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SECURITIES 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 June 30, 2001 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.)
|                                        
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|                                         |  |                    
|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 checkmark    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 August 10, 2001
|                              |  |                               
|Common Stock, Par value $2.50 |  | 185,272,498                   



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TABLE OF CONTENTS



|                                                                                      |                                          |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | ---------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                        
|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)                     
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|PART II. OTHER INFORMATION                                                           
|                                                                                      | Item 6. Exhibits and Reports on Form 8-K
|                                                                                      | SIGNATURES                              
|Three Year Credit Agreement                                                          
|No. 364-Day Credit Agreement                                                         



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##### Table of Contents



CNA FINANCIAL CORPORATION
INDEX



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|PART I. FINANCIAL INFORMATION                                                         |                                                                                                                       |  |          |  
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|CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                          |                                                                                                                       |  |          |  
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|                                                                                      | CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 (Unaudited) AND DECEMBER 31, 2000                                 |  |          | 1 | 
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|                                                                                      | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 |  |          | 2 | 
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|                                                                                      | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000           |  |          | 3 | 
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|                                                                                      | NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) JUNE 30, 2001                                        |  |          | 4 | 
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|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |                                                                                                                       |  | 29       |  
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|PART II. OTHER INFORMATION                                                            |                                                                                                                       |  |          |  
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|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                              |                                                                                                                       |  | 63       |  
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|SIGNATURES                                                                            |                                                                                                                       |  | 63       |  





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CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |              |        |        |        | 
|-------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------- | ------------------------------------------ | ------ | ----------- | ------ | ------------ | ------ | ------ | ------ | 
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        | (Unaudited) |        |              |        |       
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        | June 30,    |        | December 31,
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        | 2001        |        | 2000        
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|(In millions, except share data)       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|Assets:                                |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                      
|                                      
|                                      
|                                      
|                                       | Investments:                                                                                                                                                                        |                                                                                      |                            |                                            |        |             |        |              |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Fixed maturity securities available-for-sale (amortized cost of $26,737 and $26,579) |                            | $                                          | 26,854 |             |        | $            | 26,652 |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Equity securities available-for-sale (cost of $1,281 and $1,175)                     |                            |                                            | 1,575  |             |        |              | 2,412  |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Mortgage loans and real estate (less accumulated depreciation of $1 and $1)          |                            |                                            | 25     |             |        |              | 26     |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Policy loans                                                                         |                            |                                            | 194    |             |        |              | 193    |       
|                                      
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|                                      
|                                       |                                                                                                                                                                                     | Other invested assets                                                                |                            |                                            | 1,359  |             |        |              | 1,116  |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Short-term investments                                                               |                            |                                            | 5,882  |             |        |              | 4,723  |       
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                       |                                                                                                                                                                                     |                                                                                      | Total investments          |                                            |        | 35,889      |        |              |        | 35,122 |       
|                                      
|                                      
|                                      
|                                      
|                                       | Cash and cash equivalents                                                                                                                                                           |                                                                                      |                            | 142                                        |        |             |        | 163          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Receivables:                                                                                                                                                                        |                                                                                      |                            |                                            |        |             |        |              |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Reinsurance                                                                          |                            |                                            | 11,133 |             |        |              | 9,397  |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Insurance                                                                            |                            |                                            | 4,286  |             |        |              | 5,026  |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Less allowance for doubtful accounts                                                 |                            |                                            | (321   | )           |        |              | (321   | )     
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued investment income                                                                                                                                                           |                                                                                      |                            | 401                                        |        |             |        | 404          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Receivable for securities sold                                                                                                                                                      |                                                                                      |                            | 993                                        |        |             |        | 424          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred acquisition costs                                                                                                                                                          |                                                                                      |                            | 2,464                                      |        |             |        | 2,418        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Prepaid reinsurance premiums                                                                                                                                                        |                                                                                      |                            | 1,356                                      |        |             |        | 1,445        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Federal income taxes recoverable (includes $842 and $25 due from Loews)                                                                                                             |                                                                                      |                            | 850                                        |        |             |        | 15           |       
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred income taxes                                                                                                                                                               |                                                                                      |                            | 879                                        |        |             |        | 503          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Property and equipment at cost (less accumulated depreciation of $794 and $802)                                                                                                     |                                                                                      |                            | 476                                        |        |             |        | 716          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Intangibles                                                                                                                                                                         |                                                                                      |                            | 297                                        |        |             |        | 317          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Other assets                                                                                                                                                                        |                                                                                      |                            | 2,342                                      |        |             |        | 2,152        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Separate account business                                                                                                                                                           |                                                                                      |                            | 4,081                                      |        |             |        | 4,287        |       
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                       |                                                                                                                                                                                     |                                                                                      |                            | Total assets                               |        | $           | 65,268 |              |        | $      | 62,068 | 
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|Liabilities and Stockholders Equity:  |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                      
|                                      
|                                      
|                                      
|Liabilities:                           |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                      
|                                      
|                                      
|                                      
|                                       | Insurance reserves:                                                                                                                                                                 |                                                                                      |                            |                                            |        |             |        |              |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Claim and claim adjustment expense                                                   |                            | $                                          | 29,507 |             |        | $            | 26,962 |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Unearned premiums                                                                    |                            |                                            | 4,756  |             |        |              | 4,821  |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Future policy benefits                                                               |                            |                                            | 7,055  |             |        |              | 6,669  |       
|                                      
|                                      
|                                      
|                                      
|                                       |                                                                                                                                                                                     | Policyholders funds                                                                 |                            |                                            | 590    |             |        |              | 602    |       
|                                      
|                                      
|                                      
|                                      
|                                       | Collateral on loaned securities and derivatives                                                                                                                                     |                                                                                      |                            | 2,407                                      |        |             |        | 1,308        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Payables for securities purchased                                                                                                                                                   |                                                                                      |                            | 1,312                                      |        |             |        | 593          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Participating policyholders funds                                                                                                                                                  |                                                                                      |                            | 110                                        |        |             |        | 131          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Debt                                                                                                                                                                                |                                                                                      |                            | 2,468                                      |        |             |        | 2,729        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Other liabilities                                                                                                                                                                   |                                                                                      |                            | 5,170                                      |        |             |        | 4,102        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Separate account business                                                                                                                                                           |                                                                                      |                            | 4,081                                      |        |             |        | 4,287        |       
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                       |                                                                                                                                                                                     |                                                                                      | Total liabilities          |                                            |        | 57,456      |        |              |        | 52,204 |       
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|Commitments and contingencies (Note E) |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|Minority interest                      |                                                                                                                                                                                     |                                                                                      | 219                        |                                            |        |             | 217    |             
|                                      
|                                      
|                                      
|                                      
|Stockholders equity:                  |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock ($2.50 par value; 500,000,000 shares authorized; 185,525,907 shares
issued; and 183,272,498 and 183,263,873 shares outstanding at June 30, 2001 and
December 31, 2000) |                                                                                      |                            | 464                                        |        |             |        | 464          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Additional paid-in capital                                                                                                                                                          |                                                                                      |                            | 126                                        |        |             |        | 126          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Retained earnings                                                                                                                                                                   |                                                                                      |                            | 6,860                                      |        |             |        | 8,327        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated other comprehensive income                                                                                                                                              |                                                                                      |                            | 286                                        |        |             |        | 873          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Treasury stock, at cost                                                                                                                                                             |                                                                                      |                            | (70                                        | )      |             |        | (71          | )     
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                       |                                                                                                                                                                                     |                                                                                      | 7,666                      |                                            |        |             | 9,719  |             
|                                      
|                                      
|                                      
|                                      
|                                       | Notes receivable for the issuance of common stock                                                                                                                                   |                                                                                      |                            | (73                                        | )      |             |        | (72          | )     
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                       |                                                                                                                                                                                     |                                                                                      | Total stockholders equity |                                            |        | 7,593       |        |              |        | 9,647  |       
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             
|                                       |                                                                                                                                                                                     |                                                                                      |                            | Total liabilities and stockholders equity |        | $           | 65,268 |              |        | $      | 62,068 | 
|                                       |                                                                                                                                                                                     |                                                                                      |                            |                                            |        |             |        |             

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

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##### Table of Contents






CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |       | 
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------- | - | ------------ | ----- | ---------- | - | ----- | ----- | ---- | - | ------ | ----- | - | - | ----- | ----- | 
|                                                                                                             |                                                                                       |   | Three Months |       | Six Months
|                                                                                                             |                                                                                       |   |              |       |           
|                                                                                                             |                                                                                       |   | 2001         |       | 2000       |   | 2001  |       | 2000
|Period ended June 30                                                                                         |                                                                                       |   |              |       |            |   |       |      
|(In millions, except per share data)                                                                         |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|Revenues:                                                                                                    |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Net earned premiums                                                                   |   | $            | 1,603 |            |   | $     | 2,778 |      |   | $      | 4,134 |   |   | $     | 5,548 | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Net investment income                                                                 |   |              | 411   |            |   |       | 598   |      |   |        | 928   |   |   |       | 1,130 | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Realized investment gains, net of participating policyholders
and minority interests |   |              | 568   |            |   |       | 271   |      |   |        | 939   |   |   |       | 304   | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Other revenues                                                                        |   |              | 152   |            |   |       | 190   |      |   |        | 345   |   |   |       | 346   | 
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|Total revenues                                                                                               |                                                                                       |   | 2,734        |       |            |   | 3,837 |       |      |   | 6,346  |       |   |   | 7,328 |      
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|Claims, Benefits and Expenses:                                                                               |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Insurance claims and policyholders benefits                                          |   |              | 4,297 |            |   |       | 2,348 |      |   |        | 6,406 |   |   |       | 4,691 | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Amortization of deferred acquisition costs                                            |   |              | 450   |            |   |       | 532   |      |   |        | 874   |   |   |       | 925   | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Other operating expenses                                                              |   |              | 501   |            |   |       | 415   |      |   |        | 984   |   |   |       | 911   | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Restructuring and other related charges                                               |   |              | 56    |            |   |       |      |      |   |        | 62    |   |   |       |      | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Interest                                                                              |   |              | 41    |            |   |       | 48    |      |   |        | 84    |   |   |       | 100   | 
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|Total claims, benefits and expenses                                                                          |                                                                                       |   | 5,345        |       |            |   | 3,343 |       |      |   | 8,410  |       |   |   | 6,627 |      
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|(Loss) income before income tax, minority interest and cumulative
effect of a change in accounting principle |                                                                                       |   | (2,611       | )     |            |   | 494   |       |      |   | (2,064 | )     |   |   | 701   |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Income tax benefit (expense)                                                                                 |                                                                                       |   | 855          |       |            |   | (157  | )     |      |   | 670    |       |   |   | (217  | )    
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Minority interest                                                                                            |                                                                                       |   | (6           | )     |            |   | (7    | )     |      |   | (12    | )     |   |   | (13   | )    
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|(Loss) income before cumulative effect of a change in accounting
principle                                   |                                                                                       |   | (1,762       | )     |            |   | 330   |       |      |   | (1,406 | )     |   |   | 471   |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Cumulative effect of a change in accounting principle, net of tax
of $33                                     |                                                                                       |   |             |       |            |   |      |       |      |   | (61    | )     |   |   |      |      
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|Net (loss) income                                                                                            |                                                                                       | $ | (1,762       | )     |            | $ | 330   |       |      | $ | (1,467 | )     |   | $ | 471   |      
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|Basic and Diluted (Loss) Earnings Per Share:                                                                 |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | (Loss) income before cumulative effect of a change in accounting
principle            |   | $            | (9.61 | )          |   | $     | 1.80  |      |   | $      | (7.66 | ) |   | $     | 2.56  | 
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             | Cumulative effect of a change in accounting principle, net of tax                     |   |              |      |            |   |       |      |      |   |        | (0.34 | ) |   |       |      | 
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Basic and diluted (loss) earnings per share available to common
stockholders                                 |                                                                                       | $ | (9.61        | )     |            | $ | 1.80  |       |      | $ | (8.00  | )     |   | $ | 2.56  |      
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      
|Weighted average outstanding common stock and common stock
equivalents                                       |                                                                                       |   | 183.3        |       |            |   | 183.3 |       |      |   | 183.3  |       |   |   | 183.8 |      
|                                                                                                             |                                                                                       |   |              |       |            |   |       |       |      |   |        |       |   |   |       |      

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

2



---



##### Table of Contents






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

|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |         |        |        |        |  
|-------------------------------------------------- | ------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ---------------------------------------- | ----------------- | ------ | ----- | ----- | ------- | ------ | ------ | ------ | -
|                                                   |                                                                                            |                                                                 |                                          |                   |        | 2001  |       | 2000   
|Six months ended June 30                           |                                                                                            |                                                                 |                                          |                  
|(In millions)                                      |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Net Cash Flows used by Operating Activities:       |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net (loss) income                                                                          |                                                                 | $                                        | (1,467            | )      |       | $     | 471     |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Adjustments to reconcile net (loss) income to net cash flows used by operating activities: |                                                                 |                                          |                   |        |       |       |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Cumulative effect of change in accounting principle, net of tax |                                          |                   | 61     |       |       |         |       |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Minority interest                                               |                                          |                   | 12     |       |       |         | 13     |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Deferred income tax provision                                   |                                          |                   | (83    | )     |       |         | 162    |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Net realized investment gains                                   |                                          |                   | (939   | )     |       |         | (304   | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Equity method income                                            |                                          |                   | (32    | )     |       |         | (158   | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Amortization of intangibles                                     |                                          |                   | 11     |       |       |         | 10     |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Amortization of bond discount                                   |                                          |                   | (124   | )     |       |         | (147   | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Depreciation                                                    |                                          |                   | 72     |       |       |         | 80     |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Changes in:                                                     |                                          |                   |        |       |       |         |        |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            |                                                                 | Receivables, net                         |                   |        | (996  | )     |         |        | (1,560 | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            |                                                                 | Deferred acquisition costs               |                   |        | (51   | )     |         |        | (134   | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            |                                                                 | Accrued investment income                |                   |        | 3     |       |         |        | 23     |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            |                                                                 | Federal income taxes recoverable/payable |                   |        | (801  | )     |         |        | 291    |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            |                                                                 | Prepaid reinsurance premiums             |                   |        | 89    |       |         |        | (70    | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            |                                                                 | Insurance reserves                       |                   |        | 2,889 |       |         |        | 308    |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            |                                                                 | Other, net                               |                   |        | 463   |       |         |        | 260    |       
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|                                                   |                                                                                            |                                                                 |                                          | Total adjustments |        |       | 574   |         |        |        | (1,226 | )
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Net cash flows used by operating activities        |                                                                                            |                                                                 | (893                                     | )                 |        |       | (755  | )      
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Net Cash Flows from Investing Activities:          |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of fixed maturity securities                                                     |                                                                 |                                          | (41,868           | )      |       |       | (17,261 | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from fixed maturity securities:                                                   |                                                                 |                                          |                   |        |       |       |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Sales                                                           |                                          |                   | 30,076 |       |       |         | 19,772 |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Maturities, calls and redemptions                               |                                          |                   | 11,964 |       |       |         | 1,133  |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of equity securities                                                             |                                                                 |                                          | (752              | )      |       |       | (952    | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from sales of equity securities                                                   |                                                                 |                                          | 1,652             |        |       |       | 1,249   |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Change in short-term investments                                                           |                                                                 |                                          | (1,069            | )      |       |       | (3,127  | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Change in collateral on loaned securities and derivatives                                  |                                                                 |                                          | 1,099             |        |       |       | 415     |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Change in other investments                                                                |                                                                 |                                          | (210              | )      |       |       |        |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of property and equipment                                                        |                                                                 |                                          | (70               | )      |       |       | (79     | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Sales of property and equipment                                                            |                                                                 |                                          | 258               |        |       |       |        |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Other, net                                                                                 |                                                                 |                                          | 91                |        |       |       | (8      | )     
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Net cash flows from investing activities           |                                                                                            |                                                                 | 1,171                                    |                   |        |       | 1,142 |        
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Net Cash Flows used by Financing Activities:       |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Dividends paid to preferred stockholders                                                   |                                                                 |                                          |                  |        |       |       | (1      | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchase of treasury stock                                                                 |                                                                 |                                          |                  |        |       |       | (30     | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Receipts from investment contracts credited to policyholder account balances               |                                                                 |                                          | 2                 |        |       |       | 3       |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Return of policyholder account balances on investment contracts                            |                                                                 |                                          | (38               | )      |       |       | (72     | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Principal payments on debt                                                                 |                                                                 |                                          | (262              | )      |       |       | (110    | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from issuance of debt                                                             |                                                                 |                                          |                  |        |       |       | 4       |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Redemption of preferred stock                                                              |                                                                 |                                          |                  |        |       |       | (150    | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accrued interest on notes receivable for issuance of common stock                          |                                                                 |                                          | (1                | )      |       |       |        |       
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Net cash flows used by financing activities        |                                                                                            |                                                                 | (299                                     | )                 |        |       | (356  | )      
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Net change in cash and cash equivalents            |                                                                                            |                                                                 | (21                                      | )                 |        |       | 31    |        
|                                                  
|                                                  
|                                                  
|                                                  
|Cash and cash equivalents, beginning of year       |                                                                                            |                                                                 | 163                                      |                   |        |       | 153   |        
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Cash and cash equivalents, end of period           |                                                                                            | $                                                               | 142                                      |                   |        | $     | 184   |        
|                                                   |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|Supplemental Disclosures of Cash Flow Information: |                                                                                            |                                                                 |                                          |                   |        |       |       |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash paid (received):                                                                      |                                                                 |                                          |                   |        |       |       |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Interest                                                        |                                          | $                 | 83     |       |       | $       | 75     |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Federal income taxes                                            |                                          |                   | 182    |       |       |         | (235   | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Non-cash transactions:                                                                     |                                                                 |                                          |                   |        |       |       |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                            | Notes receivable for the issuance of common stock               |                                          |                   |       |       |       |         | (4     | )     

