    |  
|                                           |  |               |   |             |   |          |  |       |     |       |  |   |     |   |  |   |     |  
|Accrued costs at September 30, 2002        |  |               | $ | 16          |   |          |  | $     | 45  |       |  | $ | 4   |   |  | $ |    |  
|                                           |  |               |   |             |   |          |  |       |     |       |  |   |     |   |  |   |     |  

Reserves  Estimates
 and Uncertainties

The Company maintains loss
 reserves (reserves) to cover its estimated ultimate unpaid liability for losses
 and loss adjustment expenses, including the estimated cost of the claims
 adjudication process, for claims that have been reported but not yet settled and
 claims that have been incurred but not reported. Reserves are reflected as
 liabilities on the Condensed Consolidated Balance Sheets under the heading
 Insurance Reserves. Changes in estimates of reserves are reflected in
 the Companys Condensed Consolidated Statements of Operations, as incurred
 losses in the period in which the change arises.

The level of reserves
 maintained by the Company represents managements best estimate, as of a
 particular point in time, of what the ultimate settlement and administration of
 claims will cost based on its assessment of facts and circumstances known at that
 time. Reserves are not an exact calculation of liability but instead are estimates
 that are derived by the Company, generally utilizing a variety of actuarial reserve
 estimation techniques, from numerous assumptions and expectations about future
 events, both internal and external, many of which are highly uncertain. Some of the
 many uncertain future events about which the Company makes assumptions and
 estimates are claims severity, frequency of claims, economic inflation, the impact
 of underwriting policy and claims handling practices and the lag time between the

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

occurrence of an insured event and the time
 it is ultimately settled (referred to in the insurance industry as the tail).

The Companys experience has been that
 the inherent uncertainties of estimating insurance reserves are generally greater
 for casualty coverages (particularly long-tail casualty risks such as APMT losses)
 than for property coverages. Estimates of the cost of future APMT claims are highly
 complex and include an assessment of, among other things, whether certain costs
 are covered under the policies and whether recovery limits apply, allocation of
 liability among numerous parties, some of whom are in bankruptcy proceedings, inconsistent
 court decisions and developing legal theories and tactics of plaintiffs lawyers.
 Reserves for property-related catastrophes, both natural disasters and man-made
 catastrophes such as terrorist acts, are also difficult to estimate. See the discussion
 of the Second Quarter 2001 Prior Year Reserve Strengthening, the WTC Event, and
 Environmental Pollution and Mass Tort and Asbestos Reserves in the MD&A for
 further information.

In addition to the uncertainties inherent
 in estimating APMT and catastrophe losses, the Company is subject to the uncertain
 effects of emerging or potential claims and coverage issues, which arise as industry
 practices and legal, judicial, social, and other environmental conditions change.
 These issues can have a negative effect on the Companys business by either
 extending coverage beyond the original underwriting intent or by increasing the
 number or size of claims. Either development could require material increases in
 reserves. Examples of emerging or potential claims and coverage issues include:
 (i) increases in the number and size of water damage claims related to expenses
 for testing and remediation of mold conditions; (ii) increases in the number and
 size of claims relating to injuries from medical products, and exposure to lead
 and radiation related to cellular phone usage; (iii) expected increases in the number
 and size of claims relating to accounting and financial reporting, including director
 and officer and errors and omissions insurance claims, in an environment of major
 corporate bankruptcies; and (iv) a growing trend of plaintiffs targeting insurers
 in class action litigation relating to claims-handling and other practices. The
 future impact of these and other unforeseen emerging or potential claims and coverage
 issues is extremely hard to predict and could materially adversely affect the adequacy
 of the Companys reserves and could lead to future reserve additions.

The Companys current reserve levels
 reflect managements best estimate of the Companys ultimate claims and
 claim adjustment expenses at September 30, 2002, based upon known facts and current
 law. However, in light of the many uncertainties associated with making the estimates
 and assumptions necessary to establish reserve levels, the Company reviews its reserve
 estimates on a regular and ongoing basis and makes changes as experience develops.
 The Company may in the future determine that its recorded reserves are not sufficient
 and may increase its reserves by amounts that may be material, which could materially
 adversely affect the Companys business and financial condition. Any such
 increase in reserves would be recorded as a charge against the Companys earnings
 for the period in which the change in estimate arises.

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

Terrorism Exposure

CNA and the insurance industry incurred
 substantial losses related to the WTC event. 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 the WTC event centered on the role, if any, the U.S.
 federal government should play in providing a terrorism backstop for
 the industry. On October 17, 2002, a conference committee of the U.S. Congress
 produced a bill reconciling two bills formerly passed by the U.S. Senate and House
 of Representatives. The bill, entitled The Terrorism Risk Insurance Act (the Act),
 establishes a program within the Department of the Treasury, under which
 the Federal government would share the risk of loss from future terrorist attacks
 with the insurance industry. The Act terminates on December 31, 2005. Each participating
 insurance company would pay a deductible before Federal assistance becomes available.
 This deductible is based on a percentage of direct premiums for commercial insurance
 lines from the previous calendar year, and rises from 7 percent during the first
 year to 10 percent in year two and 15 percent in year three. For losses above a
 companys deductible, the Federal government will cover 90%, while companies
 contribute 10%. Losses covered by the program will be capped at $100 billion; above
 this amount, Congress is to determine the procedures for and the source of any payments.
 Insurance companies providing commercial property and casualty insurance are required
 to participate in the program. The Act does not cover life or health insurance
 products. During the first two years of the program, the bill has a mandatory offer
 requirement for terrorism coverage by insurers. The Secretary of Treasury has discretion
 to extend this requirement to the third year of the program.

The Act, if it becomes law, would provide
 the property and casualty industry with a greater ability to withstand the effect
 of any terrorist event in the next three years. In addition, the Act may help to
 encourage reinsurers to offer terrorism coverage on a broader basis than they have
 been writing following the WTC event.

To date, however, U.S. Congress has not
 enacted the Act. Without any federal backstop in place, the Company is exposed
 to potentially material losses arising from a future terrorism event. Accordingly,
 the Companys results of operations and equity could be materially adversely
 impacted by a future terrorism event. The Company is attempting to mitigate this
 exposure through its underwriting practices, policy terms and conditions, and the
 use of reinsurance. The Company is generally prohibited from excluding terrorism
 exposure from its primary workers compensation, individual life and group life and
 health policies. The Companys current reinsurance arrangements either exclude
 terrorism coverage or significantly limit the level of coverage.

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CNA FINANCIAL
 CORPORATIONMANAGEMENT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 |       | Nine Months
|-------------------------------- |  | ------------ | ----- | -----------
|                                 |  |              |       |            
|Period ended September 30        |  | 2002         |       | 2001       
|(In millions)                    |  |              |       |            
|Net written premiums             |  | $            | 1,027 |            
|Net earned premiums              |  |              | 988   |            
|Underwriting income (loss)       |  |              | 85    |            
|Net investment income            |  |              | 66    |            
|Net operating income (loss)      |  |              | 107   |            
|Ratios                           |  |              |       |            
|Loss and loss adjustment expense |  |              | 60.3  | %          
|Expense                          |  |              | 28.5  |            
|Dividend                         |  |              | 2.6   |            
|                                 |  |              |       |            
|Combined                         |  |              | 91.4  | %          
|                                 |  |              |       |            
|2001 adjusted underwriting loss* |  |              |       |            
|                                 |  |              |       |            
|2001 adjusted ratios*            |  |              |       |            
|Loss and loss adjustment expense |  |              |       |            
|Expense                          |  |              |       |            
|Dividend                         |  |              |       |            
|                                 |  |              |       |            
|Combined                         |  |              |       |            
|                                 |  |              |       |            

* The 2001 adjusted
 underwriting loss and adjusted ratios exclude the impact of the second quarter
 2001 reserve strengthening, the WTC event, both net of the related benefit of
 corporate aggregate reinsurance treaties, and restructuring and other related
 charges.

Net operating results improved
 $88 million for the third quarter of 2002 as compared with the same period in 2001.
 Included in the 2001 results was $50 million of after-tax losses related to the WTC
 event, net of the related corporate aggregate reinsurance treaties benefit.
 Excluding this 2001 significant item, net operating results increased $38 million
 for the third quarter of 2002 as compared with the same period in 2001. This
 increase was due primarily to improved underwriting results partially offset by
 decreased net investment income, including a $33 million decrease in limited
 partnership investment income.

The combined ratio decreased
 12.9 points for the third quarter of 2002 as compared with the adjusted combined
 ratio for the same period in 2001, and underwriting results improved by $123 million
 as compared with the adjusted underwriting results for the same period in 2001.
 This change was due to decreases in the loss, expense and dividend ratios. The loss
 ratio decreased 3.8 points due principally to significant favorable net prior year
 loss reserve development recorded in the third quarter of 2002 across certain lines
 of business. In the third quarter of 2002, $108 million of favorable prior year loss
 reserve development was recorded which was attributable to participation in the
 Workers Compensation Reinsurance Bureau (WCRB), a reinsurance pool, and residual
 markets. The favorable prior year loss reserve development for WCRB is the result of
 information recently received from the WCRB. This information indicated that the
 Companys net required reserves for accident years 1970 through 1996 were $60
 million less than the carried reserves. In addition, during the third quarter, the
 Company commuted accident years 1965 through 1969 for a payment of approximately $5
 million to cover carried reserves of approximately $13 million, resulting in further
 favorable development of $8 million. The favorable residual market prior year loss
 reserve development

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

was the result of lower than expected paid
 loss activity during recent periods for older accident years. In addition, Standard
 Lines had favorable prior year loss reserve development, primarily in the package
 liability and auto liability lines of business due to new claims initiatives.

These new claims initiatives, which include
 specialized training on specific areas of the claims adjudication process, enhanced
 claims litigation management, enhanced adjuster-level metrics to monitor performance
 and more focused metric-based claim file review and oversight, are expected to produce
 significant reductions in ultimate claim costs. Based on managements current
 best estimate of the reduction in ultimate claim costs, approximately $100 million
 of favorable prior year reserve development was recorded in the third quarter of
 2002. Additional favorable reserve development may be recorded in the future as
 management continues to monitor these estimates and as additional evidence becomes
 available to measure the effectiveness of the claim cost containment initiatives
 and managements corresponding estimate of such expected ultimate claim cost
 reductions. While management believes that the estimate of ultimate claim cost
 reductions as a result of the claim cost containment initiatives is reasonable,
 there can be no assurance that the ultimate expected claim cost reductions will
 be achieved, or that any additional favorable development will be recorded as a
 result of the claim cost containment initiatives described above.

The improvements in the third quarter 2002
 loss ratio were partially offset by unfavorable prior year loss reserve development
 across several lines of business, including contractor package policy business.
 Additionally, the cost of the Companys reinsurance programs increased the
 2002 loss ratio as compared with a significant benefit from reinsurance in 2001,
 including a benefit related to the corporate aggregate reinsurance treaties from
 core operations which was recorded primarily based on increased 2001 accident year
 losses for the workers compensation line of business.

The expense ratio decreased 7.3 points as
 a result of decreased acquisition expenses, principally due to reduction in accruals
 for certain insurance-related assessments resulting from changes in the basis on
 which the assessments were calculated. Furthermore, the expense ratio decreased
 due to reduced head count as a result of the 2001 Plan and an increased net earned
 premium base. The dividend ratio decreased 1.8 points due to favorable current
 accident year dividends and lower adverse dividend reserve development recorded
 in 2002.

Net written premiums increased $265 million
 for the third quarter of 2002 as compared with the same period in 2001. Included
 in 2001 net written premiums was $159 million of ceded written premiums related
 to both the WTC event and the corporate aggregate reinsurance treaties from core
 operations. Excluding these 2001 significant premium items, net written premiums
 increased $106 million due primarily to strong rate increases and lower ceded premiums
 due to decreased use of reinsurance in 2002. Net earned premiums increased $249
 million for the third quarter of 2002 as compared with the same period in 2001 due
 primarily to the increases in net written premiums as noted above.

Net operating results improved $643 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in the 2001 results were $619 million related to the second quarter
 2001 reserve strengthening, $50 million related to the WTC event and $4 million
 for restructuring and other related charges. Excluding these 2001 significant items,
 net operating results declined $30 million for the nine months ended September 30,
 2002 as compared with the same period in 2001. This decrease was due primarily
 to decreased net investment income, partially offset by improved underwriting results.

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

The combined ratio decreased 3.1 points
 for the nine months ended September 30, 2002 as compared with the adjusted combined
 ratio for the same period in 2001, and underwriting results improved by $62 million
 as compared with the adjusted underwriting results for the same period in 2001.
 This change was due to an increase in the loss ratio, more than offset by decreases
 in the expense and dividend ratios. The loss ratio increased 3.6 points due principally
 to unfavorable prior year loss reserve development recorded in 2002 across certain
 lines of business including contractor package policy and excess and surplus lines
 of business, and the net cost of reinsurance in 2002 as compared with a significant
 benefit from the use of reinsurance in 2001, including a benefit related to the
 corporate aggregate reinsurance treaties from core operations that was recorded
 based on increased 2001 accident year losses primarily for workers compensation
 business. These increases in the loss ratio were partially offset by significant
 favorable loss reserve development across many lines of business recorded in the
 third quarter of 2002 for new claim initiatives throughout Standard Lines and residual
 markets. The expense ratio decreased 5.2 points
 as a result of decreased acquisition expenses, principally due to reduction in accruals
 for certain insurance-related assessments resulting from changes in the basis on
 which the assessments were calculated. Furthermore, the expense ratio decreased
 due to reduced head count as a result of the 2001 Plan and increased net earned
 premium base. The dividend ratio decreased 1.5 points primarily due to favorable
 current accident year dividends.

Net written premiums increased $1,122 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in the 2001 net written premiums was $815 million of ceded premiums
 related to the corporate aggregate reinsurance treaties, additional ceded premiums
 arising from both the reserve strengthening and WTC event, and a change in estimate
 for involuntary market premium accruals. Excluding these 2001 significant premium
 items, net written premiums increased $307 million primarily as a result of strong
 rate increases and lower ceded premiums.

Net earned premiums increased $1,488 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in the 2001 net earned premiums was $1,180 million of ceded premiums
 related to the corporate aggregate reinsurance treaties, additional ceded premiums
 and a change in estimate for retrospective premium accruals arising from the reserve
 strengthening, additional ceded premiums arising from the WTC event, and a change
 in estimate for involuntary market premium accruals. Excluding these 2001 significant
 premium items, net earned premiums increased $308 million primarily as a result
 of the increases in net written premiums as described above.

Standard Lines achieved an average rate
 increase of 28% in the third quarter of 2002 for contracts that renewed during the
 period and had a retention rate of 68% for those contracts that were up for renewal.
 Standard Lines achieved an average rate increase of 18% in the third quarter of
 2001 for contracts that were renewed during the period and had a retention rate
 of 80% for those contracts that were up for renewal.

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CNA FINANCIAL
 CORPORATIONMANAGEMENT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 |       | Nine Months
|--------------------------------------- |  | ------------ | ----- | -----------
|                                        |  |              |       |            
|Period ended September 30               |  | 2002         |       | 2001       
|(In millions)                           |  |              |       |            
|Net written premiums                    |  | $            | 634   |            
|Net earned premiums                     |  |              | 555   |            
|Underwriting loss                       |  |              | (143  | )          
|Net investment income                   |  |              | 50    |            
|Net operating (loss) income             |  |              | (67   | )          
|Ratios                                  |  |              |       |            
|Loss and loss adjustment expense        |  |              | 91.0  | %          
|Expense                                 |  |              | 34.5  |            
|Dividend                                |  |              | 0.2   |            
|                                        |  |              |       |            
|Combined                                |  |              | 125.7 | %          
|                                        |  |              |       |            
|2001 adjusted underwriting gain (loss)* |  |              |       |            
|                                        |  |              |       |            
|2001 adjusted ratios*                   |  |              |       |            
|Loss and loss adjustment expense        |  |              |       |            
|Expense                                 |  |              |       |            
|Dividend                                |  |              |       |            
|                                        |  |              |       |            
|Combined                                |  |              |       |            
|                                        |  |              |       |            

* The 2001 adjusted
 underwriting loss and adjusted ratios exclude the impact of the second quarter
 2001 reserve strengthening, the WTC event, both net of the related
benefit of corporate aggregate reinsurance
 treaties, and restructuring and other related charges.

Net operating results
 decreased $106 million for the third quarter of 2002 as compared
 with the same period in 2001. Included in the 2001 results was $12
 million of after-tax losses related to the WTC event, net of the
 related corporate aggregate reinsurance treaties benefit. Excluding
 this 2001 significant item, net operating results decreased $118
 million for the third quarter of 2002 as compared with the same
 period in 2001. This decrease was due primarily to decreases in both
 underwriting results and net investment income, including a $13
 million decrease in limited partnership income.

The combined ratio
 increased 26.7 points for the third quarter of 2002 as compared with
 the adjusted combined ratio for the same period in 2001, and
 underwriting results decreased by $149 million as compared with the
 adjusted underwriting results for the same period in 2001. This
 change was due to an increase in the loss ratio, partially offset by
 a decrease in the expense ratio. The loss ratio increased 30.7 points
 due principally to increased adverse prior year loss reserve
 development recorded in the third quarter of 2002 primarily in CNA
 HealthPro, voluntary pools and the European operations. The adverse
 prior year loss reserve development of approximately $150 million for
 CNA HealthPro was driven principally by medical malpractice excess
 products provided to hospitals and physicians and coverages provided
 to long term care facilities, principally nursing homes. $100 million
 of the prior year loss reserve development was related to assumed
 excess products and loss portfolio transfers, and was primarily
 driven by unexpected increases in the number of excess claims in
 recent accident years. The most recent review of this business
 indicated that the percentage of total claims greater than one
 million dollars has increased by 33%, from less than 3% of all claims
 to more than 4% of all claims. CNA Health Pro no longer writes loss
 portfolio transfers and assumed excess products.

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

The remaining $50 million of the prior year
 loss reserve development was related to long-term care facilities primarily as a
 result of a review completed during the third quarter of 2002 that indicated that
 the average value of claims closed during the first several months of 2002 had increased
 by more then 50% when compared to claims closed during 2001. In response to those
 trends, CNA Health Pro has reduced its writings of national for-profit nursing home
 chains.

The increase in the loss ratio was also
 due to increased current year catastrophe losses, including $17 million of catastrophe
 losses for the European floods. In 2002, there was a net cost for reinsurance as
 compared with a significant benefit from the use of reinsurance in 2001, including
 a benefit related to the corporate aggregate reinsurance treaties from core operations
 which was recorded based on 2001 accident year losses. These adverse results were
 partially offset by favorable prior year loss reserve development recorded in 2002
 in CNA Pro, rate increases across the entire book of business and the increased
 benefit related to additional cessions to the CCC Cover as a result of the prior
 year loss reserve development recorded in the third quarter of 2002. The favorable
 prior year loss reserve development in CNA Pro was primarily driven by approximately
 $100 million of favorable prior year loss reserve development on programs providing
 professional liability coverage to accountants, lawyers and realtors. Recent reviews
 of this business have found that the average claim size for older accident years
 has not been increasing as expected. Previous reviews had expected claim size trend
 of 5% to 6%. The expense ratio decreased 4.0 points as a result of lower underwriting
 expenses due to decreased staff levels as a result of the 2001 Plan, other expense
 reduction initiatives and increased net earned premium base.

Net written premiums increased $114 million
 for the third quarter of 2002 as compared with the same period in 2001. Included
 in 2001 net written premiums was $34 million of ceded written premiums related to
 both the WTC event and the corporate aggregate reinsurance treaties from core operations.
 Excluding these 2001 significant premium items, net written premiums increased
 $80 million due primarily to growth in CNA Pro and CNA HealthPro resulting from
 strong rate increases and increased new business, partially offset by increased
 ceded premiums related to the additional cessions to the CCC Cover. Net earned
 premiums increased $81 million for the third quarter of 2002 as compared with the
 same period in 2001 due primarily to the increases in net written premiums noted
 above.

Net operating results improved $231 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in the 2001 results were $277 million related to the second quarter
 2001 reserve strengthening, $12 million related to the WTC event and $1 million
 for restructuring and other related charges. Excluding these 2001 significant items,
 net operating results decreased $59 million for the nine months ended September
 30, 2002 as compared with the same period in 2001. This decrease was due primarily
 to a decline in both underwriting results and net investment income partially offset
 by the impact of better aligning premium earnings patterns with the emergence of
 claims in the vehicle warranty line of business, which reduced operating results
 in 2001.

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

The combined ratio increased 3.0 points
 for the nine months ended September 30, 2002 as compared with the adjusted combined
 ratio for the same period in 2001, and underwriting results decreased $65 million
 as compared with the adjusted underwriting results for the same period in 2001.
 This change was due to an increase in the loss ratio, partially offset by decreases
 in the expense and dividend ratios. The loss ratio increased 11.6 points primarily
 due to the third quarter 2002 activity discussed in the quarterly results discussion
 above. The expense ratio decreased 8.5 points as a result of the 2001 write-off
 of unrecoverable deferred acquisition costs in the vehicle warranty line of business
 and lower underwriting expenses due to decreased staff levels as a result of the
 2001 Plan, and other expense reduction initiatives.

Net written premiums increased $305 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in 2001 net written premiums was $57 million related to the corporate
 aggregate reinsurance treaties, additional ceded premiums arising from both the
 reserve strengthening and WTC event, and a change in estimate for involuntary market
 premium accruals. Excluding these 2001 significant premium items, net written premiums
 increased $248 million primarily as a result of growth in CNA Pro, CNA HealthPro
 and Marine due to strong rate increases and increased new business.

Net earned premiums increased $223 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in 2001 net earned premiums was $71 million related to the corporate
 aggregate reinsurance treaties, additional ceded premiums and a change in estimate
 for retrospective premium accruals arising from the reserve strengthening, additional
 ceded premiums arising from the WTC event and a change in estimate for involuntary
 market premium accruals. Excluding these 2001 significant premium items, net written
 premiums increased $152 million primarily as a result of the increases in net written
 premiums as noted above.

Specialty Lines achieved an average rate
 increase of 30% in the third quarter of 2002 for contracts that renewed during the
 period and had a retention rate of 77% for those contracts that were up for renewal.
 Specialty Lines achieved an average rate increase of 21% in the third quarter of
 2001 for contracts that renewed during the period and had a retention rate of 75%
 for those contracts that were up for renewal. Retention rates above apply to Specialty
 Lines excluding the CNA Guaranty and Credit, Surety and Warranty businesses.

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CNA FINANCIAL
 CORPORATIONMANAGEMENT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 |       | Nine Months
|-------------------------------- |  | ------------ | ----- | -----------
|                                 |  |              |       |            
|Period ended September 30        |  | 2002         |       | 2001       
|(In millions)                    |  |              |       |            
|Net written premiums             |  | $            | 167   |            
|Net earned premiums              |  |              | 157   |            
|Underwriting loss                |  |              | (75   | )          
|Net investment income            |  |              | 29    |            
|Net operating (loss) income      |  |              | (27   | )          
|Ratios                           |  |              |       |            
|Loss and loss adjustment expense |  |              | 116.1 | %          
|Expense                          |  |              | 31.7  |            
|                                 |  |              |       |            
|Combined                         |  |              | 147.8 | %          
|                                 |  |              |       |            
|2001 adjusted underwriting loss* |  |              |       |            
|                                 |  |              |       |            
|2001 adjusted ratios*            |  |              |       |            
|Loss and loss adjustment expense |  |              |       |            
|Expense                          |  |              |       |            
|                                 |  |              |       |            
|Combined                         |  |              |       |            
|                                 |  |              |       |            

* The 2001
 adjusted underwriting loss and adjusted ratios exclude the impact of
 the second quarter 2001 reserve strengthening, the WTC event, both
net of the related benefit of  corporate aggregate reinsurance
treaties, and restructuring and other
 related charges.

Net operating results
 improved $119 million for the third quarter of 2002 as compared with
 the same period in 2001. Included in the 2001 results was $176
 million of after-tax losses related to the WTC event, net of the
 related corporate aggregate reinsurance treaties benefit. Excluding
 this 2001 significant item, net operating results decreased $57
 million for the third quarter of 2002 as compared with the same
 period in 2001. This decrease was due primarily to declines in
 underwriting results and net investment income, including a $7
 million decrease in limited partnership income.