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

3



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##### Table of Contents






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

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include CNA
Financial Corporation (CNAF) and its controlled subsidiaries, which include
property-casualty insurance companies (principally Continental Casualty Company
(CCC) and The Continental Insurance Company (CIC)) and life insurance companies
(principally Continental Assurance Company (CAC), Valley Forge Life Insurance
Company (VFL) and CNA Group Life Assurance Company (CNAGLAC)), collectively CNA
or the Company. As of June 30, 2001, Loews Corporation (Loews) owned
approximately 87% of the outstanding common stock of CNAF.

The accompanying Condensed Consolidated Financial Statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America (GAAP). Certain financial information that is normally
included in annual financial statements, including certain financial statement
footnotes, prepared in accordance with GAAP, 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, 2000 (incorporated by reference in Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2000).

The interim financial data as of June 30, 2001 and 2000 and for the six months
and three months ended June 30, 2001 and 2000 is unaudited. However, in the
opinion of management, the interim data includes all adjustments, consisting of
normal recurring accruals, necessary for a fair statement of the Companys
results for the interim periods. The operating results for the interim periods
are not necessarily indicative of the results to be expected for the full year.
All significant intercompany amounts have been eliminated.

Certain amounts applicable to prior periods have been reclassified to conform
to presentation followed in 2001.

During the first quarter of 2001, the Company reclassified equity method income
from limited partnership investments. This income was previously classified in
realized investment gains, net of participating policyholders and minority
interests and is now classified in net investment income. The after-tax impact
of this reclassification on net operating results was a loss of $3 million and
income of $66 million for the three months ended June 30, 2001 and 2000 and
income of $21 million and $102 million for the six months ended June 30, 2001
and 2000.

4



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##### Table of Contents



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

Net investment income and realized investment gains, net of participating
policyholders and minority interests is composed of the following.

Net Investment Income and Realized Investment Gains, Net of Participating Policyholders and Minority Interests

|                                                                                      |  |              |     |            |  |      |     |      |  |   |     |   |  |   |       |  
|------------------------------------------------------------------------------------- |  | ------------ | --- | ---------- |  | ---- | --- | ---- |  | - | --- | - |  | - | ----- | -
|                                                                                      |  | Three Months |     | Six Months
|                                                                                      |  |              |     |           
|                                                                                      |  | 2001         |     | 2000       |  | 2001 |     | 2000
|Period ended June 30                                                                  |  |              |     |            |  |      |     |     
|(In millions)                                                                         |  |              |     |            |  |      |     |      |  |   |     |   |  |   |       |  
|Fixed maturity securities                                                             |  | $            | 436 |            |  | $    | 427 |      |  | $ | 887 |   |  | $ | 866   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Short-term investments                                                                |  |              | 37  |            |  |      | 53  |      |  |   | 79  |   |  |   | 91    |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Limited partnerships                                                                  |  |              | (4  | )          |  |      | 102 |      |  |   | 32  |   |  |   | 158   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Other                                                                                 |  |              | (45 | )          |  |      | 28  |      |  |   | (41 | ) |  |   | 41    |  
|                                                                                      |  |              |     |            |  |      |     |      |  |   |     |   |  |   |       |  
|Gross investment income                                                               |  |              | 424 |            |  |      | 610 |      |  |   | 957 |   |  |   | 1,156 |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Investment expense                                                                    |  |              | (13 | )          |  |      | (12 | )    |  |   | (29 | ) |  |   | (26   | )
|                                                                                      |  |              |     |            |  |      |     |      |  |   |     |   |  |   |       |  
|Net investment income                                                                 |  | $            | 411 |            |  | $    | 598 |      |  | $ | 928 |   |  | $ | 1,130 |  
|                                                                                      |  |              |     |            |  |      |     |      |  |   |     |   |  |   |       |  
|Realized investment
gains, net of
participating
policyholders and
minority interests |  | $            | 568 |            |  | $    | 271 |      |  | $ | 939 |   |  | $ | 304   |  
|                                                                                      |  |              |     |            |  |      |     |      |  |   |     |   |  |   |       |  

Note B. Accounting Pronouncements

On April 1, 2001 the Company adopted Emerging Issues Task Force (EITF) Issue
No. 99-20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets(EITF 99-20).
EITF 99-20 establishes how a transferor that retains an interest in securitized
financial assets or an enterprise that purchases a beneficial interest in
securitized financial assets should account for interest income and impairment.
This issue did not have a significant impact on the results of operations or
equity of the Company.

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

Effective January 1, 2001, the Company adopted the Codification of Statutory
Accounting Principles (Codification) for preparing its statutory-basis
financial statements. Codification is intended to standardize regulatory
accounting and reporting to state insurance departments. However, statutory
accounting principles will continue to be established by individual state laws
and permitted practices. The states in which CNAFs insurance subsidiaries
conduct business required adoption of Codification (with certain
modifications). The Companys adoption of

5



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##### Table of Contents



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

Codification, as modified, resulted in an increase in statutory capital and
surplus as of January 1, 2001 of $24 million, which primarily relates to
deferred tax assets, partially offset by insurance-related assessments and
pension-related liabilities.

Additionally, CNAs property-casualty companies implemented a change, effective
January 1, 2001, in the timing of recording written premiums for policies with
future effective dates. This change was made in conjunction with changes
required by Codification related to the recording of written premiums. The
effect of this change was to reduce net written premiums by $118 million for
the six months ended June 30, 2001. This change has no impact on net earned
premiums or net income.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations(SFAS 141). SFAS 141 requires companies to use the
purchase method of accounting for business combinations initiated after June
30, 2001 and prohibits the use of the pooling-of-interests method of
accounting. CNA will adopt this standard for any future business combinations.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142 Goodwill and Other Intangible Assets(SFAS 142). SFAS 142 changes the
accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach. Amortization of goodwill
and indefinite-lived intangible assets, including goodwill recorded in past
business combinations, will cease upon adoption of SFAS 142, which for CNA will
be January 1, 2002. The Company is in the process of quantifying the impact
this new standard will have on its operations and intangible assets.

Note C. (Loss) Earnings Per Share

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

(Loss) Earnings Per Share

|                                                                             |  |              |        |            |  |      |       |      |  |   |        |   |  |   |       |  
|---------------------------------------------------------------------------- |  | ------------ | ------ | ---------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                             |  | Three Months |        | Six Months
|                                                                             |  |              |        |           
|                                                                             |  | 2001         |        | 2000       |  | 2001 |       | 2000
|Period Ended June 30                                                         |  |              |        |            |  |      |       |     
|(In millions, except per share amounts)                                      |  |              |        |            |  |      |       |      |  |   |        |   |  |   |       |  
|Net (loss) income                                                            |  | $            | (1,762 | )          |  | $    | 330   |      |  | $ | (1,467 | ) |  | $ | 471   |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Less preferred dividends                                                     |  |              |       |            |  |      |      |      |  |   |       |   |  |   | (1    | )
|                                                                             |  |              |        |            |  |      |       |      |  |   |        |   |  |   |       |  
|Net (loss) income applicable to common stock                                 |  | $            | (1,762 | )          |  | $    | 330   |      |  | $ | (1,467 | ) |  | $ | 470   |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Weighted average outstanding common stock
and common stock equivalents       |  |              | 183.3  |            |  |      | 183.3 |      |  |   | 183.3  |   |  |   | 183.8 |  
|                                                                             |  |              |        |            |  |      |       |      |  |   |        |   |  |   |       |  
|Basic and diluted (loss) earnings per share
available to common stockholders |  | $            | (9.61  | )          |  | $    | 1.80  |      |  | $ | (8.00  | ) |  | $ | 2.56  |  
|                                                                             |  |              |        |            |  |      |       |      |  |   |        |   |  |   |       |  

6



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##### Table of Contents



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

Note D. Derivative Financial Instruments

As discussed in Note B, effective in 2001, the Company accounts for derivatives
and hedging in accordance with SFAS 133. A derivative is typically defined as
an instrument whose value is derived from an underlying instrument, index or
rate, has a notional amount, and can be net settled. Derivatives include, but
are not limited to, the following types of investments: interest rate swaps,
interest rate caps and floors, put and call options, warrants, swaptions,
futures, forwards and commitments to purchase securities and combinations of
the foregoing. Derivatives embedded within non-derivative instruments (such as
call options embedded in convertible bonds) must be split from the host
instrument and accounted for under SFAS 133 when the embedded derivative is not
clearly and closely related to the host instrument. In addition,
non-investment instruments, including certain types of insurance contracts that
have historically not been considered derivatives can be derivatives or contain
embedded derivatives under SFAS 133.

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

|                            |  |                                                                                                                                           
|--------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Nature of Hedge Designation |  | Derivative's Change in Fair Value Reflected In:                                                                                           
|                            |  |                                                                                                                                           
|No hedge designation        |  | Realized investment gains.                                                                                                                
|                           
|                           
|                           
|                           
|Fair value                  |  | Realized investment gains, along with the
change in fair value of the hedged asset or
liability.                                          
|                           
|                           
|                           
|                           
|Cash flow                   |  | Other comprehensive income, with subsequent
reclassification to earnings when the hedged
transaction, asset or liability impacts
earnings.
|                           
|                           
|                           
|                           
|Foreign currency            |  | Consistent with fair value or cash flow above,
depending on the nature of the hedging
relationship.                                       

Changes in the fair value of derivatives held in the separate accounts are
reflected in separate account earnings. Because separate account investments
are generally carried at fair value with changes therein reflected in separate
account earnings, hedge accounting is generally not applicable to separate
account derivatives.

Use of Derivatives

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

7



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

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

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

Risk Management Strategies Regarding Market Risk

The Company has exposure to economic losses due to interest rate risk arising
from changes in the level of, or volatility of, interest rates. The Company
attempts to mitigate its exposure to interest rate risk through active
portfolio management, which includes rebalancing its existing portfolios or
assets and liabilities, as well as changing the characteristics of investments
to be purchased or sold in the future. In addition, various derivative
financial instruments are used to modify the interest rate risk exposures of
certain assets and liabilities. These strategies include the use of interest
rate swaps, interest rate caps and floors, options, futures, forwards, and
commitments to purchase securities. These instruments are generally used to
lock in interest rates or unrealized gains, to shorten or lengthen durations of
fixed maturity securities or investment contracts, or to hedge (on an economic
basis) interest rate risks associated with investments, variable rate debt and
life insurance liabilities. Historically, the Company has used these types of
instruments as hedges against specific assets or liabilities on an infrequent
basis.

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

Foreign exchange rate risk arises from the possibility that changes in foreign
currency exchange rates will impact the value of financial instruments
denominated in a foreign currency. The Companys foreign transactions are
primarily denominated in Canadian Dollars, British Pounds and Euros. The
Company manages this risk via asset/liability matching and through the use of
foreign currency futures and/or forwards. Historically, the Company has
infrequently designated these types of instruments as hedges against assets or
liabilities.

8



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

Derivative Holdings

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

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

Derivative Financial Instruments

|                   |                                                             |   |             |     |            |   |             |     |  |   |     |     |  
|------------------ | ----------------------------------------------------------- | - | ----------- | --- | ---------- | - | ----------- | --- |  | - | --- | --- | -
|                   |                                                             |   | Contractual |     | Fair Value
|                   |                                                             |   | Notional    |     |           
|                   |                                                             |   | Amount      |     | Asset      |   | (Liability)
|June 30, 2001      |                                                             |   |             |     |            |  
|(In millions)      |                                                             |   |             |     |            |   |             |     |  |   |     |    
|General Account:   |                                                             |   |             |     |            |   |             |     |  |   |     |    
|                  
|                  
|                  
|                  
|                   | Total return swaps                                          |   | $           | 12  |            |   | $           |    |  |   | $   |    |  
|                  
|                  
|                  
|                  
|                   | Interest rate caps                                          |   |             | 500 |            |   |             | 1   |  |   |     |     |  
|                  
|                  
|                  
|                  
|                   | Futures sold, not yet purchased                             |   |             | 543 |            |   |             |    |  |   |     |    |  
|                  
|                  
|                  
|                  
|                   | Forwards                                                    |   |             | 177 |            |   |             |    |  |   |     | (3  | )
|                  
|                  
|                  
|                  
|                   | Equity warrants                                             |   |             | 15  |            |   |             | 1   |  |   |     |    |  
|                  
|                  
|                  
|                  
|                   | Collateralized debt obligation liabilities                  |   |             | 170 |            |   |             |    |  |   |     | (15 | )
|                  
|                  
|                  
|                  
|                   | Options purchased                                           |   |             | 18  |            |   |             | 1   |  |   |     |    |  
|                  
|                  
|                  
|                  
|                   | Options written                                             |   |             | 1   |            |   |             |    |  |   |     |    |  
|                  
|                  
|                  
|                  
|                   | Options embedded in convertible debt securities             |   |             | 869 |            |   |             | 186 |  |   |     |    |  
|                   |                                                             |   |             |     |            |   |             |     |  |   |     |    
|Total              |                                                             | $ | 2,305       |     |            | $ | 189         |     |  | $ | (18 | )  
|                   |                                                             |   |             |     |            |   |             |     |  |   |     |    
|Separate Accounts: |                                                             |   |             |     |            |   |             |     |  |   |     |    
|                  
|                  
|                  
|                  
|                   | Futures purchased                                           |   | $           | 969 |            |   | $           | 4   |  |   | $   |    |  
|                  
|                  
|                  
|                  
|                   | Futures sold, not yet purchased                             |   |             | 7   |            |   |             |    |  |   |     |    |  
|                  
|                  
|                  
|                  
|                   | Commitments to purchase government and municipal securities |   |             | 85  |            |   |             |    |  |   |     |    |  
|                  
|                  
|                  
|                  
|                   | Options purchased                                           |   |             | 77  |            |   |             |    |  |   |     |    |  
|                  
|                  
|                  
|                  
|                   | Options written                                             |   |             | 81  |            |   |             |    |  |   |     |    |  
|                   |                                                             |   |             |     |            |   |             |     |  |   |     |    
|Total              |                                                             | $ | 1,219       |     |            | $ | 4           |     |  | $ |    |    
|                   |                                                             |   |             |     |            |   |             |     |  |   |     |    

9



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

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

Derivative Financial Instruments

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

Collateralized debt obligations represent a credit enhancement product that is
typically structured in the form of a swap. The Company has determined that
this product is a derivative under SFAS 133. The Company is no longer writing
this product. Options embedded in convertible debt securities are classified
as fixed maturity securities in the Condensed Consolidated Balance Sheets,
consistent with the host instruments.