The combined ratio
 increased 43.5 points for the third quarter of 2002 as compared with
 the adjusted combined ratio for the same period in 2001, and
 underwriting results decreased by $68 million as compared with the
 adjusted underwriting results for the same period in 2001. This
 change was due to an increase in the loss ratio, partially offset by
 improvement in the expense ratio. The loss ratio increased 48.1
 points due principally to increased adverse prior year loss reserve
 development recorded in 2002. This increase in adverse prior year
 loss reserve development was the result of a review completed during
 the third quarter of 2002 and was primarily recorded in the
 professional liability and surety lines of business. Several large
 losses as well as continued increases in the overall average size of
 claims for these lines have resulted in higher than expected loss
 ratios. The expense ratio decreased 4.6 points primarily as a result
 of a shift in business mix resulting in lower commission rates and a
 reduction in underwriting expenses relative to the earned premium
 base.

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

Net written premiums increased $59 million
 for the third quarter of 2002 as compared with the same period in 2001. Included
 in 2001 net written premiums was $125 million of ceded written premiums related
 to both the WTC event and the corporate aggregate reinsurance treaties from core
 operations, partially offset by $89 million of reinstatement premiums related to
 the WTC event. Excluding these 2001 significant premium items, net written premiums
 increased $23 million principally as a result of clients increasing their premium
 writings, achieved rate increases and an increase in new business. These increases
 were partially offset by the decision made in the third quarter of 2001 to cease
 new and renewal business writings in CNA Re U.K. Net earned premiums increased
 $8 million for the third quarter of 2002 as compared with the same period in 2001,
 due primarily to the increases in net written premiums noted above.

Net operating results improved $538 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in the 2001 results were $384 million related to the second quarter
 2001 reserve strengthening and $176 million of after-tax losses related to the WTC
 event, net of related corporate aggregate reinsurance treaties benefit. Excluding
 these 2001 significant items, net operating results decreased $22 million for the
 nine months ended September 30, 2002 as compared with the same period in 2001.
 This decrease was due to a decrease in underwriting results and net investment income,
 partially offset by an increased benefit related to the additional cessions to the
 CCC Cover as a result of the increase in WTC related losses recorded in the first
 quarter of 2002.

The combined ratio increased 2.4 points
 for the nine months ended September 30, 2002 as compared with the adjusted combined
 ratio for the same period in 2001, and underwriting results decreased $7 million
 as compared with the adjusted underwriting results for the same period in 2001.
 This change was due to an increase in the loss ratio, partially offset by a decrease
 in the expense ratio. The loss ratio increased 8.1 points due principally to an
 increase in adverse prior year loss reserve development recorded in the third quarter
 of 2002 and the additional premiums and losses recorded as a result of the re-estimation
 of the WTC event in the first quarter of 2002. This increase in adverse prior year
 loss reserve development was the result of a review completed during the third quarter
 of 2002 and was primarily recorded in the directors and officers, professional liability
 errors and omissions, and surety lines of business. Several large losses as well
 as continued increases in the overall average size of claims for these lines have
 resulted in higher than expected loss ratios. These increases were partially offset
 by a $32 million net underwriting benefit related to the corporate aggregate reinsurance
 treaties. The expense ratio decreased 5.7 points primarily as a result of the a
 shift in business mix resulting in lower commission rates and a reduction in underwriting
 expenses relative to the earned premium base.

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

Net written premiums increased $116 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in 2001 net written premiums was $59 million related to the corporate
 aggregate reinsurance treaties and additional ceded premiums arising from both the
 reserve strengthening and WTC event. These reductions in net written premiums were
 more than offset by $89 million of reinstatement premiums related to the WTC event.
 Excluding these 2001 significant premium items, net written premiums increased
 $146 million principally as a result of clients increasing their premium writings,
 achieved rate increases and an increase in new business. These increases were partially
 offset by the decision made in the third quarter of 2001 to cease new and renewal
 business writings in CNA Re U.K. Net earned premiums increased $10 million for
 the nine months ended September 30, 2002 as compared with the same period in 2001,
 due primarily to the increases in net written premiums noted above.

On July 15, 2002, the Company announced
 that it signed a share purchase agreement to sell CNA Re U.K. The sale was completed
 on October 31, 2002. See the discussion of realized investment losses in the Investments
 section of the MD&A for additional information.

Group Operations

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



|Operating Results           |              |     |             |  |      |     |      |  |   |       |  |  |   |       | 
|--------------------------- | ------------ | --- | ----------- |  | ---- | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                            | Three Months |     | Nine Months
|                            |              |     |            
|Period ended September 30   | 2002         |     | 2001        |  | 2002 |     | 2001
|(In millions)               |              |     |             |  |      |     |     
|Net earned premiums         | $            | 292 |             |  | $    | 906 |      |  | $ | 2,016 |  |  | $ | 2,524 | 
|Net investment income       |              | 44  |             |  |      | 40  |      |  |   | 127   |  |  |   | 119   | 
|Net operating income (loss) |              | 25  |             |  |      | (19 | )    |  |   | 59    |  |  |   | 11    | 

During the second quarter of 2002, the Company
 announced the sale of the Claims Administration Corporation and the transfer of
 the National Postal Mail Handlers Union group benefits plan (the Mail Handlers Plan)
 to First Health Group Corporation, effective July 1, 2002. In the third quarter
 of 2002, the Company recognized a $5 million pretax realized loss on the sale of
 Claims Administration Corporation and $14 million pretax of non-recurring fee income
 related to the transfer of the Mail Handlers Plan.

Net operating results improved $44 million
 for the third quarter of 2002 as compared with the same period in 2001. Included
 in the 2001 results was a $35 million loss related to the WTC event. Excluding
 this 2001 significant item, net operating results improved $9 million due primarily
 to increased net investment income and the non-recurring fee income related to the
 transfer of the Mail Handlers Plan.

Net earned premiums decreased $614 million
 for the third quarter of 2002 as compared with the same period in 2001. This decline
 was due primarily to the transfer of the Mail Handlers Plan.

Net operating income improved $48 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in the 2001 results was a $35 million loss related to the WTC event.
 Excluding this 2001 significant item, net operating results improved $13 million
 due primarily to increased net investment income and the non-recurring fee income
 related to the transfer of the Mail Handlers Plan.

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

Net earned premiums decreased $508 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. This decline was due primarily to the transfer of the Mail Handlers Plan
 partially offset by an increase in premiums in the disability and long term care
 products within Group Benefits.

Life Operations

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



|Operating Results         |              |     |             |  |      |     |      |  |   |       |  |  |   |       | 
|------------------------- | ------------ | --- | ----------- |  | ---- | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                          | Three Months |     | Nine Months
|                          |              |     |            
|Period ended September 30 | 2002         |     | 2001        |  | 2002 |     | 2001
|(In millions)             |              |     |             |  |      |     |     
|Sales volume*             | $            | 475 |             |  | $    | 592 |      |  | $ | 1,326 |  |  | $ | 2,021 | 
|Net earned premiums       |              | 236 |             |  |      | 234 |      |  |   | 711   |  |  |   | 677   | 
|Net investment income     |              | 152 |             |  |      | 141 |      |  |   | 463   |  |  |   | 413   | 
|Net operating income      |              | 36  |             |  |      | 0   |      |  |   | 108   |  |  |   | 67    | 

*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 results improved $36 million
 for the third quarter of 2002 as compared with the same period in 2001. Included
 in the 2001 results was a $14 million loss related to the WTC event. Excluding
 this 2001 significant item, net operating results improved $22 million due primarily
 to improved 2002 Individual Life mortality experience and a decrease in reinsurance
 charges as compared with 2001, partially offset by unfavorable Long Term Care morbidity
 in 2002.

Sales volume decreased $117 million for
 the third quarter of 2002 as compared with the same period in 2001. This decrease
 was attributable primarily to lower sales of synthetic guaranteed investment contracts
 and structured settlement annuities, along with reduced sales in the variable products
 business, which the Company decided to exit in the fourth quarter of 2001. These
 decreases were partially offset by increased sales in the Long Term Care business.
 Net earned premiums increased $2 million for the third quarter of 2002 as compared
 with the same period in 2001, attributable primarily to growth in the Long Term
 Care business partially offset by sales declines in structured settlements.

Net operating results improved $41 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in the 2001 results was a $14 million loss related to the WTC event
 and an $11 million loss related to restructuring and other related charges. Excluding
 these 2001 significant items, net operating results improved $16 million due primarily
 to higher net investment income
 and a decrease in reinsurance charges as compared with 2001, partially offset by
 unfavorable Long Term Care morbidity in 2002.

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

Sales volume decreased $695 million for
 the nine months ended September 30, 2002 as compared with the same period in 2001.
 This decrease was attributable primarily to lower sales of synthetic guaranteed
 investment contracts and structured settlement annuities, along with reduced sales
 in the variable products business, which the Company decided to exit in the fourth
 quarter 2001. These decreases were partially offset by increased sales in the Long
 Term Care business. Net earned premiums increased $34 million for the nine months
 ended September 30, 2002 as compared with the same period in 2001 attributable primarily
 to growth in the Long Term Care business partially offset by sales declines in structured
 settlements and the Retirement Services business.

Corporate and Other

The following table summarizes key components
 of operating results for Corporate and Other.



|Operating Results         |              |     |             |  |      |     |      |  |   |     |   |  |   |      |  
|------------------------- | ------------ | --- | ----------- |  | ---- | --- | ---- |  | - | --- | - |  | - | ---- | -
|                          | Three Months |     | Nine Months
|                          |              |     |            
|Period ended September 30 | 2002         |     | 2001        |  | 2002 |     | 2001
|(In millions)             |              |     |             |  |      |     |     
|Net investment income     | $            | 23  |             |  | $    | 40  |      |  | $ | 102 |   |  | $ | 107  |  
|Operating revenues        |              | 68  |             |  |      | 107 |      |  |   | 278 |   |  |   | 293  |  
|Net operating loss        |              | (36 | )           |  |      | (53 | )    |  |   | (82 | ) |  |   | (988 | )

Net operating results improved $17 million
 for the third quarter of 2002 as compared with the same period in 2001. Included
 in the 2001 results was a $17 million loss related to the WTC event related to Group
 Reinsurance. Excluding the impact of the WTC event, net operating results were
 comparable to the same period in the prior year. Reduced expenses for e-Business
 initiatives and improved results for Group Reinsurance were offset by lower net
 investment income, higher losses related to CNA UniSource and severance and other
 costs related to changes in senior management during the third quarter of 2002.

Operating revenues decreased $39 million
 for the third quarter 2002 as compared with the same period in 2001. This decrease
 was due primarily to reduced revenues for CNA UniSource and reduced net investment
 income partially offset by increased net earned premiums in Group Reinsurance.

Net operating results improved $906 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. Included in the 2001 results were $799 million related to the second quarter
 2001 reserve strengthening, including $741 million for APMT, $17 million related
 to the WTC event and $24 million of restructuring and other related charges. Excluding
 these 2001 significant items, net operating results improved $66 million for the
 nine months ended September 30, 2002 as compared with the same period in 2001.
 Reduced expenses for e-Business initiatives and improved results for Group Reinsurance
 were offset by lower net investment income, higher losses related to CNA UniSource
 and severance and other costs related to changes in senior management during the
 third quarter of 2002.

Operating revenues decreased $15 million
 for the nine months ended September 30, 2002 as compared with the same period in
 2001. This decrease was due primarily to reduced revenues for CNA UniSource and
 reduced net investment income partially offset by increased net earned premiums
 in Group Reinsurance.

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

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. After exploring
 possible transactions to dispose of its payroll business, CNA UniSource has decided
 to exit the payroll processing business as of December 31, 2002. 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 and payroll operations run-off for the remainder
 of 2002 and into the first half of 2003.

Environmental Pollution and Mass Tort
 and Asbestos Reserves

CNAs property and casualty insurance
 subsidiaries have actual and potential exposures related to environmental pollution
 and 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 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. The vast majority of 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 nine 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

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

meaningful prediction of the pattern of
 regulation that would result or the effect upon CNAs results of operations
 and/or equity.

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 September 30, 2002 and December 31,
 2001, CNA carried approximately $526 million and $617 million of claim and claim
 adjustment expense reserves, net of reinsurance recoverables, for reported and unreported
 environmental pollution and mass tort claims. There was no environmental pollution
 and mass tort net development for the three and nine months ended September 30,
 2002 and the three months ended September 30, 2001. Unfavorable environmental pollution
 and mass tort development for the nine months ended September 30, 2001 amounted
 to $453 million. The Company paid environmental pollution-related claims and other
 mass tort related claims, net of reinsurance recoveries, of $91 million and $153
 million for the nine months ended September 30, 2002 and 2001.

CNAs property and 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 September 30, 2002 and December 31,
 2001, CNA carried approximately $1,216 million and $1,204 million of claim and claim
 adjustment expense reserves, net of reinsurance recoverables, for reported and unreported
 asbestos-related claims. There was no asbestos net claim and claim adjustment expense
 development for the three and nine months ended September 30, 2002 and the three
 months ended September 30, 2001. Unfavorable asbestos net claim and claim adjustment
 reserve development for the nine months ended September 30, 2001 amounted to $769
 million. The Company had a net $12 million receipt of cash related to asbestos
 in the first nine months of 2002 as reinsurance recoveries collected exceeded claim
 payments. The Company made asbestos-related claim payments, net of reinsurance
 recoveries, of $78 million for the nine months ended September 30, 2001.

In the past several years, CNA has experienced
 significant increases in claim counts for asbestos-related claims. The factors
 that led to these increases included, among other things, intensive advertising
 campaigns by lawyers for asbestos claimants, mass medical screening programs sponsored
 by plaintiff lawyers, and the addition of new defendants such as the distributors
 and installers of products containing asbestos. Currently, the majority of asbestos
 bodily injury claims are filed by persons exhibiting few, if any, disease symptoms.
 It is estimated that approximately 90% of the current non-malignant asbestos claimants
 do not meet the American Medical Associations definition of impairment. Some
 courts, including the federal district court responsible for pre-trial proceedings
 in all federal asbestos bodily injury actions,

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

have ordered that so-called unimpaired
 claimants may not recover unless at some point the claimants condition
 worsens to the point of impairment.

Since 1982, at least sixty-two companies
 that mined asbestos, or manufactured or used asbestos-containing products, have
 filed for bankruptcy. Of these sixty-two companies, twenty-six companies have filed
 bankruptcy since January 1, 2000. This phenomenon has prompted plaintiff attorneys
 to file claims against companies that had only peripheral involvement with asbestos.
 Many of these defendants were users or distributors of asbestos-containing products,
 or manufacturers of products in which asbestos was encapsulated. These defendants
 include equipment manufacturers, brake, gasket, and sealant manufacturers, and general
 construction contractors. According to a comprehensive report on asbestos litigation
 recently released by the Rand Corporation, over 6,000 companies have been named
 as defendants in asbestos lawsuits, with 75 out of 83 different types of industries
 in the United States impacted by asbestos litigation. The study found that a typical
 claimant names 70 to 80 defendants, up from an average of 20 in the early years
 of asbestos litigation.

Some asbestos-related defendants have asserted
 that their claims for insurance are not subject to aggregate limits on coverage.
 CNA 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 purportedly 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. CNA is currently attempting to achieve settlements
 of several of these claims for coverage purportedly not subject to aggregate limits. Nevertheless,
 there can be no assurance any of these settlement efforts will be successful, or
 that any such claims can be settled on terms acceptable to CNA. 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 equity.

Policyholders have also initiated litigation
 directly against CNA and other insurers. CNA has been named in Adams v. Aetna,
 Inc., at. al. (Circuit Court of Kanhwha County, West Virginia), a purported class
 action against CNA and other insurers, alleging that the defendants violated West
 Virginias Unfair Trade Practices Act in handling and resolving asbestos claims
 against their policyholders. In addition, lawsuits have been filed in Texas against
 CNA and other insurers and non-insurer corporate defendants asserting liability
 for failing to warn of the dangers of asbestos. (Boson v. Union Carbide Corp.,
 et al. (District Court of Nueces County, Texas)). It is difficult to predict the
 outcome or financial exposure represented by this type of litigation in light of
 the broad nature of the relief requested and the novel theories asserted.

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, CNAs abilities to recover reinsurance, future court decisions
 and the possibility of legislative reform.

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

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 equity.

CNA reviews each active asbestos account every six
 months to determine whether changes in
 reserves may be warranted. The Company considers input from its analyst professionals with
 direct responsibility for the claims, inside and outside counsel with responsibility for
 representation of the Company, and its actuarial staff. These professionals review, among
 many factors, the policyholders present and future exposures (including such factors as claims
volume, disease mix, trial conditions, settlement demands and defense costs); the policies
 issued by CNA (including such factors as aggregate or per occurrence limits, whether the policy
 is primary, umbrella or excess, and the existence of policyholder retentions and/or deductibles);
the existence of other insurance; and reinsurance arrangements.

The results of operations and equity of CNA in future years
 may be adversely affected by
 environmental pollution and 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.

Investments

The components of net investment income for the three and nine months
 ended September 30, 2002 and 2001 are presented in the following table.



|Net Investment Income                                          |  |              |     |             |  |      |     |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------- |  | ------------ | --- | ----------- |  | ---- | --- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                               |  | Three Months |     | Nine Months
|                                                               |  |              |     |            
|Period ended September 30                                      |  | 2002         |     | 2001        |  | 2002 |     | 2001
|(In millions)                                                  |  |              |     |             |  |      |     |     
|Fixed maturity securities:                                     |  |              |     |             |  |      |     |      |  |   |       |   |  |   |       |  
|Bonds:                                                         |  |              |     |             |  |      |     |      |  |   |       |   |  |   |       |  
|Taxable                                                        |  | $            | 412 |             |  | $    | 438 |      |  | $ | 1,284 |   |  | $ | 1,247 |  
|Tax-exempt                                                     |  |              | 49  |             |  |      | 24  |      |  |   | 120   |   |  |   | 86    |  
|Limited partnerships                                           |  |              | (72 | )           |  |      | 20  |      |  |   | (28   | ) |  |   | 52    |  
|Short-term investments                                         |  |              | 17  |             |  |      | 34  |      |  |   | 44    |   |  |   | 113   |  
|Other, including interest on funds withheld and other deposits |  |              | (21 | )           |  |      | (50 | )    |  |   | (81   | ) |  |   | (94   | )
|                                                               |  |              |     |             |  |      |     |      |  |   |       |   |  |   |       |  
|Gross investment income                                        |  |              | 385 |             |  |      | 466 |      |  |   | 1,339 |   |  |   | 1,404 |  
|Investment expense                                             |  |              | (21 | )           |  |      | (18 | )    |  |   | (47   | ) |  |   | (47   | )
|                                                               |  |              |     |             |  |      |     |      |  |   |       |   |  |   |       |  
|Net investment income                                          |  | $            | 364 |             |  | $    | 448 |      |  | $ | 1,292 |   |  | $ | 1,357 |  
|                                                               |  |              |     |             |  |      |     |      |  |   |       |   |  |   |       |  

The Company experienced lower net investment income for the three and nine months ended
 September 30, 2002 as compared with the same periods in 2001. The decrease was due
 primarily to decreased limited partnership results and lower investment yields, partially offset by
 reduced interest costs on funds withheld reinsurance contracts. Other investment income
 includes interest cost on funds withheld reinsurance contracts. See the Reinsurance section of
 the MD&A for additional information. The interest cost on these contracts increased significantly
 in the second and third quarters of 2001 because of ceded losses resulting from the second
 quarter 2001 reserve strengthening and the WTC event. The decline in limited partnership
 income was primarily attributable to many of the same factors that impacted the broader
 financial markets. Limited partnership investment performance, particularly high yield bond and
 equity strategies, was adversely affected by overall market volatility including concerns over
 corporate accounting practices and credit deterioration. Based upon current trends, the

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

Company expects limited partnership losses in the
 fourth quarter of 2002 will likely be less than
 that reported in the third quarter of 2002. In future quarters, the Company expects to reallocate
 a portion of its investment in limited partnerships to other investments. The bond segment of
 the investment portfolio yielded 6.0% in the first nine months of 2002 as compared with 6.4%
 during the same period in 2001.

The components of net realized investment gains
 (losses) for the three and nine months ended
 September 30, 2002 and 2001 are presented in the following table.



|Net Realized Investment Gains (Losses)                          
|----------------------------------------------------------------
|                                                                
|                                                                
|Period ended September 30                                       
|(In millions)                                                   
|Realized investment gains (losses):                             
|Fixed maturity securities:                                      
|U.S. Government bonds                                           
|Corporate and other taxable bonds                               
|Tax-exempt bonds                                                
|Asset-backed bonds                                              
|Redeemable preferred stock                                      
|                                                                
|Total fixed maturity securities                                 
|Equity securities                                               
|Derivative securities                                           
|Other invested assets                                           
|                                                                
|Total realized investment gains (losses)                        
|Allocated to participating policyholders and minority interests
|Income tax (expense) benefit                                    
|                                                                
|Net realized investment gains (losses)                          
|                                                                

Net realized investment gains increased $16 million for the three months ended
 September 30, 2002 compared with the same period in 2001. This increase was due primarily to gains on
 sales of fixed maturities and equity securities, partially offset by increased investment
 impairment losses.

Net realized investment gains decreased $636 million for the nine months
 ended September 30, 2002 compared with the same period in 2001. This decline was due primarily to a $266 million
 after-tax increase in impairment losses recorded in 2002 principally on corporate bonds,
 contrasted with large gains realized in the second quarter of 2001 from closing out the hedge
 agreements, entered into in early 2000, related to the Companys investment in Global Crossing
 Ltd. common stock.

A primary objective in the management of the fixed maturity and equity
 portfolios 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.

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.

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

Invested assets are exposed to various risks,
 such as interest rate, market and credit. Due to the level of risk associated with
 certain invested assets and the level of uncertainty related to changes in the value
 of these assets, it is possible that changes in risks in the near term may materially
 affect the amounts reported in the Condensed Consolidated Balance Sheets and Condensed
 Consolidated Statements of Operations.

The Companys Impairment Committee
 (the Committee) reviews the investment portfolio no less frequently than quarterly
 for potentially troubled securities. The Committee (comprised of representatives
 appointed by the Companys Chief Financial Officer) determines which securities
 are impaired and the extent of the impairment. Each quarter a screening list is
 prepared consisting of the securities which fall below certain thresholds. Each
 security on the list is analyzed by the Committee in light of specific facts and
 circumstances that may be unique to that security including, but not limited to,
 the current market value relative to book value, the length of time that the securitys
 market value has been less than book value, the current view of the securitys
 market sector, its underlying circumstances and near term prospects, and
 the Companys intended holding period. The Committee evaluates available information
 and concludes if impairment losses are warranted. The Committee members continue
 to analyze new information, as it becomes available.

Realized investment losses for the three
 and nine months ended September 30, 2002, included $222 million and $533 million
 pretax of impairment losses as compared with $41 million and $124 million of pretax
 impairment losses for the same periods in 2001.

The impairments recorded in 2002 and 2001
 were primarily the result of the continued deterioration in the bond and equity
 markets and the effects on such markets due to the overall slowing of the economy.
 These impairment losses were related principally to corporate bonds in the taxable
 securities asset class of fixed maturity securities and in equity securities.

For the three months ended September 30,
 2002, the impairment losses related primarily to corporate bonds in the communications
 sector of the market and equities in the financial industry sector. On an aggregate
 basis, these impairment losses were more than offset by the realized gains in the
 overall investment portfolio.

For the three months ended September 30,
 2001, the impairment losses related to corporate bonds primarily in the internet
 communications sector of the market.

For the nine months ended September 30,
 2002 the impairment losses included $129 million related to debt securities issued
 by WorldCom Inc., $74 million related to Adelphia Communication Corporation, and
 $57 million for AT&T Canada, all of which recently filed for bankruptcy. The
 remainder of the impairment losses were primarily in the communications sector.
 If the deterioration in this and other industry sectors continues in future periods
 and the Company continues to hold these securities, the Company is likely to have
 additional impairment losses in the future.

For the nine months ended September 30,
 2001 the impairment losses were primarily in corporate bonds and included $61 million
 related to the internet communications industry sector. The remainder of the impairment
 losses were primarily in the equities sector within the medical services industry.

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

During the second quarter of 2001, the Company
 announced its intention to sell certain businesses. The assets being held for disposition
 included the U.K. subsidiaries of CNA Re (CNA Re U.K.) and certain other businesses.
 Based upon the impairment analyses performed at that time, the Company anticipated
 that it would realize losses in connection with those planned sales. In determining
 the anticipated loss from these sales, the Company estimated the net realizable
 value of each business being held for sale. An estimated after-tax loss of $320
 million was initially recorded in the second quarter of 2001. This loss was reported
 in other realized investment losses.