Fair Value Hedges

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

The effectiveness of this hedge was measured based on changes in the intrinsic
value of the collar in relation to changes in the fair value of the Global
Crossing common stock. Changes in the time value component of the collars
fair value were excluded from the hedge designation and measurement of
effectiveness. Up to the date of the sale, the Global Crossing hedge was 100%
effective. The change in the time value component of the collar was a pretax
gain of $12 million and $33 million for the three months and six months ended
June 30, 2001, and has

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

been recorded as a realized investment gain in the Condensed Consolidated
Statements of Operations.

During the second quarter 2001, the Company entered into two additional fair
value hedges that under SFAS 133 meet the criteria for hedge
accounting treatment. First, as a hedge of a portion of its 10-year Treasury Note position, the
Company acquired $515 million notional value of 10-year Treasury Futures. The
ineffective portion of this hedge resulted in a realized investment gain of $0.8
million. Second, as a hedge against currency fluctuations related to the
Canary Wharf plc common stock position, the Company entered into a £125 million
British Pound currency forward contract. The ineffective portion of this hedge
resulted in a realized investment loss of $0.3 million.

Note E. Legal Proceedings and Contingent Liabilities

Tobacco Litigation

Four insurance subsidiaries of CNAF are defendants in a lawsuit arising out of
policies allegedly issued to Liggett Group, Inc. (Liggett). The lawsuit was
filed by Liggett and its current parent, Brooke Group Holding Inc., in the
Delaware Superior Court, New Castle County, on January 26, 2000. The lawsuit,
which involves numerous insurers, concerns coverage issues relating to a number
of tobacco-related claims asserted against Liggett over the past 20 years. However, Liggett only began submitting claims
for coverage under the policies in January 2000. CNA believes its coverage
defenses are strong. Based on facts and circumstances currently known,
management believes that the ultimate outcome of the pending litigation should
not materially affect the financial condition, results of operations or cash
flows of CNA.

IGI Contingency

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

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

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

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

As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. CNA believes it has valid and enforceable
reinsurance contracts with the AAHRU Facility and other reinsurers with respect
to the IGI Program, including the United States workers compensation carve-out
business. It is likely that certain reinsurers will dispute their liabilities
to CNA; however, the Company is unable to predict the extent of such potential
disputes at this time. Legal actions could result, and the resolution of any
such actions could take years.

Based on the Companys review of the entire IGI Program, CNA has established
reserves for its estimated exposure under the program and an estimate for
recoverables from retrocessionaires.

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

Other Litigation

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

Environmental Pollution and Other Mass Tort and Asbestos Reserves

CNAs property-casualty insurance companies have potential exposures related to
environmental pollution and other mass tort and asbestos claims. In
the second quarter of 2001, CNA recorded $1.2 billion pretax in
reserve strengthening relating to asbestos,
environmental pollution and other mass tort exposures. This reserve
strengthening for asbestos, environmental pollution and other mass tort claims
was based on a management review of developments with respect to these
exposures conducted in the second quarter, as well as a review of the results of CNAs
annual analysis of these 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

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

(EPA) on its National Priorities List (NPL). State authorities have designated
many cleanup sites as well.

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

A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress during 2000 or the first six
months of 2001, and it is unclear what positions the Congress or the
administration and what legislation, if any, will result in the future. If
there is legislation, and in some circumstances even if there is no
legislation, the federal role in environmental cleanup may be significantly
reduced in favor of state action. Substantial changes in the federal statute or
the activity of the EPA may cause states to reconsider their environmental
cleanup statutes and regulations. There can be no meaningful prediction of the
pattern of regulation that would result or the effect upon CNA's
results of operations and/or financial position.

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

As of June 30, 2001 and December 31, 2000, CNA carried approximately $680
million and $347 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims. Unfavorable environmental pollution and other mass
tort net claim and claim adjustment expense reserve development for the three
months ended June 30, 2001 and 2000 amounted to $449 million and $21 million.
Unfavorable environmental pollution and other mass tort net claim and claim
adjustment expense reserve development for the six months ended June 30, 2001
and 2000 amounted to $453 million and $21 million.

CNAs property-casualty insurance subsidiaries also have exposure to asbestos
claims. Estimation of asbestos claims 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 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 June 30, 2001 and December 31, 2000, CNA carried approximately
$1,271 million and $603 million of net claim and claim adjustment expense
reserves, net of reinsurance

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

recoverables, for reported and unreported asbestos-related claims. Unfavorable
asbestos net claim and claim adjustment expense reserve development for the
three months ended June 30, 2001 and 2000 amounted to $748 million and $5
million. Unfavorable asbestos net claim and claim adjustment expense reserve
development for the six months ended June 30, 2001 and 2000 amounted to $769
million and $31 million. The Company made asbestos payments of $126 million
and $43 million in calendar year 2000 and the six months ended June 30, 2001
respectively on a net basis, excluding payments made in connection with the
1993 settlement of litigation related to Fibreboard Corporation. CNA
has attempted to manage its asbestos exposures by
aggressively resolving old accounts.

The reserve strengthening in the second quarter of 2001 for asbestos-related claims
was based on a management review of developments with respect to these
exposures conducted in the second quarter, as well as a review of the results of CNAs
annual analysis of these claims. This
analysis indicated a significant increase in claim counts for asbestos-related
claims. The factors that have led to the deterioration in claim counts include,
among other things, intensive advertising campaigns by lawyers for asbestos
claimants and the addition of new defendants such as the distributors and
installers of asbestos containing products. New claim filings increased
significantly in 2000 over 1999 and that trend continues thus far in 2001. The
volume of new claims has caused the bankruptcies of numerous asbestos
defendants. Those bankruptcies also may result in increased liability for
remaining defendants under principles of joint and several liability.

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

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

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##### Table of Contents



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

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

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

Environmental Pollution and Other Mass Tort and Asbestos

|               |  |               |      |                   |  |           |       |               |  |   |      |   |  |   |      |  
|-------------- |  | ------------- | ---- | ----------------- |  | --------- | ----- | ------------- |  | - | ---- | - |  | - | ---- | -
|               |  | June 30, 2001 |      | December 31, 2000
|               |  |               |      |                  
|               |  | Environmental |      |                   |  |           |       | Environmental |  |   |      |  
|               |  | Pollution     |      |                   |  |           |       | Pollution     |  |   |      |  
|               |  | and Other     |      |                   |  |           |       | and Other     |  |   |      |  
|               |  | Mass Tort     |      | Asbestos          |  | Mass Tort |       | Asbestos     
|               |  |               |      |                   |  |           |       |              
|(In millions)  |  |               |      |                   |  |           |       |               |  |   |      |   |  |   |      |  
|Gross reserves |  | $             | 902  |                   |  | $         | 1,627 |               |  | $ | 493  |   |  | $ | 848  |  
|              
|              
|              
|              
|Ceded reserves |  |               | (222 | )                 |  |           | (356  | )             |  |   | (146 | ) |  |   | (245 | )
|               |  |               |      |                   |  |           |       |               |  |   |      |   |  |   |      |  
|Net reserves   |  | $             | 680  |                   |  | $         | 1,271 |               |  | $ | 347  |   |  | $ | 603  |  
|               |  |               |      |                   |  |           |       |               |  |   |      |   |  |   |      |  

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.
In the area of asbestos and environmental pollution, the Company reviewed
internal claims data as well as studies generated by external parties,
including a significant industry analysis on asbestos, environmental pollution
and other mass tort claims (APMT) published by an international rating
agency. As a result of these various reviews, management concluded that
ultimate losses, including losses for APMT, will be higher in the range of
possible outcomes than previously estimated. The Company recorded $2.6 billion of pretax reserve
strengthening associated with a change in estimate of prior year net loss and
allocated loss adjustment expense reserves (loss reserves), including $1.2
billion pretax related to APMT. 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. As a result, the Company recorded a $0.6 billion pretax
charge related to retrospective premium and other premium accruals (premium
accruals). The studies included the review of all such retrospective insurance
policies and the current estimate of ultimate losses.

15



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##### Table of Contents



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

The net prior year loss reserve strengthening and related items comprising the
amounts noted above are detailed in the following table.

Net Prior Year Loss Reserve Strengthening

|                                                                                                             |                                            |          |       |                                                |       |       |       | 
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | -------- | ----- | ---------------------------------------------- | ----- | ----- | ----- | 
|                                                                                                             |                                            |          |       |                                                |       | Total
|Three months ended June 30, 2001                                                                             |                                            |         
|(In millions)                                                                                                |                                            |          |       |                                               
|Net reserve strengthening excluding the impact of the corporate
aggregate excess-of-loss reinsurance treaty: |                                            |          |       |                                               
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             |                                            | APMT     |       | $                                              | 1,197 |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                             |                                            | Non-APMT |       |                                                | 1,594 |      
|                                                                                                             |                                            |          |       |                                               
|                                                                                                             |                                            |          | Total |                                                |       | 2,791 |      
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Pretax benefit from corporate aggregate excess-of-loss reinsurance
treaty on accident year 1999**            |                                            |          | (223  | )                                             
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Accrual for insurance-related assessments                                                                    |                                            |          | 48    |                                               
|                                                                                                             |                                            |          |       |                                               
|                                                                                                             |                                            |          |       | Net reserve strengthening and related accruals |       |       | 2,616 | 
|                                                                                                             |                                            |          |       |                                               
|Change in estimate of premium accruals                                                                       |                                            |          | 616   |                                               
|                                                                                                            
|                                                                                                            
|                                                                                                            
|                                                                                                            
|Reduction of related commission accruals                                                                     |                                            |          | (50   | )                                             
|                                                                                                             |                                            |          |       |                                               
|                                                                                                             | Net premium and related accrual reductions |          |       | 566                                            |      
|                                                                                                             |                                            |          |       |                                               
|Total second quarter 2001 reserve strengthening and related accruals                                         |                                            | $        | 3,182 |                                               
|                                                                                                             |                                            |          |       |                                               



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

The adverse loss development excluding asbestos, environmental pollution and
other mass tort (non-APMT) was the result of recent analyses of several
businesses. The non-APMT reserve strengthening principally related to commercial insurance
coverages including automobile liability and commercial multiple-peril, 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, excluding the impact of
the corporate aggregate excess-of-loss reinsurance treaty, of the adverse loss development is a result of analyses of several
coverages provided to commercial entities written by various segments of CNA.
These analyses 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. In addition,
the number of commercial automobile liability claims was higher than expected. Finally, 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.

An analysis of CNA Res assumed reinsurance business showed that the paid and
reported losses for recent accident years were higher than
expectations and resulted in an increase of net reserves of
approximately $560 million, excluding the impact of the corporate
aggregate excess-of-loss reinsurance treaty. The estimated ultimate loss ratios
for these recent accident years have been revised to reflect the paid
and reported losses.

Approximately $320 million, excluding the impact of
the corporate aggregate excess-of-loss reinsurance treaty, adverse loss development occurred in Specialty
Operations and was caused by 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. In addition, the
average size of claims resulting from coverages provided to physicians and
institutions providing healthcare related services increased more than
expected.

16



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

Note F. Reinsurance

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

Components of Earned Premiums

|                         |                     |   |        |       |         |   |       |     |     |   |       |     |  |   |       |       | 
|------------------------ | ------------------- | - | ------ | ----- | ------- | - | ----- | --- | --- | - | ----- | --- |  | - | ----- | ----- | 
|                         |                     |   | Direct |       | Assumed |   | Ceded |     | Net
|Six months ended June 30 |                     |   |        |       |         |   |       |    
|(In millions)            |                     |   |        |       |         |   |       |     |     |   |       |     |  |   |       |      
|2001
Property-casualty   |                     | $ | 3,926  |       |         | $ | 372   |     |     | $ | 2,304 |     |  | $ | 1,994 |      
|                        
|                        
|                        
|                        
|                         | Accident and health |   |        | 1,754 |         |   |       | 137 |     |   |       | 139 |  |   |       | 1,752 | 
|                        
|                        
|                        
|                        
|                         | Life                |   |        | 608   |         |   |       | 119 |     |   |       | 339 |  |   |       | 388   | 
|                         |                     |   |        |       |         |   |       |     |     |   |       |     |  |   |       |      
|Total earned premiums    |                     | $ | 6,288  |       |         | $ | 628   |     |     | $ | 2,782 |     |  | $ | 4,134 |      
|                         |                     |   |        |       |         |   |       |     |     |   |       |     |  |   |       |      
|2000
Property-casualty   |                     | $ | 4,019  |       |         | $ | 903   |     |     | $ | 1,700 |     |  | $ | 3,222 |      
|                        
|                        
|                        
|                        
|                         | Accident and health |   |        | 1,969 |         |   |       | 169 |     |   |       | 261 |  |   |       | 1,877 | 
|                        
|                        
|                        
|                        
|                         | Life                |   |        | 594   |         |   |       | 98  |     |   |       | 243 |  |   |       | 449   | 
|                         |                     |   |        |       |         |   |       |     |     |   |       |     |  |   |       |      
|Total earned premiums    |                     | $ | 6,582  |       |         | $ | 1,170 |     |     | $ | 2,204 |     |  | $ | 5,548 |      
|                         |                     |   |        |       |         |   |       |     |     |   |       |     |  |   |       |      

In 1999, the Company entered into an aggregate excess-of-loss reinsurance
treaty related to the 1999 through 2001 accident years covering substantially
all of the Companys property-casualty lines of business (the Aggregate
Cover). The Company has two sections of coverage under the terms of the
Aggregate Cover. These coverages attach at defined loss and allocated loss
adjustment expense (collectively, losses) ratios for each accident year.
Coverage under the first section of the Aggregate Cover, which is available for
all accident years covered by the contract, has annual limits of $500 million
of losses with an aggregate limit of $1 billion of losses for the three-year
period. The ceded premium for each $500 million of limit is up to $230
million. The second section of the Aggregate Cover, which is available for
accident year 2001 only, provides additional coverage of up to $510 million of
losses for ceded premiums of $310 million. Additional premiums may be
payable if the aggregate loss ratio for the three-year period exceeds certain
thresholds.

In the first quarter of 2001, the Company triggered the coverage under the
second section of the Aggregate Cover for the 2001 accident year. In the
second quarter of 2001, the significant reserve additions fully utilized the
limit on the 1999 accident year under the first section. Under the Aggregate
Cover, interest expense on the funds withheld generally accrues at 8% per
annum.