The Company continues to monitor the impairment
 losses recorded for these businesses and perform updated impairment analysis. Based
 on these analyses the impairment loss has been reduced by approximately $170 million,
 primarily because the net assets of the businesses had been significantly diminished
 by their operating losses, including adverse loss reserve development recognized
 by CNA Re U.K. in the fourth quarter of 2001.

In the fourth quarter of 2001, the Company
 sold certain businesses as planned. The realized after-tax loss applicable to these
 businesses recognized in the second quarter of 2001 was $38 million. Revenues of
 these businesses included in the three and nine months ended September 30, 2001
 totaled approximately $6 million and $28 million. These businesses contributed
 approximately $3 million of net operating income and $14 million of losses in the
 three and nine months ended September 30, 2001.

At September 30, 2002, CNA Re U.K. remained
 held for sale. On October 31, 2002, the Company completed the sale of CNA Re U.K.
 to Tawa U.K. Limited, a subsidiary of Artemis Group, a diversified French-based
 holding company. The sale includes business underwritten since inception by CNA
 Re U.K., except for certain risks retained by CCC as discussed below. In October,
 the sale was approved in the United Kingdom by the Financial Services Authority
 (FSA) and by the Illinois Insurance Department. This sale does not impact CNA Res
 on-going U.S.-based operations.

CNA Re U.K. was sold for $1, subject to
 adjustments that are primarily driven by certain operating results and changes in
 interest rates between January 1, 2002 and October 31, 2002, and realized foreign
 currency losses recognized by CNA Re U.K. prior to December 31, 2002. CNAF has
 also committed to contribute up to $9.6 million to CNA Re U.K. over a four-year
 period beginning in 2010 should the FSA deem CNA Re U.K. to be undercapitalized.
 Due to the various components of the completion adjustments, which are initially
 prepared by the buyer, the final settlement cannot yet be determined. However,
 based upon information currently available to the Company,
management believes there will be a reduction in the previously
recognized impairment loss, which will be reflected as a realized gain when the
completion adjustments are finalized.

Concurrent with the sale, several reinsurance
 agreements under which CCC had provided retrocessional protection to CNA Re U.K.
 will be terminated. As part of the sale, CNA Re U.K.s net exposure to all
 IGI Program liabilities will be ceded to CCC. Further, CCC will provide a $100 million
 stop loss cover attaching at carried reserves on CNA Re U.K.s 2001 underwriting
 year exposures, for which CCC received premiums of $25 million.

The statutory surplus of CNA Re U.K. was
 below the required regulatory minimum surplus level at December 31, 2001. CCC contributed
 $120 million of capital on March 25, 2002, bringing the capital above the regulatory
 minimum.

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

CNA Re U.K. contributed revenues of approximately
 $14 million and $57 million for the three months ended September 30, 2002 and 2001,
 and $57 million and $220 million for the nine months ended September 30, 2002 and
 2001. CNA Re U.K. contributed net operating income of $9 million and net operating
 losses of $109 million for the three months ended September 30, 2002 and 2001 and
 net operating income of $13 million and net operating losses of $176 million for
 the nine months ended September 30, 2002 and 2001. The assets and liabilities of
 CNA Re U.K., including the effects of planned concurrent transactions, were approximately
 $2.7 billion and $2.7 billion as of September 30, 2002 and $2.9
billion and $2.9
 billion as of December 31, 2001.

The businesses sold in 2002, excluding CNA
 Vida, Claims Administration Corporation and the Mail Handlers Plan, and those that
 continue to be held for disposition as of September 30, 2002, excluding CNA Re U.K.,
 contributed revenues of approximately $6 million and $28 million for the three months
 ended September 30, 2002 and 2001, and $35 million and $95 million for the nine
 months ended September 30, 2002 and 2001. Additionally, these businesses contributed
 net operating losses of $2 million and $2 million for the three months ended September
 30, 2002 and 2001 and $14 million and $12 million for the nine months ended September
 30, 2002 and 2001. The assets and liabilities of these businesses were approximately
 $96 million and $83 million as of September 30, 2002 and $126
million and $109
 million as of December 31, 2001. All anticipated sales are expected to be completed
 in 2002.

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

The following table presents the carrying values of the
 Companys
 investments at September 30, 2002 and December 31, 2001, and the change in unrealized gains/losses
 of those securities included in other comprehensive income for the nine months ended September 30, 2002.



|General Account Investments                                              |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|------------------------------------------------------------------------ | ------------------ | ------ | ----------------- |  | ---------------------------------------------------------------- | ------ |  |  | - | ---- | -
|                                                                         | September 30,
2002 |        | December 31,
2001 |  | Nine MonthsEndedSeptember 30,2002Change inUnrealizedGains/Losses
|(In millions)                                                            |                    |        |                   |  |                                                                 
|Fixed maturity securities:                                               |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|U.S. Treasury securities and obligations of government agencies          | $                  | 3,697  |                   |  | $                                                                | 5,081  |  |  | $ | 250  |  
|Asset-backed securities                                                  |                    | 7,643  |                   |  |                                                                  | 7,723  |  |  |   | 199  |  
|Tax-exempt securities                                                    |                    | 4,785  |                   |  |                                                                  | 2,720  |  |  |   | 233  |  
|Corporate securities                                                     |                    | 8,389  |                   |  |                                                                  | 9,587  |  |  |   | (13  | )
|Other debt securities                                                    |                    | 3,781  |                   |  |                                                                  | 3,816  |  |  |   | (213 | )
|Redeemable preferred stock                                               |                    | 26     |                   |  |                                                                  | 48     |  |  |   | (1   | )
|Options embedded in convertible debt securities                          |                    | 122    |                   |  |                                                                  | 189    |  |  |   |     |  
|                                                                         |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|Total fixed maturity securities                                          |                    | 28,443 |                   |  |                                                                  | 29,164 |  |  |   | 455  |  
|                                                                         |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|Equity securities:                                                       |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|Common stock                                                             |                    | 633    |                   |  |                                                                  | 996    |  |  |   | (123 | )
|Non-redeemable preferred stock                                           |                    | 299    |                   |  |                                                                  | 342    |  |  |   | (32  | )
|                                                                         |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|                                                                         |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|Total equity securities                                                  |                    | 932    |                   |  |                                                                  | 1,338  |  |  |   | (155 | )
|Short-term investments                                                   |                    | 5,185  |                   |  |                                                                  | 3,740  |  |  |   | 19   |  
|Other investments, primarily limited partnerships                        |                    | 1,620  |                   |  |                                                                  | 1,584  |  |  |   |     |  
|                                                                         |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|Total investments                                                        | $                  | 36,180 |                   |  | $                                                                | 35,826 |  |  |   | 319  |  
|                                                                         |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|Separate account business and other                                      |                    |        |                   |  |                                                                  |        |  |  |   | 40   |  
|                                                                         |                    |        |                   |  |                                                                  |        |  |  |   |      |  
|Change in unrealized gains/losses reported in other comprehensive income |                    |        |                   |  |                                                                  |        |  |  | $ | 359  |  
|                                                                         |                    |        |                   |  |                                                                  |        |  |  |   |      |  

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 gain of $664 million at September 30, 2002 compared with $345 million at December
 31, 2001. The unrealized position at September 30, 2002 was composed of a net unrealized
 gain of $650 million for fixed maturities and a net unrealized gain of $14 million for equity
 securities. The unrealized position at December 31, 2001 was composed of a net unrealized gain
 of $194 million for fixed maturities, a net unrealized gain of $170 million for equity securities
 and a net unrealized loss of $19 million for short-term securities.

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

Unrealized Gains (Losses) on Fixed Maturity and Equity
    Securities



|September 30, 2002                                              | Cost orAmortizedCost |        | GrossUnrealizedGains |  | GrossUnrealizedLosses |       | NetUnrealizedGain/(Loss)
|--------------------------------------------------------------- | -------------------- | ------ | -------------------- |  | --------------------- | ----- | ------------------------
|(In millions)                                                   |                      |        |                      |  |                       |       |                         
|Fixed maturity securities:                                      |                      |        |                      |  |                       |       |                         
|U.S. Treasury securities and obligations of government agencies | $                    | 3,369  |                      |  | $                     | 328   |                         
|Asset-backed securities                                         |                      | 7,323  |                      |  |                       | 345   |                         
|Tax-exempt securities                                           |                      | 4,580  |                      |  |                       | 242   |                         
|Corporate securities                                            |                      | 8,384  |                      |  |                       | 496   |                         
|Other debt securities                                           |                      | 3,989  |                      |  |                       | 162   |                         
|Redeemable preferred stock                                      |                      | 26     |                      |  |                       |      |                         
|Options embedded in convertible debt securities                 |                      | 122    |                      |  |                       |      |                         
|                                                                |                      |        |                      |  |                       |       |                         
|Total fixed maturity securities                                 |                      | 27,793 |                      |  |                       | 1,573 |                         
|                                                                |                      |        |                      |  |                       |       |                         
|Equity securities:                                              |                      |        |                      |  |                       |       |                         
|Common stock                                                    |                      | 580    |                      |  |                       | 188   |                         
|Non-redeemable preferred stock                                  |                      | 338    |                      |  |                       | 4     |                         
|                                                                |                      |        |                      |  |                       |       |                         
|Total equity securities                                         |                      | 918    |                      |  |                       | 192   |                         
|                                                                |                      |        |                      |  |                       |       |                         
|Total fixed maturity and equity securities                      | $                    | 28,711 |                      |  | $                     | 1,765 |                         
|                                                                |                      |        |                      |  |                       |       |                         

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities



|December 31, 2001                                               | Cost orAmortizedCost |        | GrossUnrealizedGains |  | GrossUnrealizedLosses |       | NetUnrealizedGain/(Loss)
|--------------------------------------------------------------- | -------------------- | ------ | -------------------- |  | --------------------- | ----- | ------------------------
|(In millions)                                                   |                      |        |                      |  |                       |       |                         
|Fixed maturity securities:                                      |                      |        |                      |  |                       |       |                         
|U.S. Treasury securities and obligations of government agencies | $                    | 5,002  |                      |  | $                     | 109   |                         
|Asset-backed securities                                         |                      | 7,603  |                      |  |                       | 139   |                         
|Tax-exempt securities                                           |                      | 2,748  |                      |  |                       | 19    |                         
|Corporate securities                                            |                      | 9,569  |                      |  |                       | 247   |                         
|Other debt securities                                           |                      | 3,811  |                      |  |                       | 152   |                         
|Redeemable preferred stock                                      |                      | 48     |                      |  |                       | 1     |                         
|Options embedded in convertible debt securities                 |                      | 189    |                      |  |                       |      |                         
|                                                                |                      |        |                      |  |                       |       |                         
|Total fixed maturity securities                                 |                      | 28,970 |                      |  |                       | 667   |                         
|                                                                |                      |        |                      |  |                       |       |                         
|Equity securities:                                              |                      |        |                      |  |                       |       |                         
|Common stock                                                    |                      | 820    |                      |  |                       | 326   |                         
|Non-redeemable preferred stock                                  |                      | 348    |                      |  |                       | 17    |                         
|                                                                |                      |        |                      |  |                       |       |                         
|Total equity securities                                         |                      | 1,168  |                      |  |                       | 343   |                         
|                                                                |                      |        |                      |  |                       |       |                         
|Total fixed maturity and equity securities                      | $                    | 30,138 |                      |  | $                     | 1,010 |                         
|                                                                |                      |        |                      |  |                       |       |                         

At September 30, 2002 the Company held fixed maturity and equity
 securities with a net unrealized gain of $664 million. Included in this amount were gross unrealized
 losses of $1,101 million which were more than offset by gross unrealized gains of $1,765 million. As
 previously described, the Companys Impairment Committee continually reviews the makeup of securities in
 an unrealized position for potential impairments. At September 30, 2002 the average market value of the
 securities in an unrealized loss position was 82% of cost or amortized cost as applicable.

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

At December 31, 2001 the Company held fixed maturity and equity
 securities with an aggregate
 net unrealized gain of $364 million. Included in this amount were gross unrealized losses of
 $646 million, which were more than offset by gross unrealized gains of $1,010 million. At
 December 31, 2001 the average market value of the securities in an unrealized loss position
 was 94% of cost or amortized cost as applicable.