17



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

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

Impact of Aggregate Cover on Pretax Operating Results

|                                       |  |        |     |        |  |   |     | 
|-------------------------------------- |  | ------ | --- | ------ |  | - | --- | 
|                                       |  | Three  |     | Six   
|                                       |  | Months |     | Months
|Period ended June 30, 2001             |  |        |     |       
|(In millions)                          |  |        |     |        |  |   |     | 
|Ceded earned premium                   |  | $      | 418 |        |  | $ | 460 | 
|                                      
|                                      
|                                      
|                                      
|Ceded loss and loss adjustment expense |  |        | 683 |        |  |   | 722 | 
|                                      
|                                      
|                                      
|                                      
|Interest charges                       |  |        | 53  |        |  |   | 59  | 
|                                       |  |        |     |        |  |   |     | 
|Pretax benefit on operating results    |  | $      | 212 |        |  | $ | 203 | 
|                                       |  |        |     |        |  |   |     | 

In 2001, the Company entered into a one-year aggregate excess-of-loss
reinsurance treaty related to the 2001 accident year covering substantially all
property-casualty lines of business in the Continental Casualty Company pool
(the CCC Cover). Ceded premiums in the amount of $1.5 million were recorded
in the second quarter for the CCC Cover. For the first six months, ceded
premiums were $2.5 million. The loss protection provided by the CCC Cover has
an aggregate limit of $750 million to $825 million of losses depending on CCCs
2001 actual premium volume. The CCC Cover provides continuous coverage in
excess of the second section of the Aggregate Cover discussed above.

The pretax benefit (loss) from the Aggregate Cover and the CCC Cover by
operating segments was as follows.

Pretax Benefit (Loss) from the Aggregate Cover and CCC Cover

|                                    |  |        |     |        |  |   |     |  
|----------------------------------- |  | ------ | --- | ------ |  | - | --- | -
|                                    |  | Three  |     | Six   
|                                    |  | Months |     | Months
|Period ended June 30, 2001          |  |        |     |       
|(In millions)                       |  |        |     |        |  |   |     |  
|Agency Market Operations            |  | $      | 141 |        |  | $ | 137 |  
|                                   
|                                   
|                                   
|                                   
|Specialty Operations                |  |        | (2  | )      |  |   | (3  | )
|                                   
|                                   
|                                   
|                                   
|CNA Re                              |  |        | 25  |        |  |   | 25  |  
|                                   
|                                   
|                                   
|                                   
|Global Operations                   |  |        | (2  | )      |  |   | (3  | )
|                                   
|                                   
|                                   
|                                   
|Risk Management                     |  |        | 45  |        |  |   | 45  |  
|                                   
|                                   
|                                   
|                                   
|Corporate and Other                 |  |        | 3   |        |  |   |    |  
|                                    |  |        |     |        |  |   |     |  
|Pretax benefit on operating results |  | $      | 210 |        |  | $ | 201 |  
|                                    |  |        |     |        |  |   |     |  

18



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##### Table of Contents



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

Note G. Debt

Debt is composed of the following obligations.

Debt

|                                                              |                               |   |          |     |              |   |       |     | 
|------------------------------------------------------------- | ----------------------------- | - | -------- | --- | ------------ | - | ----- | --- | 
|                                                              |                               |   | June 30, |     | December 31,
|                                                              |                               |   | 2001     |     | 2000        
|                                                              |                               |   |          |     |             
|(In millions)                                                 |                               |   |          |     |              |   |       |    
|Variable rate debt:                                           |                               |   |          |     |              |   |       |    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Commercial Paper              |   | $        | 400 |              |   | $     | 627 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Credit facility  CNA Surety  |   |          | 75  |              |   |       | 100 | 
|                                                             
|                                                             
|                                                             
|                                                             
|Senior notes:                                                 |                               |   |          |     |              |   |       |    
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 7.250%, due March 1, 2003     |   |          | 133 |              |   |       | 133 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 6.250%, due November 15, 2003 |   |          | 249 |              |   |       | 249 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 6.500%, due April 15, 2005    |   |          | 491 |              |   |       | 491 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 6.750%, due November 15, 2006 |   |          | 249 |              |   |       | 249 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 6.450%, due January 15, 2008  |   |          | 149 |              |   |       | 149 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 6.600%, due December 15, 2008 |   |          | 199 |              |   |       | 199 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 8.375%, due August 15, 2012   |   |          | 68  |              |   |       | 68  | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | 6.950%, due January 15, 2018  |   |          | 148 |              |   |       | 148 | 
|                                                             
|                                                             
|                                                             
|                                                             
|Debenture, 7.250%, due November 15, 2023                      |                               |   | 240      |     |              |   | 240   |    
|                                                             
|                                                             
|                                                             
|                                                             
|Capital leases, 8.000%-19.980%, due through December 31, 2011 |                               |   | 39       |     |              |   | 40    |    
|                                                             
|                                                             
|                                                             
|                                                             
|Other debt, 1.000%-8.500%, due through 2019                   |                               |   | 28       |     |              |   | 36    |    
|                                                              |                               |   |          |     |              |   |       |    
|Total debt                                                    |                               | $ | 2,468    |     |              | $ | 2,729 |    
|                                                              |                               |   |          |     |              |   |       |    

As of April 30, 2001, CNAF replaced its $750 million revolving credit facility
(the Prior Facility) with a new $500 million revolving credit facility (the New
Facility). No loans were outstanding under either the Prior Facility or the
New Facility at anytime during 2001. The Prior Facility was scheduled to
expire on May 10, 2001. The New Facility is split into two parts, a $250
million component with a 364-day expiration date (with an option by CNAF to
turn this part of the New Facility into a one-year term loan) and a $250
million component with a 3-year expiration date. The Company pays a facility
fee to the lenders of the New Facility for having funds available for loans
under both components. The facility fee on the 364-day component is 12.5 basis
points (which is the same as the fee on the expiring revolver) while the fee on
the 3-year component is 15 basis points.

In addition to the facility fees, if the Company borrows under the New
Facility, the Company at its current debt rating will pay an interest rate on
outstanding loans equal to the London Interbank Offering Rate (LIBOR) plus 50
basis points for the 364-day component and LIBOR plus 47.5 basis points for the
3-year component. If the Companys debt ratings are down graded one level, the
Company will pay an interest rate on the outstanding loans equal to the LIBOR
plus 60 basis points for the 364-day component and LIBOR plus 57.5 basis points
for the 3-year component.

If the Company has outstanding loans equaling more than 50% of the amounts
available under the New Facility, the Company also will pay a utilization fee
of 12.5 basis points on such loans.

19



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

The New Facility is used for general corporate purposes including
support for the commercial paper program, which currently has $400 million of
loans outstanding.

Following the announcement of second quarter 2001
earnings, the Company's commercial
paper rating was placed under review by Standard &
 Poor's. During the
period of this review,
which is expected to be finalized by the end of third quarter 2001,
the Company may redeem or hold its outstanding commercial paper loans as they
mature using internal funds.

Note H. Comprehensive Income

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

Comprehensive (Loss) Income

|                                                                                               |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |   |      |  
|---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------ | ------------ | ------ | ---------- | ---- | ---- | ---- | ---- | ------ | - | ----- | - | ---- | - | ---- | -
|                                                                                               |                                                                   |                                                                                            |        | Three Months |        | Six Months
|                                                                                               |                                                                   |                                                                                            |        |              |        |           
|                                                                                               |                                                                   |                                                                                            |        | 2001         |        | 2000       |      | 2001 |      | 2000
|Period ended June 30                                                                           |                                                                   |                                                                                            |        |              |        |            |      |     
|(In millions)                                                                                  |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  
|Net (loss) income                                                                              |                                                                   | $                                                                                          | (1,762 | )            |        | $          | 330  |      |      | $    | (1,467 | ) |       | $ | 471  |  
|                                                                                               |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  
|Other comprehensive income (loss):                                                             |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Change in unrealized gains/losses on general account investments: |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |   |     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                                   | Holding gains arising during the period                                                    |        |              | (66    | )          |      |      | (269 | )    |        |   | 136   |   |      |   | (191 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                                   | Less: unrealized gains at beginning of period included in
realized gains during the period |        |              | 1,063  |            |      |      | 375  |      |        |   | 1,123 |   |      |   | 455  |  
|                                                                                               |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  
|                                                                                               |                                                                   | Net change in unrealized gains/losses on general account
investments                       |        |              | (1,129 | )          |      |      | (644 | )    |        |   | (987  | ) |      |   | (646 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                                   | Net change in unrealized gains/losses on separate accounts and
other                       |        |              | (22    | )          |      |      | (10  | )    |        |   | (3    | ) |      |   | (2   | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                                   | Foreign currency translation adjustment                                                    |        |              | (9     | )          |      |      | (1   | )    |        |   | (5    | ) |      |   | (3   | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                                   | Allocation to participating policyholders and minority interest                            |        |              | 5      |            |      |      | 1    |      |        |   | (3    | ) |      |   | (5   | )
|                                                                                               |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  
|Other comprehensive loss, before tax and cumulative effect of a
change in accounting principle |                                                                   |                                                                                            | (1,155 | )            |        |            | (654 | )    |      |      | (998   | ) |       |   | (656 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Deferred income tax expense related to other comprehensive loss                                |                                                                   |                                                                                            | 391    |              |        |            | 243  |      |      |      | 353    |   |       |   | 241  |  
|                                                                                               |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  
|Other comprehensive loss, before cumulative effect of a change in
accounting principle         |                                                                   |                                                                                            | (764   | )            |        |            | (411 | )    |      |      | (645   | ) |       |   | (415 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Cumulative effect of a change in accounting principle, net of tax                              |                                                                   |                                                                                            |       |              |        |            |     |      |      |      | 58     |   |       |   |     |  
|                                                                                               |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  
|Other comprehensive loss, net of tax and cumulative effect of a
change in accounting principle |                                                                   |                                                                                            | (764   | )            |        |            | (411 | )    |      |      | (587   | ) |       |   | (415 | )
|                                                                                               |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  
|Total comprehensive (loss) income                                                              |                                                                   | $                                                                                          | (2,526 | )            |        | $          | (81  | )    |      | $    | (2,054 | ) |       | $ | 56   |  
|                                                                                               |                                                                   |                                                                                            |        |              |        |            |      |      |      |      |        |   |       |   |      |  

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

20



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##### Table of Contents



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

Note I. Business Segments

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

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

All significant intersegment income and expense have been eliminated. Risk
Managements other revenues and expenses for 2001 and 2000 include revenues
for services provided by RSKCo(SM) to other units within the Risk Management
segment that are eliminated at the consolidated level. Such intrasegment
revenue and expenses eliminated at the consolidated level were $38 million and
$39 million for the three months ended June 30, 2001 and 2000 and $77 million
and $80 million for the six months ended June 30, 2001 and 2000.

21



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##### Table of Contents



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



|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | - | ---------- | ------ | ---------- | - | ------ | ---- | ---------- | - | ------ | ---- | ------- | - | ----- | ---- | ---- | - | ----- | ---- | -
|                                                                                                    |                                |   | Agency     |        |            |   |        |      |            |   |        |      |         |   |       |      | Risk
|                                                                                                    |                                |   | Market     |        | Specialty  |   |        |      |            |   | Global |      | Manage-
|                                                                                                    |                                |   | Operations |        | Operations |   | CNA Re |      | Operations |   | ment  
|Three months ended June 30, 2001                                                                    |                                |   |            |        |            |   |        |      |            |  
|(In millions)                                                                                       |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Net earned premiums                                                                                 |                                | $ | 213        |        |            | $ | 182    |      |            | $ | 144    |      |         | $ | 273   |      |      | $ | (271  | )   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Claims, benefits and expenses                                                                       |                                |   | 1,478      |        |            |   | 562    |      |            |   | 755    |      |         |   | 470   |      |      |   | 622   |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Restructuring and other related charges                                                             |                                |   | 4          |        |            |   | 1      |      |            |   |       |      |         |   | 1     |      |      |   | 1     |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|                                                                                                    | Underwriting loss              |   |            | (1,269 | )          |   |        | (381 | )          |   |        | (611 | )       |   |       | (198 | )    |   |       | (894 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net investment income                                                                               |                                |   | 71         |        |            |   | 43     |      |            |   | 41     |      |         |   | 32    |      |      |   | 19    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other revenues                                                                                      |                                |   | 45         |        |            |   | 5      |      |            |   |       |      |         |   | 11    |      |      |   | 82    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other expenses                                                                                      |                                |   | 44         |        |            |   | 1      |      |            |   |       |      |         |   | 31    |      |      |   | 77    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-insurance restructuring and
other related charges                                               |                                |   |           |        |            |   |       |      |            |   |       |      |         |   |      |      |      |   | 1     |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|                                                                                                    | Pretax operating (loss) income |   |            | (1,197 | )          |   |        | (334 | )          |   |        | (570 | )       |   |       | (186 | )    |   |       | (871 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income tax benefit (expense)                                                                        |                                |   | 425        |        |            |   | 120    |      |            |   | 201    |      |         |   | 54    |      |      |   | 307   |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Minority interest                                                                                   |                                |   |           |        |            |   |       |      |            |   |       |      |         |   | (6    | )    |      |   |      |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Net operating (loss) income,
excluding realized investment
gains                                    |                                |   | (772       | )      |            |   | (214   | )    |            |   | (369   | )    |         |   | (138  | )    |      |   | (564  | )   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority
interests |                                |   | 257        |        |            |   | 105    |      |            |   | (227   | )    |         |   | 17    |      |      |   | 87    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |   |           |        |            |   |       |      |            |   |       |      |         |   |      |      |      |   |      |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Net (loss) income                                                                                   |                                | $ | (515       | )      |            | $ | (109   | )    |            | $ | (596   | )    |         | $ | (121  | )    |      | $ | (477  | )   
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Receivables, net                                                                                    |                                | $ | 5,266      |        |            | $ | 1,283  |      |            | $ | 2,126  |      |         | $ | 813   |      |      | $ | 3,163 |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Insurance reserves                                                                                  |                                | $ | 12,815     |        |            | $ | 4,059  |      |            | $ | 4,902  |      |         | $ | 2,715 |      |      | $ | 4,963 |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |        |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | - | ---------- | --- | ---------- | - | --------- | ---- | ------- | - | ----- | --- | - | - | --- | - |  | - | ------ | ------ | -
|                                                                                                    |                                |   | Group      |     | Life       |   | Corporate |      | Elimi-  |   |       |     |  
|                                                                                                    |                                |   | Operations |     | Operations |   | and Other |      | nations |   | Total
|Three months ended June 30, 2001                                                                    |                                |   |            |     |            |   |           |      |         |  
|(In millions)                                                                                       |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |       
|Net earned premiums                                                                                 |                                | $ | 830        |     |            | $ | 244       |      |         | $ | 1     |     |   | $ | (13 | ) |  | $ | 1,603  |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Claims, benefits and expenses                                                                       |                                |   | 853        |     |            |   | 353       |      |         |   | 6     |     |   |   | (13 | ) |  |   | 5,086  |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Restructuring and other related
charges                                                             |                                |   |            |     |            |   | 17        |      |         |   | 31    |     |   |   |    |   |  |   | 55     |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |       
|                                                                                                    | Underwriting loss              |   |            | (23 | )          |   |           | (126 | )       |   |       | (36 | ) |   |     |  |  |   |        | (3,538 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net investment income                                                                               |                                |   | 41         |     |            |   | 152       |      |         |   | 12    |     |   |   |    |   |  |   | 411    |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other revenues                                                                                      |                                |   | 5          |     |            |   | 46        |      |         |   |      |     |   |   | (42 | ) |  |   | 152    |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other expenses                                                                                      |                                |   | 1          |     |            |   | 32        |      |         |   | 59    |     |   |   | (42 | ) |  |   | 203    |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-insurance restructuring and
other related charges                                               |                                |   |           |     |            |   |          |      |         |   |      |     |   |   |    |   |  |   | 1      |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |       
|                                                                                                    | Pretax operating (loss) income |   |            | 22  |            |   |           | 40   |         |   |       | (83 | ) |   |     |  |  |   |        | (3,179 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income tax benefit (expense)                                                                        |                                |   | (6         | )   |            |   | (13       | )    |         |   | 22    |     |   |   |    |   |  |   | 1,110  |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Minority interest                                                                                   |                                |   |           |     |            |   |          |      |         |   |      |     |   |   |    |   |  |   | (6     | )     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |       
|Net operating (loss) income,
excluding realized investment
gains                                    |                                |   | 16         |     |            |   | 27        |      |         |   | (61   | )   |   |   |    |   |  |   | (2,075 | )     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority
interests |                                |   | 10         |     |            |   | 49        |      |         |   | 15    |     |   |   |    |   |  |   | 313    |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |   |           |     |            |   |          |      |         |   |      |     |   |   |    |   |  |   |       |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |       
|Net (loss) income                                                                                   |                                | $ | 26         |     |            | $ | 76        |      |         | $ | (46   | )   |   | $ |    |   |  | $ | (1,762 | )     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |       
|Receivables, net                                                                                    |                                | $ | 1,723      |     |            | $ | 674       |      |         | $ | 50    |     |   | $ |    |   |  | $ | 15,098 |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |       
|Insurance reserves                                                                                  |                                | $ | 2,702      |     |            | $ | 8,045     |      |         | $ | 1,707 |     |   | $ |    |   |  | $ | 41,908 |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |     |   |   |     |   |  |   |        |       

22



---



##### Table of Contents



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



|                                                                                                    |                                |            |        |            |           |        |       |            |   |      |        |     |         |   |       |     |      |   |       |     |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ------ | ---------- | --------- | ------ | ----- | ---------- | - | ---- | ------ | --- | ------- | - | ----- | --- | ---- | - | ----- | --- | -
|                                                                                                    |                                |            | Agency |            |           |        |       |            |   |      |        |     |         |   |       |     | Risk
|                                                                                                    |                                |            | Market |            | Specialty |        |       |            |   |      | Global |     | Manage-
|Three months ended June 30, 2000                                                                    |                                | Operations |        | Operations |           | CNA Re |       | Operations |   | ment
|(In millions)                                                                                       |                                |            |        |            |           |        |       |            |   |     
|Net earned premiums                                                                                 |                                | $          | 837    |            |           | $      | 152   |            |   | $    | 270    |     |         | $ | 266   |     |      | $ | 162   |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Claims, benefits and expenses                                                                       |                                |            | 935    |            |           |        | 156   |            |   |      | 294    |     |         |   | 299   |     |      |   | 196   |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Restructuring and other related
charges                                                             |                                |            |       |            |           |        |      |            |   |      |       |     |         |   |      |     |      |   |      |    
|                                                                                                    |                                |            |        |            |           |        |       |            |   |      |        |     |         |   |       |     |      |   |       |    
|                                                                                                    | Underwriting loss              |            |        | (98        | )         |        |       | (4         | ) |      |        | (24 | )       |   |       | (33 | )    |   |       | (34 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net investment income                                                                               |                                |            | 190    |            |           |        | 68    |            |   |      | 58     |     |         |   | 39    |     |      |   | 47    |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other revenues                                                                                      |                                |            | 40     |            |           |        | 5     |            |   |      | 3      |     |         |   | 29    |     |      |   | 79    |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other expenses                                                                                      |                                |            | 36     |            |           |        | 3     |            |   |      | 1      |     |         |   | 29    |     |      |   | 75    |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-insurance restructuring and
other related charges                                               |                                |            |       |            |           |        |      |            |   |      |       |     |         |   |      |     |      |   |      |    
|                                                                                                    |                                |            |        |            |           |        |       |            |   |      |        |     |         |   |       |     |      |   |       |    
|                                                                                                    | Pretax operating income (loss) |            |        | 96         |           |        |       | 66         |   |      |        | 36  |         |   |       | 6   |      |   |       | 17  |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income tax (expense) benefit                                                                        |                                |            | (28    | )          |           |        | (23   | )          |   |      | (12    | )   |         |   |      |     |      |   | (4    | )  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Minority interest                                                                                   |                                |            |       |            |           |        |      |            |   |      |       |     |         |   | (7    | )   |      |   |      |    
|                                                                                                    |                                |            |        |            |           |        |       |            |   |      |        |     |         |   |       |     |      |   |       |    
|Net operating income (loss),
excluding realized investment
gains                                    |                                |            | 68     |            |           |        | 43    |            |   |      | 24     |     |         |   | (1    | )   |      |   | 13    |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority
interests |                                |            | 87     |            |           |        | 32    |            |   |      | 18     |     |         |   | 10    |     |      |   | 21    |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |            |       |            |           |        |      |            |   |      |       |     |         |   |      |     |      |   |      |    
|                                                                                                    |                                |            |        |            |           |        |       |            |   |      |        |     |         |   |       |     |      |   |       |    
|Net income (loss)                                                                                   |                                | $          | 155    |            |           | $      | 75    |            |   | $    | 42     |     |         | $ | 9     |     |      | $ | 34    |    
|                                                                                                    |                                |            |        |            |           |        |       |            |   |      |        |     |         |   |       |     |      |   |       |    
|Receivables, net                                                                                    |                                | $          | 2,644  |            |           | $      | 959   |            |   | $    | 896    |     |         | $ | 898   |     |      | $ | 2,404 |    
|                                                                                                    |                                |            |        |            |           |        |       |            |   |      |        |     |         |   |       |     |      |   |       |    
|Insurance reserves                                                                                  |                                | $          | 12,134 |            |           | $      | 4,109 |            |   | $    | 4,586  |     |         | $ | 2,544 |     |      | $ | 4,280 |    
|                                                                                                    |                                |            |        |            |           |        |       |            |   |      |        |     |         |   |       |     |      |   |       |    

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                    |                                |            |       |            |      |           |           |         |        |       |       |     |   |   |     |   |  |   |        |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ----- | ---------- | ---- | --------- | --------- | ------- | ------ | ----- | ----- | --- | - | - | --- | - |  | - | ------ | ---- | -
|                                                                                                    |                                |            | Group |            | Life |           | Corporate |         | Elimi- |       |       |     |  
|Three months ended June 30, 2000                                                                    |                                | Operations |       | Operations |      | and Other |           | nations |        | Total
|(In millions)                                                                                       |                                |            |       |            |      |           |           |         |        |      
|Net earned premiums                                                                                 |                                | $          | 878   |            |      | $         | 226       |         |        | $     | (3    | )   |   | $ | (10 | ) |  | $ | 2,778  |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Claims, benefits and expenses                                                                       |                                |            | 894   |            |      |           | 333       |         |        |       | 24    |     |   |   | (10 | ) |  |   | 3,121  |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Restructuring and other related charges                                                             |                                |            |      |            |      |           |          |         |        |       |      |     |   |   |    |   |  |   |       |     
|                                                                                                    |                                |            |       |            |      |           |           |         |        |       |       |     |   |   |     |   |  |   |        |     
|                                                                                                    | Underwriting loss              |            |       | (16        | )    |           |           | (107    | )      |       |       | (27 | ) |   |     |  |  |   |        | (343 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net investment income                                                                               |                                |            | 40    |            |      |           | 153       |         |        |       | 3     |     |   |   |    |   |  |   | 598    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other revenues                                                                                      |                                |            | 13    |            |      |           | 52        |         |        |       | 12    |     |   |   | (43 | ) |  |   | 190    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other expenses                                                                                      |                                |            | 14    |            |      |           | 25        |         |        |       | 82    |     |   |   | (43 | ) |  |   | 222    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-insurance restructuring and
other related charges                                               |                                |            |      |            |      |           |          |         |        |       |      |     |   |   |    |   |  |   |       |     
|                                                                                                    |                                |            |       |            |      |           |           |         |        |       |       |     |   |   |     |   |  |   |        |     
|                                                                                                    | Pretax operating income (loss) |            |       | 23         |      |           |           | 73      |        |       |       | (94 | ) |   |     |  |  |   |        | 223  |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income tax (expense) benefit                                                                        |                                |            | (8    | )          |      |           | (24       | )       |        |       | 37    |     |   |   |    |   |  |   | (62    | )   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Minority interest                                                                                   |                                |            |      |            |      |           |          |         |        |       |      |     |   |   |    |   |  |   | (7     | )   
|                                                                                                    |                                |            |       |            |      |           |           |         |        |       |       |     |   |   |     |   |  |   |        |     
|Net operating income (loss),
excluding realized investment
gains                                    |                                |            | 15    |            |      |           | 49        |         |        |       | (57   | )   |   |   |    |   |  |   | 154    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority
interests |                                |            | 11    |            |      |           | (5        | )       |        |       | 2     |     |   |   |    |   |  |   | 176    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |            |      |            |      |           |          |         |        |       |      |     |   |   |    |   |  |   |       |     
|                                                                                                    |                                |            |       |            |      |           |           |         |        |       |       |     |   |   |     |   |  |   |        |     
|Net income (loss)                                                                                   |                                | $          | 26    |            |      | $         | 44        |         |        | $     | (55   | )   |   | $ |    |   |  | $ | 330    |     
|                                                                                                    |                                |            |       |            |      |           |           |         |        |       |       |     |   |   |     |   |  |   |        |     
|Receivables, net                                                                                    |                                | $          | 728   |            |      | $         | 677       |         |        | $     | 4,562 |     |   | $ |    |   |  | $ | 13,768 |     
|                                                                                                    |                                |            |       |            |      |           |           |         |        |       |       |     |   |   |     |   |  |   |        |     
|Insurance reserves                                                                                  |                                | $          | 2,494 |            |      | $         | 7,463     |         |        | $     | 1,796 |     |   | $ |    |   |  | $ | 39,406 |     
|                                                                                                    |                                |            |       |            |      |           |           |         |        |       |       |     |   |   |     |   |  |   |        |     

23



---



##### Table of Contents



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



|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | - | ---------- | ------ | ---------- | - | ------ | ---- | ---------- | - | ------ | ---- | ------- | - | ----- | ---- | ---- | - | ----- | ---- | -
|                                                                                                    |                                |   | Agency     |        |            |   |        |      |            |   |        |      |         |   |       |      | Risk
|                                                                                                    |                                |   | Market     |        | Specialty  |   |        |      |            |   | Global |      | Manage-
|                                                                                                    |                                |   | Operations |        | Operations |   | CNA Re |      | Operations |   | ment  
|Six months ended June 30, 2001                                                                      |                                |   |            |        |            |   |        |      |            |  
|(In millions)                                                                                       |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Net earned premiums                                                                                 |                                | $ | 944        |        |            | $ | 356    |      |            | $ | 303    |      |         | $ | 558   |      |      | $ | (142  | )   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Claims, benefits and expenses                                                                       |                                |   | 2,297      |        |            |   | 758    |      |            |   | 937    |      |         |   | 765   |      |      |   | 777   |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Restructuring
and other related charges                                                             |                                |   | 4          |        |            |   | 1      |      |            |   |       |      |         |   | 1     |      |      |   | 1     |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|                                                                                                    | Underwriting loss              |   |            | (1,357 | )          |   |        | (403 | )          |   |        | (634 | )       |   |       | (208 | )    |   |       | (920 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net investment income                                                                               |                                |   | 211        |        |            |   | 100    |      |            |   | 88     |      |         |   | 70    |      |      |   | 60    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other revenues                                                                                      |                                |   | 82         |        |            |   | 13     |      |            |   | 1      |      |         |   | 35    |      |      |   | 162   |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other expenses                                                                                      |                                |   | 77         |        |            |   | 3      |      |            |   |       |      |         |   | 57    |      |      |   | 153   |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-insurance restructuring and
other related charges                                               |                                |   |           |        |            |   |       |      |            |   |       |      |         |   |      |      |      |   | 1     |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|                                                                                                    | Pretax operating (loss) income |   |            | (1,141 | )          |   |        | (293 | )          |   |        | (545 | )       |   |       | (160 | )    |   |       | (852 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income tax benefit (expense)                                                                        |                                |   | 411        |        |            |   | 109    |      |            |   | 194    |      |         |   | 47    |      |      |   | 302   |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Minority interest                                                                                   |                                |   |           |        |            |   |       |      |            |   |       |      |         |   | (12   | )    |      |   |      |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Net operating (loss) income,
excluding realized investment
gains                                    |                                |   | (730       | )      |            |   | (184   | )    |            |   | (351   | )    |         |   | (125  | )    |      |   | (550  | )   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority
interests |                                |   | 321        |        |            |   | 130    |      |            |   | (212   | )    |         |   | 26    |      |      |   | 108   |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |   | (25        | )      |            |   | (12    | )    |            |   | (5     | )    |         |   | (3    | )    |      |   | (8    | )   
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Net (loss) income                                                                                   |                                | $ | (434       | )      |            | $ | (66    | )    |            | $ | (568   | )    |         | $ | (102  | )    |      | $ | (450  | )   
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Receivables, net                                                                                    |                                | $ | 5,266      |        |            | $ | 1,283  |      |            | $ | 2,126  |      |         | $ | 813   |      |      | $ | 3,163 |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     
|Insurance reserves                                                                                  |                                | $ | 12,815     |        |            | $ | 4,059  |      |            | $ | 4,902  |      |         | $ | 2,715 |      |      | $ | 4,963 |     
|                                                                                                    |                                |   |            |        |            |   |        |      |            |   |        |      |         |   |       |      |      |   |       |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |        |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | - | ---------- | --- | ---------- | - | --------- | ---- | ------- | - | ----- | ---- | - | - | --- | - |  | - | ------ | ------ | -
|                                                                                                    |                                |   | Group      |     | Life       |   | Corporate |      | Elimi-  |   |       |      |  
|                                                                                                    |                                |   | Operations |     | Operations |   | and Other |      | nations |   | Total
|Six months ended June 30, 2001                                                                      |                                |   |            |     |            |   |           |      |         |  
|(In millions)                                                                                       |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |       
|Net earned premiums                                                                                 |                                | $ | 1,648      |     |            | $ | 492       |      |         | $ | 2     |      |   | $ | (27 | ) |  | $ | 4,134  |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Claims, benefits and expenses                                                                       |                                |   | 1,697      |     |            |   | 728       |      |         |   | 37    |      |   |   | (27 | ) |  |   | 7,969  |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Restructuring
and other related charges                                                             |                                |   |           |     |            |   | 17        |      |         |   | 37    |      |   |   |    |   |  |   | 61     |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |       
|                                                                                                    | Underwriting loss              |   |            | (49 | )          |   |           | (253 | )       |   |       | (72  | ) |   |     |  |  |   |        | (3,896 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net investment income                                                                               |                                |   | 84         |     |            |   | 294       |      |         |   | 21    |      |   |   |    |   |  |   | 928    |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other revenues                                                                                      |                                |   | 10         |     |            |   | 119       |      |         |   | 6     |      |   |   | (83 | ) |  |   | 345    |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other expenses                                                                                      |                                |   | 3          |     |            |   | 55        |      |         |   | 114   |      |   |   | (83 | ) |  |   | 379    |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-insurance restructuring and
other related charges                                               |                                |   |           |     |            |   |          |      |         |   |      |      |   |   |    |   |  |   | 1      |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |       
|                                                                                                    | Pretax operating (loss) income |   |            | 42  |            |   |           | 105  |         |   |       | (159 | ) |   |     |  |  |   |        | (3,003 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income tax benefit (expense)                                                                        |                                |   | (11        | )   |            |   | (36       | )    |         |   | 43    |      |   |   |    |   |  |   | 1,059  |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Minority interest                                                                                   |                                |   |           |     |            |   |          |      |         |   |      |      |   |   |    |   |  |   | (12    | )     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |       
|Net operating (loss) income,
excluding realized investment
gains                                    |                                |   | 31         |     |            |   | 69        |      |         |   | (116  | )    |   |   |    |   |  |   | (1,956 | )     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority
interests |                                |   | 15         |     |            |   | 93        |      |         |   | 69    |      |   |   |    |   |  |   | 550    |       
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |   | (1         | )   |            |   | (3        | )    |         |   | (4    | )    |   |   |    |   |  |   | (61    | )     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |       
|Net (loss) income                                                                                   |                                | $ | 45         |     |            | $ | 159       |      |         | $ | (51   | )    |   | $ |    |   |  | $ | (1,467 | )     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |       
|Receivables, net                                                                                    |                                | $ | 1,723      |     |            | $ | 674       |      |         | $ | 51    |      |   | $ |    |   |  | $ | 15,098 |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |       
|Insurance reserves                                                                                  |                                | $ | 2,702      |     |            | $ | 8,045     |      |         | $ | 1,707 |      |   | $ |    |   |  | $ | 41,908 |       
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |       