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 September 30, 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                     |  |                   |        |   |  |  |                  |   |  
|------------------------------------------------ |  | ----------------- | ------ | - |  |  | ---------------- | - | -
|                                                 |  | September 30,2002 |        | % |  |  | December 31,2001 |   | %
|(In millions)                                    |  |                   |        |   |  |  |                  |   |  
|U.S. Government and affiliated agency securities |  | $                 | 4,075  |   |  |  | 14               | % |  
|Other AAA rated                                  |  |                   | 10,436 |   |  |  | 37               |   |  
|AA and A rated                                   |  |                   | 6,181  |   |  |  | 22               |   |  
|BBB rated                                        |  |                   | 5,275  |   |  |  | 19               |   |  
|Below investment-grade                           |  |                   | 2,450  |   |  |  | 8                |   |  
|                                                 |  |                   |        |   |  |  |                  |   |  
|Total                                            |  | $                 | 28,417 |   |  |  | 100              | % |  
|                                                 |  |                   |        |   |  |  |                  |   |  

At both September 30, 2002 and December 31, 2001, approximately 97% 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 the 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 September 30, 2002
 are $7,643 million of asset-backed securities, at fair value, consisting of approximately 73% in
 collateralized mortgage obligations (CMOs), 13% in corporate asset-backed obligations, 9% in
 U.S. Government agency issued pass-through certificates and 5% in corporate mortgage-backed pass-through certificates. The majority of CMOs held are actively traded in liquid
 markets and are priced by broker-dealers.

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

Other invested
 assets include investments in limited partnerships and certain 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 of the Companys limited
 partnership investments 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 $1,334 million and $1,307 million as of September 30, 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 the partnerships management, who 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.

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 R (S&P 500R) index
 futures in a notional amount equal to the contract liability relating to Life
 Operations Index 500
 guaranteed investment contract product.

Short-term
 investments at September 30, 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       |  |                   |       |                  |  |   |       | 
|---------------------------- |  | ----------------- | ----- | ---------------- |  | - | ----- | 
|                             |  | September 30,2002 |       | December 31,2001
|(In millions)                |  |                   |       |                 
|Commercial paper             |  | $                 | 775   |                  |  | $ | 1,194 | 
|U.S. Treasury securities     |  |                   | 2,254 |                  |  |   | 175   | 
|Money market funds           |  |                   | 918   |                  |  |   | 1,641 | 
|Other                        |  |                   | 1,238 |                  |  |   | 730   | 
|                             |  |                   |       |                  |  |   |       | 
|Total short-term investments |  | $                 | 5,185 |                  |  | $ | 3,740 | 
|                             |  |                   |       |                  |  |   |       | 

Liquidity and Capital Resources

The
 principal operating cash flow sources of CNAs property and 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
 nine months ended September 30, 2002 net cash provided by operating activities was
 $807 million as compared with net cash used by operating activities of $698 million for the same
 period in 2001. The improvement related primarily to federal tax refunds received in 2002 as
 compared to taxes paid in 2001 and decreased net payments for insurance claims in the first
 nine months of 2002 as compared to 2001.

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

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 nine months ended September 30, 2002, net cash used by investing activities was
 $636 million as compared with net cash provided by investing activities of $345 million for the
 same period in 2001. This decrease was due primarily to purchases of fixed maturity securities
 and $264 million of net proceeds related to the sale of 180 Maiden Lane, New York facility in
 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 nine months ended September 30, 2002, net cash used by financing activities was
 $54 million as compared with net cash provided by financing activities of $310 million for the
 same period in 2001. Cash provided by financing activities in 2001 includes the completion of a
 common stock rights offering on September 26, 2001, successfully raising $1 billion
 (40.3 million shares sold at $25 per share). Additionally, CNAF repaid debt of $646 million in
 2001.

The
 Company is monitoring 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 37%, 36% and 22% 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, respectively. As of November 1, 2002, the Company has paid
 $438 million in claims and recovered $229 million from reinsurers.

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



|Debt                                                          |  |                   |       |                  |  |   |       | 
|------------------------------------------------------------- |  | ----------------- | ----- | ---------------- |  | - | ----- | 
|                                                              |  | September 30,2002 |       | December 31,2001
|(In millions)                                                 |  |                   |       |                 
|Variable rate debt:                                           |  |                   |       |                  |  |   |       | 
|Credit facility  CNAF, due April 29, 2002                    |  | $                 |      |                  |  | $ | 250   | 
|Credit facility  CNAF, due April 30, 2004                    |  |                   | 250   |                  |  |   | 250   | 
|Term loan due April 29, 2003                                  |  |                   | 250   |                  |  |   |      | 
|Credit facility  CNA Surety, due September 30, 2002          |  |                   |      |                  |  |   | 75    | 
|Credit facility  CNA Surety, due September 30, 2003          |  |                   | 35    |                  |  |   |      | 
|Term loan  CNA Surety, due September 30, 2005                |  |                   | 30    |                  |  |   |      | 
|Senior notes:                                                 |  |                   |       |                  |  |   |       | 
|7.250%, face amount of $128, due March 1, 2003                |  |                   | 128   |                  |  |   | 133   | 
|6.250%, face amount of $248, due November 15, 2003            |  |                   | 248   |                  |  |   | 250   | 
|6.500%, face amount of $493, due April 15, 2005               |  |                   | 491   |                  |  |   | 491   | 
|6.750%, face amount of $250, due November 15, 2006            |  |                   | 249   |                  |  |   | 249   | 
|6.450%, face amount of $150, due January 15, 2008             |  |                   | 149   |                  |  |   | 149   | 
|6.600%, face amount of $200, due December 15, 2008            |  |                   | 199   |                  |  |   | 199   | 
|8.375%, face amount of $70, due August 15, 2012               |  |                   | 69    |                  |  |   | 68    | 
|6.950%, face amount of $150, due January 15, 2018             |  |                   | 149   |                  |  |   | 148   | 
|Debenture, 7.250%, face amount of $243, due November 15, 2023 |  |                   | 240   |                  |  |   | 240   | 
|Capital leases, 8.000%-13.700%, due through December 31, 2011 |  |                   | 36    |                  |  |   | 38    | 
|Other debt, 1.000%-8.500%, due through 2019                   |  |                   | 26    |                  |  |   | 27    | 
|                                                              |  |                   |       |                  |  |   |       | 
|Total debt                                                    |  | $                 | 2,549 |                  |  | $ | 2,567 | 
|                                                              |  |                   |       |                  |  |   |       | 

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

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

CNA is currently evaluating various capital
 raising alternatives. Any capital raised in the near-term would be used to refinance
 debt, which matures in 2003, and to enhance the overall capital position of the
 Companys insurance subsidiaries. The effects on net income of any near-term
 capital raising activities on future operations is currently uncertain.

The Company pays a facility fee to the lenders
 for having funds available for loans under the three-year credit facility with an
 April 30, 2004 expiration date. The fee varies based on the long-term debt ratings
 of the Company. At September 30, 2002, the facility fee on the three-year component
 was 17.5 basis points.

The Company pays interest on any outstanding
 debt/borrowings under the one-year term loan and three-year 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 60.0 basis points for
 the one-year term loan and LIBOR plus 57.5 basis points for the three-year facility.
 Further, if the Company has outstanding loans greater than 50% of the amounts available
 under the three-year 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 25.0 basis points. The applicable
 interest rate on the one-year term loan would increase from LIBOR plus 60.0 basis
 points to LIBOR plus 80.0 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
 75.0 basis points. The utilization fee would remain unchanged on the three-year
 facility at 12.5 basis points.

On September 30, 2002, CNA Surety Corporation
 (CNA Surety), a 64% owned and consolidated subsidiary of CNA, entered into a $65
 million credit agreement with one bank, which consists of a $35 million 364-day
 revolving credit facility and a $30 million term loan. As of September 30, 2002,
 the facility was fully utilized. The credit agreement replaced a $130 million revolving
 credit facility that terminated September 30, 2002. Under the new agreement, CNA
 Surety pays a facility fee of 12.5 basis points, interest at LIBOR plus 45.0 basis
 points, and for utilization greater than 50% of the amount available to borrow an
 additional fee of 5.0 basis points. On the term loan, CNA Surety pays interest at
 LIBOR plus 62.5 basis points.

Under the former agreement, CNA Surety paid
 interest on outstanding borrowings based on, among other rates, LIBOR plus the applicable
 margin. The applicable margin was determined by the companys leverage ratio
 (debt to total capitalization). At the termination date of the facility, the applicable
 margin was 30.0 basis points, including the 10.0 basis point facility fee.

The terms of the agreement require the assumption
 by a second bank of $15 million of the credit risk by November 30, 2002 or CNA Surety
 will be required to repay $15 million to reduce the amount of the credit facility
 commitment from $35 million to $20 million. CNAF and CNA

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

Surety have entered into an agreement whereby
 CNAF will lend CNA Surety the amount needed to repay its bank loans, if necessary.
 CNA Surety is exploring other capital opportunities to repay or refinance $15 million
 of loans, and currently believes that it is reasonably possible that CNAF may be
 required to perform on some portion of its guaranty.

The terms of CNAFs and CNA Suretys
 credit facilities require CNAF and CNA Surety to maintain certain financial
 ratios and combined property and casualty company statutory surplus levels. At
 September 30, 2002 and December 31, 2001, CNAF and CNA Surety were 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 September 30, 2002 there were approximately
 $282 million of outstanding letters of credit.

As of September 30, 2002, the Company had
 committed approximately $157 million for 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.

As of September 30, 2002, the Company is
 obligated to make future payments totaling $470 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: $27 million in 2002; $94 million in 2003; $75 million
 in 2004; $66 million in 2005; and $208 million in 2006 and beyond. Additionally,
 the Company has entered into a limited number of guaranteed payment contracts, primarily
 relating to telecommunication services, amounting to approximately $25 million.
 Estimated future minimum purchases under these contracts are as follows: $4 million
 in 2002; $11 million in 2003; $8 million in 2004; and $2 million in 2005.

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. One or more of these agencies could take action in the
future to change the ratings of CNA's insurance subsidiaries. If
those ratings were downgraded as a result, CNA's results of operations
and/or equity could be materially adversely affected.

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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 November
 13, 2002 for the CCC Pool, the Continental Insurance Company (CIC) Pool, Continental
 Assurance Corporation (CAC) Pool and CNA Group Life Assurance Company (CNAGLA). Also
 rated were CNAFs senior debt and The Continental Corporation (Continental) senior debt.



|                                                                                                                  |  | Insurance Financial Strength Ratings |    | Debt Ratings
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | -- | ------------
|                                                                                                                  |  |                                      |    |             
|                                                                                                                  |  | Property & Casualty                  |    | Life & Group
|                                                                                                                  |  |                                      |    |             
|                                                                                                                  |  | CCCPool                              |    | CICPool     
|                                                                                                                  |  |                                      |    |             
|A.M. Best                                                                                                         |  |                                      | A  |             
|Fitch                                                                                                             |  |                                      | A  |             
|Moodys                                                                                                           |  |                                      | A3 |             
|                                                                                                                  |  |                                      |    |             
|S&P                                                                                                               |  |                                      | A- |             
|NR = Not Rated                                                                                                    |  |                                      |    |             
|* CAC and
 Valley Forge Life Insurance Company (VFL) are rated separately by Moodys and both have
 an A2 rating. |  |                                     

During
 the second quarter, the assignment of a new insurance financial strength rating to
 CNAGLA was the only rating action. A.M. Best assigned an A rating and Fitch assigned an
 A+ rating with a stable outlook to CNAGLA. Currently, group life and health policies are
 written in CCC, CAC, and VFL and then assumed through reinsurance by CNAGLA. With the
 addition of these separate entity specific ratings, CNAGLA has commenced direct writing group
 insurance policies.

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.

Corporate
 bonds comprise a significant portion of the Companys investment portfolio. The
 Company regularly reviews the market value of these securities, and challenges whether an
 other than temporary decline in value has occurred for securities that are trading below cost
 (see Investments section of MD&A). In light of the current volatility in the financial markets and
 the dramatic impact that several recent accounting scandals have had on specific issuers, the
 Company may be subject to future impairment losses that could materially adversely impact its
 results of operations. Any future impairment losses would not have a material impact on the
 Companys overall equity. See the discussion of CNAs impairment committee in the
 investment section of the MD&A.

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

CCC is the lead insurance company subsidiary
 within the CCC Pool and is the main source of CNAF dividends. All other insurance
 companies within the CCC Pool are subsidiaries of CCC and are subject to the dividend
 rules of their applicable state of domicile. Dividends from CCC 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 Illinois Department of Insurance (Illinois Department), may
 be paid only from earned surplus, which is calculated by removing unrealized gains
 (under which statutory accounting includes the undistributed cumulative earnings
 of CCCs subsidiaries) from unassigned surplus. As of September 30, 2002,
 CCC is in a negative earned surplus position. In February 2002, the Illinois 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 Illinois Department.

Prompted, in part, by the negative earned
 surplus position described above, the Company has embarked on a capital realignment
 initiative within the CCC Pool which is expected to restore CCCs earned surplus
 to a positive position. This initiative involves the payment of dividends to CCC
 from the cumulative undistributed earnings of its insurance subsidiaries during
 the fourth quarter of 2002. This capital realignment initiative is pending regulatory
 approval from the applicable domiciliary state insurance departments of CCCs
 insurance subsidiaries. As a result of this initiative, it is anticipated that
 CCCs earned surplus will be restored to a positive level by December 31, 2002.

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

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 changed 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 recorded in past business combinations, ceased upon adoption of SFAS 142,
 which for CNA was January 1, 2002. Net income for the nine months ended September
 30, 2002 does not include amortization expense on goodwill.

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

Had
 the Company not amortized goodwill in 2001, net income and the related basic and diluted
 earnings per share amounts would have been as follows:



|Pro Forma Effect of SFAS 142 on 2001 Results                                                   
|-----------------------------------------------------------------------------------------------
|                                                                                               
|                                                                                               
|Period ended September 30, 2001                                                                
|(In millions, except per share amounts)                                                        
|Results as reported in prior year                                                              
|Add goodwill amortization, after-tax                                                           
|                                                                                               
|Adjusted reported results to include the impact
 of the non-amortization provisions of SFAS 142
|                                                                                               

During
 the third quarter of 2002, the Company completed its initial goodwill impairment testing
 and recorded a $64 million pretax ($57 million after-tax) impairment charge. In accordance with
 SFAS 142, the impairment charge, which primarily relates to Specialty Lines and Life
 Operations, was recorded as a cumulative effect of a change in accounting principle as of
 January 1, 2002. Any impairment losses incurred after the initial application of this standard will
 be reported in operating results.

The
 impact of the goodwill impairment charge on net income and the related basic and diluted
 per share amounts, for the three months ended March 31, 2002 and the six months ended
 June 30, 2002, is presented in the table below.



|Restatement of 2002 Prior Period Results in Accordance with SFAS 142
|--------------------------------------------------------------------
|                                                                    
|                                                                    
|                                                                    
|(In millions, except per share amounts)                             
|Results as reported in prior periods                                
|Less cumulative effect of adopting SFAS 142, net of tax             
|                                                                    
|Results as restated                                                 
|                                                                    

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 (SFAS 121).
 Effective January 1, 2002, CNA adopted this statement for impairments of long-lived assets and
 for long-lived assets to be disposed of on or after January 1, 2002. Certain operations identified
 for sale prior to January 1, 2002 continue to be accounted for under the provisions of SFAS 121.
 The adoption of SFAS 144 did not have a significant impact on the net income or equity of the
 Company; however, it did impact the income statement presentation of certain operations sold
 in 2002.

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

In June 2002, the FASB issued Statement
 of Financial Accounting Standards No. 146, Accounting for Costs Associated with
 Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial accounting
 and reporting for costs associated with exit or disposal activities and supercedes
 Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain
 Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
 Costs Incurred in a Restructuring) (EITF 94-3). CNA adopted the provisions
 of SFAS 146 for all disposal activities initiated after June 30, 2002. The adoption
 of SFAS 146 did not have a significant impact on the results of operations or equity
 of the Company.

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 developments in the Companys insurance business, including losses
 for asbestos, environmental pollution and 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 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, including inflationary pressures on medical care costs, construction
 costs and other economic sectors that increase the severity of claims;                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                       
| | changes in
 financial markets such as fluctuations in interest rates, long-term periods of low
 interest rates, credit conditions and currency, commodity and stock prices;                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                       
| | the effects
 of corporate bankruptcies, such as Enron and WorldCom, on surety bond claims, as
 well as on capital markets, and on the markets for directors and officers and errors
 and omissions coverages;                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                       
| | changes in
 foreign or domestic political, social and economic conditions;                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                       
| | regulatory
 initiatives and compliance with governmental regulations, judicial decisions, including
 interpretation of policy provisions, decisions regarding coverage and theories of
 liability, trends in litigation and the outcome of any litigation involving the
 Company, and rulings and changes in tax laws and regulations;
|  |                                                                                                                                                                                                                                                                                                                                       
| | regulatory
 limitations and restrictions upon the Company;                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                       
| | the impact
 of competitive products, policies and pricing and the competitive environment in
 which the Company operates, including changes in the Companys books of business;                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                       
| | product and
 policy availability and demand and market responses, including the level of ability
 to obtain rate increases and decline or non-renew underpriced accounts, to achieve
 premium targets and profitability and to realize growth and retention estimates;                                                                
|  |                                                                                                                                                                                                                                                                                                                                       
| | development
 of claims and the impact on loss reserves, including changes in claim settlement
 practices;                                                                                                                                                                                                                             

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



| | the effectiveness
 of current initiatives by claims management to reduce loss and expense ratio through
 more efficacious claims handling techniques;                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                           
| | the performance
 of reinsurance companies under reinsurance contracts with the Company;                                                                                                                                   
|  |                                                                                                                                                                                                                           
| | results of
 financing efforts, including the availability of bank credit facilities;                                                                                                                                      
|  |                                                                                                                                                                                                                           
| | changes in
 the Companys composition of operating segments;                                                                                                                                                              
|  |                                                                                                                                                                                                                           
| | weather and
 other natural physical events, including the severity and frequency of storms, hail,
 snowfall and other winter conditions, as well as of natural disasters such as hurricanes
 and earthquakes;             
|  |                                                                                                                                                                                                                           
| | man-made disasters,
 including the possible occurrence of terrorist attacks and the effect of the absence
 of applicable terrorism legislation on coverages;                                                              
|  |                                                                                                                                                                                                                           
| | the occurrence
 of epidemics;                                                                                                                                                                                             
|  |                                                                                                                                                                                                                           
| | exposure to
 liabilities due to claims made by insureds and others relating to asbestos remediation
 and health-based asbestos impairments, and exposure to liabilities for environmental
 pollution and mass tort claims;
|  |                                                                                                                                                                                                                           
| | the sufficiency
 of the Companys loss reserves and the possibility of future increases in reserves;                                                                                                                      
|  |                                                                                                                                                                                                                           
| | the level
 of success in integrating acquired businesses and operations, and in consolidating
 existing ones;                                                                                                             
|  |                                                                                                                                                                                                                           
| | 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.

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CNA FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

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 September 30, 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 September 30, 2002 and December 31,
 2001, with all other variables held constant.

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CNA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued

Equity price risk was measured assuming
 an instantaneous 10% and 25% decline in the S&P 500 Index (Index) from its
 level at September 30, 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 September 30, 2002, a 10% and 25% decrease in the
 Index would result in a $258 million and $645 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, $104 million and $260 million at September 30, 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.

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CNA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
The following tables present the estimated effects on the market value of the Companys
financial instruments at September 30, 2002 and December 31, 2001, due to an increase in
interest rates of 100 basis points, a 10% decline in foreign currency exchange rates and a 10%
decline in the Index.Market Risk Scenario 1



|                                                      |             |        |                   | Increase (Decrease)
|----------------------------------------------------- | ----------- | ------ | ----------------- | -------------------
|                                                      |             |        |                   |                    
|September 30, 2002                                    | MarketValue |        | InterestRate Risk |                    
|(In millions)                                         |             |        |                   |                    
|Held for Other Than Trading Purposes:                 |             |        |                   |                    
|General account:                                      |             |        |                   |                    
|Fixed maturity securities                             | $           | 28,443 |                   | $                  
|Equity securities                                     |             | 932    |                   |                    
|Short-term investments                                |             | 5,185  |                   |                    
|Limited partnerships                                  |             | 1,334  |                   |                    
|Other invested assets                                 |             | 275    |                   |                    
|Interest rate caps                                    |             | 1      |                   |                    
|Interest rate swaps                                   |             | 9      |                   |                    
|Other derivative securities                           |             | 1      |                   |                    
|                                                      |             |        |                   |                    
|Total general account                                 |             | 36,180 |                   |                    
|                                                      |             |        |                   |                    
|Separate accounts:                                    |             |        |                   |                    
|Fixed maturity securities                             |             | 1,947  |                   |                    
|Equity securities                                     |             | 106    |                   |                    
|Short-term investments                                |             | 104    |                   |                    
|Other invested assets                                 |             | 384    |                   |                    
|                                                      |             |        |                   |                    
|Total separate accounts                               |             | 2,541  |                   |                    
|                                                      |             |        |                   |                    
|Total securities held for other than trading purposes |             | 38,721 |                   |                    
|                                                      |             |        |                   |                    
|Held for Trading Purposes:                            |             |        |                   |                    
|Separate accounts:                                    |             |        |                   |                    
|Fixed maturity securities                             |             | 172    |                   |                    
|Equity securities                                     |             | 9      |                   |                    
|Short-term investments                                |             | 109    |                   |                    
|Limited partnerships                                  |             | 318    |                   |                    
|Equity indexed futures                                |             |       |                   |                    
|Other derivative securities                           |             | 1      |                   |                    
|                                                      |             |        |                   |                    
|Total securities held for trading purposes            |             | 609    |                   |                    
|                                                      |             |        |                   |                    
|Total securities                                      | $           | 39,330 |                   | $                  
|                                                      |             |        |                   |                    
|Debt (carrying value)                                 | $           | 2,549  |                   | $                  
|                                                      |             |        |                   |                    

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CNA FINANCIAL CORPORATION
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
 Market Risk Scenario 1



|                                                      |             |        |                   |  | Increase (Decrease)
|----------------------------------------------------- | ----------- | ------ | ----------------- |  | -------------------
|                                                      |             |        |                   |  |                    
|December 31, 2001                                     | MarketValue |        | InterestRate Risk |  | CurrencyRisk       
|(In millions)                                         |             |        |                   |  |                    
|Held for Other Than Trading Purposes:                 |             |        |                   |  |                    
|General account:                                      |             |        |                   |  |                    
|Fixed maturity securities                             | $           | 29,164 |                   |  | $                  
|Equity securities                                     |             | 1,338  |                   |  |                    
|Short-term investments                                |             | 3,740  |                   |  |                    
|Limited partnerships                                  |             | 1,307  |                   |  |                    
|Other invested assets                                 |             | 258    |                   |  |                    
|Interest rate caps                                    |             | 2      |                   |  |                    
|Interest rate swaps                                   |             | 3      |                   |  |                    
|Other derivative securities                           |             | 14     |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total general account                                 |             | 35,826 |                   |  |                    
|                                                      |             |        |                   |  |                    
|Separate accounts:                                    |             |        |                   |  |                    
|Fixed maturity securities                             |             | 2,039  |                   |  |                    
|Equity securities                                     |             | 149    |                   |  |                    
|Short-term investments                                |             | 98     |                   |  |                    
|Other invested assets                                 |             | 533    |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total separate accounts                               |             | 2,819  |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities held for other than trading purposes |             | 38,645 |                   |  |                    
|                                                      |             |        |                   |  |                    
|Held for Trading Purposes:                            |             |        |                   |  |                    
|Separate accounts:                                    |             |        |                   |  |                    
|Fixed maturity securities                             |             | 308    |                   |  |                    
|Equity securities                                     |             | 12     |                   |  |                    
|Short-term investments                                |             | 296    |                   |  |                    
|Limited partnerships                                  |             | 342    |                   |  |                    
|Equity indexed futures                                |             |       |                   |  |                    
|Other derivative securities                           |             | 1      |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities held for trading purposes            |             | 959    |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities                                      | $           | 39,604 |                   |  | $                  
|                                                      |             |        |                   |  |                    
|Debt (carrying value)                                 | $           | 2,567  |                   |  | $                  
|                                                      |             |        |                   |  |                    