24



---



##### Table of Contents



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



|                                                                                                    |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |     |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | - | ---------- | ---- | ---------- | - | ------ | --- | ---------- | - | ------ | --- | ------- | - | ----- | --- | ---- | - | ----- | --- | -
|                                                                                                    |                                |   | Agency     |      |            |   |        |     |            |   |        |     |         |   |       |     | Risk
|                                                                                                    |                                |   | Market     |      | Specialty  |   |        |     |            |   | Global |     | Manage-
|                                                                                                    |                                |   | Operations |      | Operations |   | CNA Re |     | Operations |   | ment  
|Six months ended June 30, 2000                                                                      |                                |   |            |      |            |   |        |     |            |  
|(In millions)                                                                                       |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |    
|Net earned premiums                                                                                 |                                | $ | 1,670      |      |            | $ | 344    |     |            | $ | 513    |     |         | $ | 540   |     |      | $ | 305   |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Claims, benefits and expenses                                                                       |                                |   | 1,879      |      |            |   | 351    |     |            |   | 556    |     |         |   | 573   |     |      |   | 376   |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Restructuring
and other related charges                                                             |                                |   |           |      |            |   |       |     |            |   |       |     |         |   |      |     |      |   |      |    
|                                                                                                    |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |    
|                                                                                                    | Underwriting loss              |   |            | (209 | )          |   |        | (7  | )          |   |        | (43 | )       |   |       | (33 | )    |   |       | (71 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net investment income                                                                               |                                |   | 357        |      |            |   | 126    |     |            |   | 109    |     |         |   | 75    |     |      |   | 86    |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other revenues                                                                                      |                                |   | 70         |      |            |   | 13     |     |            |   | 3      |     |         |   | 53    |     |      |   | 159   |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other expenses                                                                                      |                                |   | 66         |      |            |   | 7      |     |            |   | 2      |     |         |   | 54    |     |      |   | 151   |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-insurance restructuring and
other related charges                                               |                                |   |           |      |            |   |       |     |            |   |       |     |         |   |      |     |      |   |      |    
|                                                                                                    |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |    
|                                                                                                    | Pretax operating income (loss) |   |            | 152  |            |   |        | 125 |            |   |        | 67  |         |   |       | 41  |      |   |       | 23  |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income tax (expense) benefit                                                                        |                                |   | (41        | )    |            |   | (41    | )   |            |   | (22    | )   |         |   | (12   | )   |      |   | (4    | )  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Minority interest                                                                                   |                                |   |           |      |            |   |       |     |            |   |       |     |         |   | (13   | )   |      |   |      |    
|                                                                                                    |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |    
|Net operating income (loss),
excluding realized investment
gains                                    |                                |   | 111        |      |            |   | 84     |     |            |   | 45     |     |         |   | 16    |     |      |   | 19    |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority
interests |                                |   | 102        |      |            |   | 38     |     |            |   | 21     |     |         |   | 12    |     |      |   | 25    |    
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |   |           |      |            |   |       |     |            |   |       |     |         |   |      |     |      |   |      |    
|                                                                                                    |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |    
|Net income (loss)                                                                                   |                                | $ | 213        |      |            | $ | 122    |     |            | $ | 66     |     |         | $ | 28    |     |      | $ | 44    |    
|                                                                                                    |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |    
|Receivables, net                                                                                    |                                | $ | 2,644      |      |            | $ | 959    |     |            | $ | 896    |     |         | $ | 898   |     |      | $ | 2,404 |    
|                                                                                                    |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |    
|Insurance reserves                                                                                  |                                | $ | 12,134     |      |            | $ | 4,109  |     |            | $ | 4,586  |     |         | $ | 2,544 |     |      | $ | 4,280 |    
|                                                                                                    |                                |   |            |      |            |   |        |     |            |   |        |     |         |   |       |     |      |   |       |    

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | - | ---------- | --- | ---------- | - | --------- | ---- | ------- | - | ----- | ---- | - | - | --- | - |  | - | ------ | ---- | -
|                                                                                                    |                                |   | Group      |     | Life       |   | Corporate |      | Elimi-  |   |       |      |  
|                                                                                                    |                                |   | Operations |     | Operations |   | and Other |      | nations |   | Total
|Six months ended June 30, 2000                                                                      |                                |   |            |     |            |   |           |      |         |  
|(In millions)                                                                                       |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |     
|Net earned premiums                                                                                 |                                | $ | 1,760      |     |            | $ | 438       |      |         | $ | (1    | )    |   | $ | (21 | ) |  | $ | 5,548  |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Claims, benefits and expenses                                                                       |                                |   | 1,797      |     |            |   | 650       |      |         |   | 55    |      |   |   | (21 | ) |  |   | 6,216  |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Restructuring
and other related charges                                                             |                                |   |           |     |            |   |          |      |         |   |      |      |   |   |    |   |  |   |       |     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |     
|                                                                                                    | Underwriting loss              |   |            | (37 | )          |   |           | (212 | )       |   |       | (56  | ) |   |     |  |  |   |        | (668 | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net investment income                                                                               |                                |   | 77         |     |            |   | 298       |      |         |   | 2     |      |   |   |    |   |  |   | 1,130  |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other revenues                                                                                      |                                |   | 24         |     |            |   | 100       |      |         |   | 12    |      |   |   | (88 | ) |  |   | 346    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Other expenses                                                                                      |                                |   | 27         |     |            |   | 49        |      |         |   | 143   |      |   |   | (88 | ) |  |   | 411    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Non-insurance restructuring and
other related charges                                               |                                |   |           |     |            |   |          |      |         |   |      |      |   |   |    |   |  |   |       |     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |     
|                                                                                                    | Pretax operating income (loss) |   |            | 37  |            |   |           | 137  |         |   |       | (185 | ) |   |     |  |  |   |        | 397  |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Income tax (expense) benefit                                                                        |                                |   | (12        | )   |            |   | (45       | )    |         |   | 67    |      |   |   |    |   |  |   | (110   | )   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Minority interest                                                                                   |                                |   |           |     |            |   |          |      |         |   |      |      |   |   |    |   |  |   | (13    | )   
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |     
|Net operating income (loss),
excluding realized investment
gains                                    |                                |   | 25         |     |            |   | 92        |      |         |   | (118  | )    |   |   |    |   |  |   | 274    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority
interests |                                |   | 13         |     |            |   | (13       | )    |         |   | (1    | )    |   |   |    |   |  |   | 197    |     
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |   |           |     |            |   |          |      |         |   |      |      |   |   |    |   |  |   |       |     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |     
|Net income (loss)                                                                                   |                                | $ | 38         |     |            | $ | 79        |      |         | $ | (119  | )    |   | $ |    |   |  | $ | 471    |     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |     
|Receivables, net                                                                                    |                                | $ | 728        |     |            | $ | 677       |      |         | $ | 4,562 |      |   | $ |    |   |  | $ | 13,768 |     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |     
|Insurance reserves                                                                                  |                                | $ | 2,494      |     |            | $ | 7,463     |      |         | $ | 1,796 |      |   | $ |    |   |  | $ | 39,406 |     
|                                                                                                    |                                |   |            |     |            |   |           |      |         |   |       |      |   |   |     |   |  |   |        |     

25



---



##### Table of Contents



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

Note J. Restructuring and Other Related Charges

In the second quarter of 2001, the Company finalized and approved a
restructuring plan related to its Information Technology operations (the IT
Plan). The overall goal of the IT Plan is to improve technology for the
underwriting function and throughout the Company, and to eliminate
inefficiencies in the deployment of IT resources. These changes will
facilitate a strong focus on enterprise-wide system initiatives. The IT Plan
has two main components: 1) the reorganization of IT resources into the
Technology Solutions Group with a structure based on centralized, functional
roles; and 2) the implementation of an integrated technology roadmap that
includes common architecture and platform standards that directly support the
Companys strategies.

In connection with the IT Plan, the Company has incurred $62 million, pretax,
of restructuring and other related charges, primarily related to planned
reductions in the workforce of approximately 260 positions (gross and net), and
software and hardware asset write-offs. The Company does not expect to incur
significant amounts of additional charges with respect to the IT Plan in any
single future quarter and, as a result, does not intend to separately classify
such expenses as restructuring and related charges when they occur.

The $62 million charge included approximately: $32 million of asset write-offs
(primarily software and hardware), $29 million related to workforce reductions,
and $1 million of other costs.

Approximately $37 million of restructuring and other related charges were
incurred in the Corporate and Other segment. These costs include $14 million
of asset write-offs, $22 million related to workforce reductions, and $1
million of other costs.

Approximately $17 million of restructuring and other related charges were
incurred in Life Operations. These costs represent the write-off of software
abandoned pursuant to the technology roadmap.

Agency Market Operations incurred approximately $4 million of restructuring and
other related charges. These costs related almost entirely to the workforce
reduction stemming from the centralization of IT resources.

Risk Management incurred approximately $2 million of restructuring and other
related charges. Approximately $1 million of these costs related to the
workforce reduction stemming from the centralization of IT resources, with the
remaining $1 million primarily attributable to the write-off of hardware.

The remainder of the Companys segments incurred restructuring and other
related charges of $1 million or less. These costs related to workforce
reductions stemming from the centralization of IT resources and from hardware
write-offs.

Upon adoption of the IT Plan, an accrual of $30 million was established related
to $29 million of workforce reductions and the $1 million of other costs.
Approximately $6 million of this accrual has been paid through June 30, 2001,
resulting in an ending accrual of $24 million.

26



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##### Table of Contents



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

Additionally, at December 31, 2000, an accrual of $7 million of lease
termination costs remained related to the August 1998 restructuring.
Approximately $3 million of these costs were paid during the six months,
resulting in a remaining accrual of $4 million as of June 30, 2001.

Note K. Significant Transactions

Planned Dispositions of Certain Subsidiaries

The Company is currently negotiating the sale of
certain subsidiaries and expects the sales to
be completed prior to year-end 2001. The assets being held for
disposition include the United
Kingdom subsidiaries of CNA Re and certain other subsidiaries. The
Company anticipates that
it will realize losses in connection with those sales. In determining
the anticipated loss from
these sales, the Company estimated sales proceeds, transactional
costs, lease termination
costs, employee related costs and the cost of certain reinsurance
transactions. The sale of the
United Kingdom insurance subsidiary will be subject to regulatory
approval. An after-tax realized loss of $320 million was recorded in connection with these
planned dispositions.

Individual Life Reinsurance Transaction

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

MARC assumed approximately $294 million of liabilities (primarily future policy
benefits and claim reserves) and approximately $209 million in assets
(primarily uncollected premiums and deferred policy acquisition costs). The
net gain from the reinsurance transaction, which is subject to certain
post-closing adjustments, has been recorded as deferred revenue and will be
recognized in income over the next 9 to 15 months as CNA Life Res assumed
contracts are novated to MARC.

The CNA Life Re business contributed net earned premiums of $57 million and
$106 million and pretax operating income of $6 million and $16 million for the
three months and six months ended June 30, 2000.

Note L. Related Party Transactions

CNA reimburses Loews, or pays directly to Loews employees, approximately $14
million annually for management fees, travel and related expenses, and expenses
of investment facilities and services provided to CNA.

CNA and its eligible subsidiaries are included in the consolidated Federal
income tax return of Loews and its eligible subsidiaries. During the first six
months of 2001 CNA paid Loews $166 million for income taxes. During the first
six months of 2000, CNA received a tax refund of $252 million from Loews.

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

27



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##### Table of Contents



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

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

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

28



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##### Table of Contents






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

Consolidated Operations

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

Loews Corporation (Loews) owns approximately 87% of the outstanding common
stock of CNA Financial Corporation (CNAF). The following discussion should be
read in conjunction with the Condensed Consolidated Financial Statements and
related Notes found on pages 1 to 28 and with CNAF's Annual Report to
Shareholders for the year ended December 31, 2000.

CNA conducts its operations through seven operating segments. In addition to
the seven operating segments, certain other activities are reported in the
Corporate and Other segment. These operating segments reflect the way in which
CNA distributes its products to the marketplace and the way in which it manages
operations and makes business decisions. Agency Market Operations,
Specialty Operations, CNA Re, Global Operations and Risk
Management comprise the property-casualty segments.

Operating Results

The following table summarizes key components of operating results for the
three months and six months ended June 30, 2001 and 2000.

Consolidated Operations

|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |       | 
|---------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---- | ------------ | ------ | ---------- | ---- | ----- | ----- |  | - | ------ | ------ | - | - | ----- | ----- | 
|                                                                             |                                                                   |      | Three Months |        | Six Months
|                                                                             |                                                                   |      |              |        |           
|Period ended June 30                                                         |                                                                   | 2001 |              | 2000   |            | 2001 |       | 2000 
|                                                                             |                                                                   |      |              |        |            |      |       |      
|(In millions, except per share data)                                         |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Revenues:                                                                    |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Net earned premiums                                               |      | $            | 1,603  |            |      | $     | 2,778 |  |   | $      | 4,134  |   |   | $     | 5,548 | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Net investment income                                             |      |              | 411    |            |      |       | 598   |  |   |        | 928    |   |   |       | 1,130 | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Other revenues                                                    |      |              | 152    |            |      |       | 190   |  |   |        | 345    |   |   |       | 346   | 
|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|Total revenues                                                               |                                                                   |      | 2,166        |        |            |      | 3,566 |       |  |   | 5,407  |        |   |   | 7,024 |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Claims, benefits and expenses                                                |                                                                   |      | 5,345        |        |            |      | 3,343 |       |  |   | 8,410  |        |   |   | 6,627 |      
|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|Operating (loss) income before income tax and minority interest              |                                                                   |      | (3,179       | )      |            |      | 223   |       |  |   | (3,003 | )      |   |   | 397   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Income tax benefit (expense)                                                 |                                                                   |      | 1,110        |        |            |      | (62   | )     |  |   | 1,059  |        |   |   | (110  | )    
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Minority interest                                                            |                                                                   |      | (6           | )      |            |      | (7    | )     |  |   | (12    | )      |   |   | (13   | )    
|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|Net operating (loss) income                                                  |                                                                   |      | (2,075       | )      |            |      | 154   |       |  |   | (1,956 | )      |   |   | 274   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net realized investment gains, net of tax and minority interest              |                                                                   |      | 313          |        |            |      | 176   |       |  |   | 550    |        |   |   | 197   |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cumulative effect of a change in accounting principle, net of tax            |                                                                   |      |             |        |            |      |      |       |  |   | (61    | )      |   |   |      |      
|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|Net (loss) income                                                            |                                                                   | $    | (1,762       | )      |            | $    | 330   |       |  | $ | (1,467 | )      |   | $ | 471   |      
|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|Basic and diluted (loss) earnings per share:                                 |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Net operating (loss) income                                       |      | $            | (11.32 | )          |      | $     | 0.84  |  |   | $      | (10.67 | ) |   | $     | 1.49  | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Net realized investment gains, net of tax and minority interest   |      |              | 1.71   |            |      |       | 0.96  |  |   |        | 3.01   |   |   |       | 1.07  | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Cumulative effect of a change in accounting principle, net of tax |      |              |       |            |      |       |      |  |   |        | (0.34  | ) |   |       |      | 
|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|Basic and diluted (loss) earnings per share available to common
stockholders |                                                                   | $    | (9.61        | )      |            | $    | 1.80  |       |  | $ | (8.00  | )      |   | $ | 2.56  |      
|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      
|Weighted average outstanding common stock and common
stock equivalents       |                                                                   |      | 183.3        |        |            |      | 183.3 |       |  |   | 183.3  |        |   |   | 183.8 |      
|                                                                             |                                                                   |      |              |        |            |      |       |       |  |   |        |        |   |   |       |      

29



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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 table summarizes net operating (loss) income by segment for the
three and six months ended June 30, 2001 and 2000.