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CNA FINANCIAL CORPORATION
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
 The following tables present the estimated effects on the market value of the Companys financial
 instruments at September 30, 2002 and December 31, 2001, due to an increase in interest rates of 150
 basis points, a 20% decline in foreign currency exchange rates and a 25% decline in the Index.Market Risk Scenario 2



|                                                      |             |        |                   |  | Increase (Decrease)
|----------------------------------------------------- | ----------- | ------ | ----------------- |  | -------------------
|                                                      |             |        |                   |  |                    
|                                                      |             |        |                   |  |                    
|September 30, 2002                                    | MarketValue |        | InterestRate Risk |  | CurrencyRisk       
|(In millions)                                         |             |        |                   |  |                    
|Held for Other Than Trading Purposes:                 |             |        |                   |  |                    
|General account:                                      |             |        |                   |  |                    
|Fixed maturity securities                             | $           | 28,443 |                   |  | $                  
|Equity securities                                     |             | 932    |                   |  |                    
|Short-term investments                                |             | 5,185  |                   |  |                    
|Limited partnerships                                  |             | 1,334  |                   |  |                    
|Other invested assets                                 |             | 275    |                   |  |                    
|Interest rate caps                                    |             | 1      |                   |  |                    
|Interest rate swaps                                   |             | 9      |                   |  |                    
|Other derivative securities                           |             | 1      |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total general account                                 |             | 36,180 |                   |  |                    
|                                                      |             |        |                   |  |                    
|Separate accounts:                                    |             |        |                   |  |                    
|Fixed maturity securities                             |             | 1,947  |                   |  |                    
|Equity securities                                     |             | 106    |                   |  |                    
|Short-term investments                                |             | 104    |                   |  |                    
|Other invested assets                                 |             | 384    |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total separate accounts                               |             | 2,541  |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities held for other than trading purposes |             | 38,721 |                   |  |                    
|                                                      |             |        |                   |  |                    
|Held for Trading Purposes:                            |             |        |                   |  |                    
|Separate accounts:                                    |             |        |                   |  |                    
|Fixed maturity securities                             |             | 172    |                   |  |                    
|Equity securities                                     |             | 9      |                   |  |                    
|Short-term investments                                |             | 109    |                   |  |                    
|Limited partnerships                                  |             | 318    |                   |  |                    
|Equity indexed futures                                |             |       |                   |  |                    
|Other derivative securities                           |             | 1      |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities held for trading purposes            |             | 609    |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities                                      | $           | 39,330 |                   |  | $                  
|                                                      |             |        |                   |  |                    
|Debt (carrying value)                                 | $           | 2,549  |                   |  | $                  
|                                                      |             |        |                   |  |                    

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CNA FINANCIAL CORPORATION
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
 Market Risk Scenario 2



|                                                      |             |        |                   |  | Increase (Decrease)
|----------------------------------------------------- | ----------- | ------ | ----------------- |  | -------------------
|                                                      |             |        |                   |  |                    
|December 31, 2001                                     | MarketValue |        | InterestRate Risk |  | CurrencyRisk       
|(In millions)                                         |             |        |                   |  |                    
|Held for Other Than Trading Purposes:                 |             |        |                   |  |                    
|General account:                                      |             |        |                   |  |                    
|Fixed maturity securities                             | $           | 29,164 |                   |  | $                  
|Equity securities                                     |             | 1,338  |                   |  |                    
|Short-term investments                                |             | 3,740  |                   |  |                    
|Limited partnerships                                  |             | 1,307  |                   |  |                    
|Other invested assets                                 |             | 258    |                   |  |                    
|Interest rate caps                                    |             | 2      |                   |  |                    
|Interest rate swaps                                   |             | 3      |                   |  |                    
|Other derivative securities                           |             | 14     |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total general account                                 |             | 35,826 |                   |  |                    
|                                                      |             |        |                   |  |                    
|Separate accounts:                                    |             |        |                   |  |                    
|Fixed maturity securities                             |             | 2,039  |                   |  |                    
|Equity securities                                     |             | 149    |                   |  |                    
|Short-term investments                                |             | 98     |                   |  |                    
|Other invested assets                                 |             | 533    |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total separate accounts                               |             | 2,819  |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities held for other than trading purposes |             | 38,645 |                   |  |                    
|                                                      |             |        |                   |  |                    
|Held for Trading Purposes:                            |             |        |                   |  |                    
|Separate accounts:                                    |             |        |                   |  |                    
|Fixed maturity securities                             |             | 308    |                   |  |                    
|Equity securities                                     |             | 12     |                   |  |                    
|Short-term investments                                |             | 296    |                   |  |                    
|Limited partnerships                                  |             | 342    |                   |  |                    
|Equity indexed futures                                |             |       |                   |  |                    
|Other derivative securities                           |             | 1      |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities held for trading purposes            |             | 959    |                   |  |                    
|                                                      |             |        |                   |  |                    
|Total securities                                      | $           | 39,604 |                   |  | $                  
|                                                      |             |        |                   |  |                    
|Debt (carrying value)                                 | $           | 2,567  |                   |  | $                  
|                                                      |             |        |                   |  |                    

93



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##### Table of Contents



CNA FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure
 controls and procedures which are designed to ensure that information required to
 be disclosed by the Company in reports that it files or submits to the Securities
 and Exchange Commission under the Securities Exchange Act of 1934, including this
 report, is recorded, processed, summarized and reported on a timely basis. These
 disclosure controls and procedures include controls and procedures designed to ensure
 that information required to be disclosed under the Exchange Act is accumulated
 and communicated to the Companys management on a timely basis to allow decisions
 regarding required disclosure.

The Companys chief executive officer
 and chief financial officer have conducted an evaluation of the Companys disclosure
 controls and procedures as of a date within 90 days prior to the date of this report.
 Based on this evaluation, the Companys chief executive officer and chief financial
 officer have each concluded that the Companys disclosure controls and procedures
 are adequate for their intended purpose.

There were no significant changes in the
 Companys internal controls or in other factors that could significantly affect
 these controls subsequent to the date of their evaluation, including any corrective
 actions with regard to significant deficiencies and material weaknesses.

94



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##### Table of Contents



CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION




Item 1. Legal Proceedings

Information on CNAs legal proceedings is set
 forth in Note F and Note G of the Condensed Consolidated Financial Statements in Part I.




Item 5. Other Information

On October 31,2002 CNA Financial Corporation
 (CNA) consummated the sale of its wholly owned United Kingdom subsidiaries
 of CNA Re (CNA Re U.K.) to Tawa U.K. Limited, a subsidiary of Artemis Group, a French
 conglomerate pursuant to the share purchase agreement dated July 15, 2002. The Company has prepared proforma financial
statements in accordance with Item 2 of Form 8-K. See Item 6
 for a list of exhibits related to this transaction.




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits



|                                                                                                        |  | Exhibit
|------------------------------------------------------------------------------------------------------- |  | -------
|Description of Exhibit                                                                                  |  | Number 
|                                                                                                        |  |        
|Share Purchase Agreement dated as of October 31, 2002 by and between CNA and Tawa U.K.
 Limited         |  | 2.1    
|                                                                                                        |  |        
|Proforma Financial Statements and Footnotes                                                             |  | 99.01  
|                                                                                                        |  |        
|Proforma Condensed Consolidated Balance Sheet, September 30, 2002 (Unaudited)                           |  |        
|                                                                                                        |  |        
|Proforma Statement of Consolidated Operations for the Year Ended December 31, 2001
 (Unaudited)         |  |        
|                                                                                                        |  |        
|Proforma Statement of Consolidated Operations for the Nine Months Ended September 30, 2002
 (Unaudited) |  |        

(b) Reports on Form 8-K:

On August 13, 2002, the chief executive
 officer and chief financial officer of the Company each submitted to the Commission
 the written certification required by 18 U.S.C. § 1350 (as adopted by Section 906
 of the Sarbanes-Oxley Act of 2002) with respect to the Companys Quarterly Report
 on Form 10-Q for the quarter ended June 30, 2002.

95



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##### Table of Contents



CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION




SIGNATURES

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



|                        | CNA FINANCIAL CORPORATION
|----------------------- | -------------------------
|                        |                          
|                        |                          
|Date: November 13, 2002 | By:                      
|                        |                          
|                        |                          
|                        |                          
|                        |                          

96



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##### Table of Contents



CERTIFICATION

I, Stephen W. Lilienthal, Chief Executive
 Officer of CNA Financial Corporation, certify that:

1. I have reviewed this quarterly report
 on Form 10-Q of CNA Financial Corporation;

2. Based on my knowledge, this quarterly
 report does not contain any untrue statement of a material fact or omit to state
 a material fact necessary to make the statements made, in light of the circumstances
 under which such statements were made, not misleading with respect to the period
 covered by this quarterly report;

3. Based on my knowledge, the financial
 statements, and other financial information included in this quarterly report, fairly
 present in all material respects the financial condition, results of operations
 and cash flows of the registrant as of, and for, the periods presented in this quarterly
 report;

4. The registrants other certifying
 officers and I are responsible for establishing and maintaining disclosure controls
 and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
 and we have:

a) designed such disclosure controls and
 procedures to ensure that material information relating to the registrant, including
 its consolidated subsidiaries, is made known to us by others within those entities,
 particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the
 registrants disclosure controls and procedures as of a date within 90
 days prior to the filing date of this quarterly report (the Evaluation
 Date); and

c) presented in this quarterly report our
 conclusions about the effectiveness of the disclosure controls and procedures based
 on our evaluation as of the Evaluation Date;

5. The registrants other certifying
 officers and I have disclosed, based on our most recent evaluation, to the
 registrants auditors and the audit committee of registrants board of
 directors (or persons performing the equivalent function):

a) all significant deficiencies in the design
 or operation of internal controls which could adversely affect the registrants
 ability to record, process, summarize and report financial data and have identified
 for the registrants auditors any material weaknesses in internal controls;
 and

b) any fraud, whether or not material, that
 involves management or other employees who have a significant role in the
 registrants internal controls; and

6. The registrants other certifying
 officers and I have indicated in this quarterly report whether or not there were
 significant changes in internal controls or in other factors that could significantly
 affect internal controls subsequent to the date of our most recent evaluation, including
 any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002



|/s/ STEPHEN
 W. LILIENTHAL | 
|-------------------------- | 
|                           | 
|Stephen W.
 Lilienthal     | 
|Chief Executive
 Officer   | 



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##### Table of Contents



CERTIFICATION

I, Robert V. Deutsch, Chief Financial Officer
 of CNA Financial Corporation, certify that:

1. I have reviewed this quarterly report
 on Form 10-Q of CNA Financial Corporation;

2. Based on my knowledge, this quarterly
 report does not contain any untrue statement of a material fact or omit to state
 a material fact necessary to make the statements made, in light of the circumstances
 under which such statements were made, not misleading with respect to the period
 covered by this quarterly report;

3. Based on my knowledge, the financial
 statements, and other financial information included in this quarterly report, fairly
 present in all material respects the financial condition, results of operations
 and cash flows of the registrant as of, and for, the periods presented in this quarterly
 report;

4. The registrants other certifying
 officers and I are responsible for establishing and maintaining disclosure controls
 and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
 and we have:

a) designed such disclosure controls and
 procedures to ensure that material information relating to the registrant, including
 its consolidated subsidiaries, is made known to us by others within those entities,
 particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the
 registrants disclosure controls and procedures as of a date within 90 days
 prior to the filing date of this quarterly report (the Evaluation
 Date); and

c) presented in this quarterly report our
 conclusions about the effectiveness of the disclosure controls and procedures based
 on our evaluation as of the Evaluation Date;

5. The registrants other certifying
 officers and I have disclosed, based on our most recent evaluation, to the
 registrants auditors and the audit committee of registrants board
 of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design
 or operation of internal controls which could adversely affect the registrants
 ability to record, process, summarize and report financial data and have identified
 for the registrants auditors any material weaknesses in internal controls;
 and

b) any fraud, whether or not material, that
 involves management or other employees who have a significant role in the
 registrants internal controls; and

6. The registrants other certifying
 officers and I have indicated in this quarterly report whether or not there were
 significant changes in internal controls or in other factors that could significantly
 affect internal controls subsequent to the date of our most recent evaluation, including
 any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002



|/s/ ROBERT
 V. DEUTSCH   | 
|------------------------ | 
|                         | 
|                         | 
|Robert V.
 Deutsch       | 
|Chief Financial
 Officer |