Net Operating (Loss) Income by Segment

|                            |  |              |        |            |  |      |     |      |  |   |        |   |  |   |      |  
|--------------------------- |  | ------------ | ------ | ---------- |  | ---- | --- | ---- |  | - | ------ | - |  | - | ---- | -
|                            |  | Three Months |        | Six Months
|                            |  |              |        |           
|Period ended June 30        |  | 2001         |        | 2000       |  | 2001 |     | 2000
|                            |  |              |        |            |  |      |     |     
|(In millions)               |  |              |        |            |  |      |     |      |  |   |        |   |  |   |      |  
|                           
|                           
|                           
|                           
|Agency Market Operations    |  | $            | (772   | )          |  | $    | 68  |      |  | $ | (730   | ) |  | $ | 111  |  
|                           
|                           
|                           
|                           
|Specialty Operations        |  |              | (214   | )          |  |      | 43  |      |  |   | (184   | ) |  |   | 84   |  
|                           
|                           
|                           
|                           
|CNA Re                      |  |              | (369   | )          |  |      | 24  |      |  |   | (351   | ) |  |   | 45   |  
|                           
|                           
|                           
|                           
|Global Operations           |  |              | (138   | )          |  |      | (1  | )    |  |   | (125   | ) |  |   | 16   |  
|                           
|                           
|                           
|                           
|Risk Management             |  |              | (564   | )          |  |      | 13  |      |  |   | (550   | ) |  |   | 19   |  
|                           
|                           
|                           
|                           
|Group Operations            |  |              | 16     |            |  |      | 15  |      |  |   | 31     |   |  |   | 25   |  
|                           
|                           
|                           
|                           
|Life Operations             |  |              | 27     |            |  |      | 49  |      |  |   | 69     |   |  |   | 92   |  
|                           
|                           
|                           
|                           
|Corporate and Other         |  |              | (61    | )          |  |      | (57 | )    |  |   | (116   | ) |  |   | (118 | )
|                            |  |              |        |            |  |      |     |      |  |   |        |   |  |   |      |  
|Net operating (loss) income |  | $            | (2,075 | )          |  | $    | 154 |      |  | $ | (1,956 | ) |  | $ | 274  |  
|                            |  |              |        |            |  |      |     |      |  |   |        |   |  |   |      |  

Net operating loss was $2,075 million, or a loss of $11.32 a share, for the
second quarter of 2001 as compared with net operating income of $154 million,
or $0.84 a share, for the same period in 2000. The decline in net operating
results was principally due to prior year reserve strengthening of $2.1 billion
after-tax in the second quarter of 2001 related to a change in estimate of prior year net loss and allocated
loss adjustment expense reserves and retrospective premium accruals and
restructuring and other related charges of $36 million after-tax.

Net earned premiums decreased $1,175 million for the second quarter of 2001 as
compared with the same period in 2000 mainly as a result of the change in
estimate for retrospective premium accruals and increased ceded premiums
related to corporate aggregate excess-of-loss reinsurance treaties.

Net operating loss was $1,956 million, or a loss of $10.67 a share, for the six
month period ended June 30, 2001 as compared with net operating income of $274
million, or $1.49 a share, for the same period in 2000. The decline in net
operating results was principally due to prior year reserve strengthening of
$2.1 billion after-tax recorded in the second quarter of 2001 related to a
change in estimate of prior year net loss and allocated loss adjustment expense
reserves and retrospective premium accruals and the restructuring and other
related charges of $40 million after-tax.

Net earned premiums decreased $1,414 million for the six month period ended
June 30, 2001 as compared with the same period in 2000 mainly as a result of
the change in estimate for retrospective premium accruals, increased ceded
premiums related to corporate aggregate excess-of-loss reinsurance treaties and
a decline in net earned premiums in Group Operations, including the reduction
of earned premiums as a result of the sale of Life Reinsurance, CNA's
individual life reinsurance business was sold via an indemnity
reinsurance agreement on December 31, 2000. (See Note K to
the Condensed Consolidated Financial Statements for a discussion of this
transaction).

The second quarter net operating loss includes the following which are
described in more detail on the following pages.



| |  | The Company recorded an after-tax charge of $2.1
billion ($3.2 billion pretax), or $11.34 per share,
related to a change in estimate of prior year net
loss and allocated loss adjustment expense reserves
and retrospective premium accruals. This amount
includes 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 aggregate excess-of-loss reinsurance treaty
that attached due to the reserve strengthening.
Further details related to
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30



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##### Table of Contents



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



|  |  | the reserve strengthening are discussed below and also in the individual
segment discussions of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | In the second quarter, the Company continued to
record ceded premium, ceded losses and interest
related to corporate aggregate excess-of-loss
reinsurance treaties in place for the 2001 accident
year. In addition, the significant reserve additions
noted above fully utilized the limit on the corporate
aggregate excess-of-loss reinsurance treaty for the
1999 accident year therefore ceded premium, ceded
losses and interest were recorded related to this
treaty during the second quarter. Further details
regarding the corporate aggregate reinsurance
treaties are discussed below. The discussion in the Corporate
Aggregate Reinsurance Treaties section below
includes the amounts related to the 1999 accident
year to provide an overview of the full impact of the
aggregate reinsurance treaties. However, the amounts
related to the 1999 accident year are included as
part of the Second Quarter 2001 Reserve Strengthening section which is discussed
in more detail below.
| 
| |  | The Company recorded after-tax restructuring and
other related charges of $36 million, or $0.20 per
share, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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. In the
area of asbestos, environmental pollution and other mass tort claims (APMT),
the Company reviewed internal claims data as well as studies generated by
external parties, including a significant industry analysis of asbestos and
environmental pollution exposures by an international rating agency. As a
result of these various reviews, management concluded that ultimate losses,
including losses for APMT, will be higher in the range of possible outcomes
than previously estimated. The Company recorded $2.6 billion pretax to
strengthen reserves ($1.7 billion after-tax) associated with a change in
estimate of prior year net loss and allocated loss adjustment expense reserves
(loss reserves), including $1.2 billion pretax ($0.8 billion after-tax)
related to APMT.

31



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##### Table of Contents



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

The net reserve strengthening and related items comprising the amounts noted
above are detailed by segment in the following table.

|                                                                                                            |                                                                                      |            |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |   |      |       |       | 
|----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ---------- | ---- | ---------- | ----- | ---------- | -- | ---------- | --- | ------ | --- | --------- | --- | ----- | -- | --------- | --- |  | --- | --- | --- |  | - | --- | --- | - | ---- | ----- | ----- | 
|For the Quarter Ended June 30, 2001                                                                         |                                                                                      | Agency     |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |  
|                                                                                                            |                                                                                      |            |      | Market     |       | Specialty  |    | Risk       |     | Global |     |           |     |       |    | Corporate |     |  |     |    
|(In millions)                                                                                               |                                                                                      | Operations |      | Operations |       | Management |    | Operations |     | CNA Re |     | and Other |     | Total
|                                                                                                            |                                                                                      |            |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |   |      |      
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Net reserve strengthening excluding the
impact of the corporate aggregate
excess-of-loss reinsurance treaty |                                                                                      |            |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |   |      |      
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                            | APMT                                                                                 |            | $    | 606        |       |            | $  |           |     |        | $   | 496       |     |       | $  | 38        |     |  | $   | 57  |     |  | $ |    |     |   | $    | 1,197 |      
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                            | Non-APMT                                                                             |            |      | 456        |       |            |    | 354        |     |        |     | 137       |     |       |    | 88        |     |  |     | 574 |     |  |   | (15 | )   |   |      | 1,594 |      
|                                                                                                            |                                                                                      |            |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |   |      |       |      
|                                                                                                            |                                                                                      | Total      |      |            | 1,062 |            |    |            | 354 |        |     |           | 633 |       |    |           | 126 |  |     |     | 631 |  |   |     | (15 | ) |      |       | 2,791 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Pretax benefit from corporate aggregate
excess-of-loss reinsurance treaty on
accident year 1999             |                                                                                      |            | (150 | )          |       |            |   |            |     |        | (47 | )         |     |       |   |           |     |  | (26 | )   |     |  |  |     |     |   | (223 | )**  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Accrual for insurance-related assessments                                                                   |                                                                                      |            | 36   |            |       |            |   |            |     |        | 12  |           |     |       |   |           |     |  |    |     |     |  |  |     |     |   | 48   |      
|                                                                                                            |                                                                                      |            |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |   |      |       |      
|                                                                                                            | Net reserve strengthening and related
accruals                                       |            |      | 948        |       |            |    | 354        |     |        |     | 598       |     |       |    | 126       |     |  |     | 605 |     |  |   | (15 | )   |   |      | 2,616 |      
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Change in estimate of premium accruals                                                                      |                                                                                      |            | 333  |            |       |            | 12 |            |     |        | 293 |           |     |       | (9 | )         |     |  | (13 | )   |     |  |  |     |     |   | 616  |      
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Reduction of related commission accruals                                                                    |                                                                                      |            | (43  | )          |       |            |   |            |     |        | (7  | )         |     |       |   |           |     |  |    |     |     |  |  |     |     |   | (50  | )    
|                                                                                                            |                                                                                      |            |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |   |      |       |      
|                                                                                                            | Net premium and related accrual reductions                                           |            |      | 290        |       |            |    | 12         |     |        |     | 286       |     |       |    | (9        | )   |  |     | (13 | )   |  |   |    |     |   |      | 566   |      
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                            | Total pretax second quarter 2001 reserve
strengthening and other related accruals    |            | $    | 1,238      |       |            | $  | 366        |     |        | $   | 884       |     |       | $  | 117       |     |  | $   | 592 |     |  | $ | (15 | )   |   | $    | 3,182 |      
|                                                                                                            |                                                                                      |            |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |   |      |       |      
|                                                                                                            | Total after-tax second quarter 2001
reserve strengthening and other related
accruals |            | $    | 805        |       |            | $  | 238        |     |        | $   | 575       |     |       | $  | 87        |     |  | $   | 384 |     |  | $ | (10 | )   |   | $    | 2,079 |      
|                                                                                                            |                                                                                      |            |      |            |       |            |    |            |     |        |     |           |     |       |    |           |     |  |     |     |     |  |   |     |     |   |      |       |      



---

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

The non-APMT adverse loss development was the result of recent analyses of
several businesses. The non-APMT reserve principally related to commercial
insurance coverages including automobile liability and commercial
multiple-peril, assumed reinsurance and healthcare related coverages. A brief
summary of these lines of business and the associated reserve development is
discussed below and in more detail in the discussion of the Companys segments.
The amount of reserve strengthening related to APMT is disclosed in each
segments discussion on the following pages.

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. As a result, the
Company recorded a $0.6 billion pretax ($0.4 billion after-tax) charge related
to retrospective premium and other premium accruals (premium accruals). The
studies included the review of all such retrospectively rated insurance policies
and the current estimate of ultimate losses.

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.
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
for the quarter. 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.

32



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

Corporate Aggregate Reinsurance Treaties

In 1999, the Company entered into an aggregate excess-of-loss reinsurance
treaty related to the 1999 through 2001 accident years covering substantially
all of the Companys property-casualty lines of business (the Aggregate
Cover). The Company has two sections of coverage under the terms of the
Aggregate Cover. These coverages attach at defined loss and allocated loss
adjustment expense (collectively, losses) ratios for each accident year.
Coverage under the first section of the Aggregate Cover, which is available for
all accident years covered by the contract, has annual limits of $500 million
of losses with an aggregate limit of $1 billion of losses for the three year
period. The ceded premiums for each $500 million of limit is up to $230
million. The second section of the Aggregate Cover, which is available for
accident year 2001 only, provides additional coverage of up to $510 million of
losses for ceded premiums of $310 million. Additional premiums may be
payable if the aggregate loss ratio for the three-year period exceeds certain
thresholds.

In the first quarter of 2001, the Company triggered the coverage under the
second section of the Aggregate Cover for the 2001 accident year. In the
second quarter of 2001, the significant reserve additions fully utilized the
limit on the 1999 accident year under the first section. Under the Aggregate
Cover, interest expense on the funds withheld generally accrues at 8% per
annum.

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

Pretax impact of Aggregate Cover

|                                    |  |        |     |        |  |   |     | 
|----------------------------------- |  | ------ | --- | ------ |  | - | --- | 
|                                    |  | Three  |     | Six   
|For the period ended June 30, 2001  |  | Months |     | Months
|                                    |  |        |     |       
|(In millions)                       |  |        |     |        |  |   |     | 
|                                   
|                                   
|                                   
|                                   
|Ceded earned premiums               |  | $      | 418 |        |  | $ | 460 | 
|                                   
|                                   
|                                   
|                                   
|Ceded losses                        |  |        | 683 |        |  |   | 722 | 
|                                   
|                                   
|                                   
|                                   
|Interest charges                    |  |        | 53  |        |  |   | 59  | 
|                                    |  |        |     |        |  |   |     | 
|Pretax benefit on operating results |  | $      | 212 |        |  | $ | 203 | 
|                                    |  |        |     |        |  |   |     | 

In 2001, the Company entered into a one-year aggregate excess-of-loss
reinsurance treaty related to the 2001 accident year covering substantially all
property-casualty lines of business in the Continental Casualty Company pool
(the CCC Cover). Ceded premiums in the amount of $1.5 million were recorded
in the second quarter of 2001 for the CCC Cover. For the first six months of
2001, ceded premiums were $2.5 million. The loss protection provided by the
CCC Cover has an aggregate limit of $750 million to $825 million of losses
depending on CCCs 2001 actual premium volume. The CCC Cover provides
continuous coverage in excess of the second section of the Aggregate Covers
discussed above.

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

The pretax benefit (loss) from the Aggregate Cover and the CCC Cover by
operating segment was as follows:

Pretax benefit (loss) of the Aggregate Cover and CCC Cover

|                                   |  |        |     |        |  |   |     |  
|---------------------------------- |  | ------ | --- | ------ |  | - | --- | -
|                                   |  | Three  |     | Six   
|For the period ended June 30, 2001 |  | Months |     | Months
|                                   |  |        |     |       
|(In millions)                      |  |        |     |        |  |   |     |  
|                                  
|                                  
|                                  
|                                  
|Agency Market Operations           |  | $      | 141 |        |  | $ | 137 |  
|                                  
|                                  
|                                  
|                                  
|Specialty Operations               |  |        | (2  | )      |  |   | (3  | )
|                                  
|                                  
|                                  
|                                  
|CNA Re                             |  |        | 25  |        |  |   | 25  |  
|                                  
|                                  
|                                  
|                                  
|Global Operations                  |  |        | (2  | )      |  |   | (3  | )
|                                  
|                                  
|                                  
|                                  
|Risk Management                    |  |        | 45  |        |  |   | 45  |  
|                                  
|                                  
|                                  
|                                  
|Corporate and Other                |  |        | 3   |        |  |   |    |  
|                                   |  |        |     |        |  |   |     |  
|Total                              |  | $      | 210 |        |  | $ | 201 |  
|                                   |  |        |     |        |  |   |     |  

2001 Restructuring

In the second quarter of 2001, the Company finalized and approved a
restructuring plan related to its Information Technology operations (the IT
Plan). The overall goal of the IT Plan is to improve technology for the
underwriting function and throughout the Company, and to eliminate
inefficiencies in the deployment of IT resources. These changes will
facilitate a strong focus on enterprise-wide system initiatives. The IT Plan
has two main components: 1) the reorganization of IT resources into the
Technology Solutions Group with a structure based on centralized, functional
roles; and 2) the implementation of an integrated technology roadmap that
includes common architecture and platform standards that directly support the
Companys strategies.

In connection with the IT Plan, the Company has incurred $62 million, pretax,
of restructuring and other related charges, primarily related to planned
reductions in the workforce of approximately 260 positions (gross and net), and
software and hardware asset write-offs. See Note J of Notes to Condensed
Consolidated Financial Statements for further details regarding this
restructuring.

The IT Plan is not expected to result in decreased operating expense in the
foreseeable future. This is because savings from the workforce reduction will
be used to fund new technology-related initiatives.

As of June 30, 2001, an accrual of approximately $24 million exists related to
the IT Plan. Approximately $23 million of the accrual relates to workforce
reductions with the remainder relating to other costs. Approximately $18
million of this accrual is expected to be paid out during the remainder of
2001.

34



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

The following table summarizes the pretax effect of these costs on the
Companys operating segments. Because future savings from the restructuring
will be used to fund corporate information technology initiatives, the majority
of these costs were borne by the Corporate and Other segment.

|                                   |  |        |    |        |  |   |    | 
|---------------------------------- |  | ------ | -- | ------ |  | - | -- | 
|                                   |  | Three  |    | Six   
|For the period ended June 30, 2001 |  | Months |    | Months
|                                   |  |        |    |       
|(In millions)                      |  |        |    |        |  |   |    | 
|                                  
|                                  
|                                  
|                                  
|Agency Market Operations           |  | $      | 4  |        |  | $ | 4  | 
|                                  
|                                  
|                                  
|                                  
|Specialty Operations               |  |        | 1  |        |  |   | 1  | 
|                                  
|                                  
|                                  
|                                  
|Risk Management                    |  |        | 2  |        |  |   | 2  | 
|                                  
|                                  
|                                  
|                                  
|Global Operations                  |  |        | 1  |        |  |   | 1  | 
|                                  
|                                  
|                                  
|                                  
|Life Operations                    |  |        | 17 |        |  |   | 17 | 
|                                  
|                                  
|                                  
|                                  
|Corporate and Other                |  |        | 31 |        |  |   | 37 | 
|                                   |  |        |    |        |  |   |    | 
|Total                              |  | $      | 56 |        |  | $ | 62 | 
|                                   |  |        |    |        |  |   |    | 

Written Premium Adjustment

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

The following table presents the effect of the adjustments made to written
premiums for the three and six months ending June 30, 2001 for each of the
Companys segments.

Adjustments to Net Written Premiums

|                                   |  |        |   |        |  |   |     | 
|---------------------------------- |  | ------ | - | ------ |  | - | --- | 
|                                   |  | Three  |   | Six   
|For the period ended June 30, 2001 |  | Months |   | Months
|                                   |  |        |   |       
|(In millions)                      |  |        |   |        |  |   |     | 
|                                  
|                                  
|                                  
|                                  
|Agency Market Operations           |  | $      |  |        |  | $ | 84  | 
|                                  
|                                  
|                                  
|                                  
|Specialty Operations               |  |        |  |        |  |   | 18  | 
|                                  
|                                  
|                                  
|                                  
|Global Operations                  |  |        | 1 |        |  |   | 9   | 
|                                  
|                                  
|                                  
|                                  
|Risk Management                    |  |        | 4 |        |  |   | 7   | 
|                                   |  |        |   |        |  |   |     | 
|Total                              |  | $      | 5 |        |  | $ | 118 | 
|                                   |  |        |   |        |  |   |     | 

35



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



---

---

Agency Market Operations

Operating Results

|                                                                                                        |                                  |                                  |        |              |       |            |     |      |       |   |        |       |       |   |       |      |       |  
|------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | ------ | ------------ | ----- | ---------- | --- | ---- | ----- | - | ------ | ----- | ----- | - | ----- | ---- | ----- | -
|                                                                                                        |                                  |                                  |        | Three Months |       | Six Months
|                                                                                                        |                                  |                                  |        |              |       |           
|Period ended June 30                                                                                    |                                  | 2001                             |        | 2000         |       | 2001       |     | 2000
|                                                                                                        |                                  |                                  |        |              |       |            |     |     
|(In millions)                                                                                           |                                  |                                  |        |              |       |            |     |      |       |   |        |       |       |   |       |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net written premiums                                                                                    |                                  | $                                | 389    |              |       | $          | 821 |      |       | $ | 1,067  |       |       | $ | 1,648 |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net earned premiums                                                                                     |                                  |                                  | 213    |              |       |            | 837 |      |       |   | 944    |       |       |   | 1,670 |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Underwriting loss                                                                                       |                                  |                                  | (1,269 | )            |       |            | (98 | )    |       |   | (1,357 | )     |       |   | (209  | )   
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net operating (loss) income                                                                             |                                  |                                  | (772   | )            |       |            | 68  |      |       |   | (730   | )     |       |   | 111   |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net operating (loss) income
excluding restructuring and other
related charges                           |                                  |                                  | (769   | )            |       |            | 68  |      |       |   | (727   | )     |       |   | 111   |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Ratios:                                                                                                 |                                  |                                  |        |              |       |            |     |      |       |   |        |       |       |   |       |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Loss and loss adjustment expense |                                  |        | 572.9        | %     |            |     | 79.2 | %     |   |        | 187.6 | %     |   |       | 80.3 | %    
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Expense                          |                                  |        | 112.4        |       |            |     | 30.0 |       |   |        | 51.6  |       |   |       | 29.9 |      
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Dividend                         |                                  |        | 10.0         |       |            |     | 2.5  |       |   |        | 4.5   |       |   |       | 2.3  |      
|                                                                                                        |                                  |                                  |        |              |       |            |     |      |       |   |        |       |       |   |       |     
|                                                                                                        |                                  | Combined                         |        |              | 695.3 | %          |     |      | 111.7 | % |        |       | 243.7 | % |       |      | 112.5 | %
|                                                                                                        |                                  |                                  |        |              |       |            |     |      |       |   |        |       |       |   |       |     
|2001 ratios excluding corporate
covers, reserve adjustment and
restructuring and other related
charges: |                                  |                                  |        |              |       |            |     |      |       |   |        |       |       |   |       |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Loss and loss adjustment expense |        |              | 73.1  | %          |     |      |       |   |        |       | 74.4  | % |       |      |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Expense                          |        |              | 31.2  |            |     |      |       |   |        |       | 31.9  |   |       |      |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Dividend                         |        |              | 2.7   |            |     |      |       |   |        |       | 2.8   |   |       |      |       |  
|                                                                                                        |                                  |                                  |        |              |       |            |     |      |       |   |        |       |       |   |       |     
|                                                                                                        |                                  | Combined                         |        |              | 107.0 | %          |     |      |       |   |        |       | 109.1 | % |       |      |       |  
|                                                                                                        |                                  |                                  |        |              |       |            |     |      |       |   |        |       |       |   |       |     

Second quarter net operating income declined by $840 million as compared with
the prior year. The after-tax impact of the reserve strengthening on Agency
Market Operations was $805 million, including $394 million for asbestos,
environmental pollution and other mass tort claims. The remaining reserve
strengthening related primarily to commercial multiple-peril, general liability
and commercial automobile liability coverages. The strengthening was based upon
detailed claim reviews, assessments of legal developments affecting these
coverages and actuarial analyses completed in the second quarter. In response
to the adverse trends indicated by these reviews, changes were made to more
closely involve legal counsel on claims affected by these legal developments
and to discontinue writing classes of business where adequate pricing cannot be
achieved for the exposure.

In addition to the impact of the reserve strengthening, net operating income
for the second quarter of 2001 decreased by $6 million related to the cost
of the 2001 accident year corporate aggregate reinsurance treaties and $3
million of restructuring and other related charges. Apart from those charges,
net operating income decreased $26 million for the second quarter of 2001 as
compared with the same period of 2000 due primarily to decreased net investment
income, principally as a result of a $32 million decline in limited partnership
income,

36



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

and $16 million after-tax related to the non-recurring ceding commission
included in the second quarter of 2000 related to the sale of Personal
Insurance business to Allstate in 1999. These quarter-over-quarter declines
were partially offset by improved current accident year underwriting results and adverse
development in the prior year of $26 million after-tax, which for 2001 is
included as part of the reserve strengthening.

The combined ratio declined 4.7 points to 107.0% for the three months ended
June 30, 2001 as compared with 2000, and underwriting losses declined $44
million. The change in underwriting results and the combined ratio was driven
by a decrease in the loss ratio, partially offset by increases in the expense
and dividend ratios. The loss ratio decline of 6.1 points reflects adverse
development in the prior year of $40 million, including $9 million for APMT,
which for 2001 is included as part of the reserve strengthening, and earned
rate achievement and re-underwriting efforts undertaken last year, partially
offset by increased catastrophe losses of $8 million. The expense ratio
increased 1.2 points due to the reduced net earned premiums base in the current
quarter; however, operating expenses have decreased because of higher ceding
commissions and lower acquisition expenses. These decreases more than offset
the $24 million benefit of the non-recurring ceding commission included in the
second quarter of 2000 related to the transfer of Personal Insurance to Allstate.
The dividend ratio increased 0.2 points due to adverse development in dividend
reserves in Commercial Insurance.

Net written premiums for Agency Market Operations in the second quarter of 2001
decreased $432 million over the prior year as a result of $233 million of ceded
premiums related to the corporate aggregate reinsurance treaties, additional
ceded premiums arising from the reserve strengthening and a change in estimate
for involuntary market premium accruals. These declines were partially offset
by higher premiums in the workers compensation, automobile, and package lines.
Net earned premiums decreased $624 million in the second quarter
of 2001 as compared with the same period in 2000. This decline is
attributable to the declines noted above in net written premiums and
an additional $100 million in adverse experience in retrospective
premium accruals. The change in estimate related to retrospective
premium receivables was based upon the Company's completion of
comprehensive studies related to estimated premium receivable
accruals on retrospectively rated insurance policies and involuntary
market facilities. The studies included the review of all such
retrospectively rated insurance policies and the current estimate of
ultimate losses.

In addition to the impact of the reserve strengthening recorded in the second
quarter, net operating income for the first six months of 2001 decreased by $8
million related to the cost of the 2001 accident year corporate aggregate
reinsurance treaties and $3 million of restructuring and other related charges.
Apart from those charges, net operating income for the first six months of
2001 decreased $25 million as compared with the same period in the prior year
due primarily to decreased net investment income, principally as a result of a
$34 million decline in limited partnership income, and $40 million related to
the non-recurring ceding commission included in the first six months of 2000
related to the transfer of Personal Insurance business to Allstate in 1999. These
declines for the first six months of 2001 as compared with the same period in
the prior year were partially offset by improved current accident year underwriting
results.

The combined ratio declined 3.4 points to 109.1% for the six months ended June
30, 2001 as compared with 2000, and underwriting losses declined $68 million.
The change in underwriting results and the combined ratio was driven by a
decrease in the loss ratio, partially offset by increases in the expense and
dividend ratios. The loss ratio decline of 5.9 points reflects adverse
development in the prior year for the second quarter, which for second quarter
2001 is included as part of the reserve strengthening, earned rate achievement
and re-underwriting efforts undertaken last year which improved current year
loss experience, most notably in workers compensation and package property
lines within Commercial Insurance. The expense ratio increased 2.0
points due to the reduced net earned premiums base in the current quarter;
however, operating expenses have decreased because of higher ceding commissions
and lower acquisition expenses. These decreases more than offset the $61
million benefit of the non-recurring ceding commission included in 2000 related to the sale of
Personal Insurance business to Allstate. The dividend ratio increased 0.5
points due to adverse development in dividend reserves in Commercial Insurance.

37



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##### Table of Contents



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

Net written premiums for Agency Market Operations for the six months ended June
30, 2001 decreased $581 million as compared with the prior year as a result of
$257 million of ceded premiums related to the corporate aggregate reinsurance
treaties, additional ceded premiums arising from the second quarter 2001
reserve strengthening and a change in estimate for involuntary market premium
accruals, $84 million related to the adjustment in net written premiums (as
previously discussed on page 35 of the Management Discussion and Analysis of
Financial Conditions and Results of Operations (MD&A)). The declines were
partially offset by higher premiums in commercial lines. Net earned premiums
likewise decreased $726 million for the first six months of 2001
as compared with the same period in 2000. This decline is
attributable to the declines noted above in net written premiums and
an additional $100 million in adverse experience in retrospective
premium accruals. The change in estimate related to retrospective
premium receivables was based upon the Company's  completion of
comprehensive studies related to estimated premium receivable
accruals on retrospectively rated insurance policies and involuntary
market facilities. The studies included the review of all such
retrospectively rated insurance policies and the current estimate of
ultimate losses.

Commercial Insurance achieved an average rate increase of 16% for the second
quarter of 2001 for the contracts that renewed during the period and had a
retention rate of 70% for those contracts that were up for renewal.

Specialty Operations

Operating Results

|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |       |       |       |   |      |       |   | 
|------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | -------- | -------- | ----- | ------------ | ----- | ---------- | ---- | ----- | ---- | ---- | ----- | ----- | ----- | - | ---- | ----- | - | 
|                                                                                                        |                                  |                                  |          |          |       | Three Months |       | Six Months
|                                                                                                        |                                  |                                  |          |          |       |              |       |           
|Period ended June 30                                                                                    |                                  | 2001                             |          | 2000     |       | 2001         |       | 2000      
|                                                                                                        |                                  |                                  |          |          |       |              |       |           
|(In millions)                                                                                           |                                  |                                  |          |          |       |              |       |            |      |       |      |      |       |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net written premiums                                                                                    |                                  | $                                | 207      |          |       | $            | 173   |            |      | $     | 343  |      |       | $     | 343   |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net earned premiums                                                                                     |                                  |                                  | 182      |          |       |              | 152   |            |      |       | 356  |      |       |       | 344   |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Underwriting loss                                                                                       |                                  |                                  | (381     | )        |       |              | (4    | )          |      |       | (403 | )    |       |       | (7    | )
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net operating (loss) income                                                                             |                                  |                                  | (214     | )        |       |              | 43    |            |      |       | (184 | )    |       |       | 84    |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net operating (loss) income
excluding restructuring and other
related charges                           |                                  |                                  | (213     | )        |       |              | 43    |            |      |       | (183 | )    |       |       | 84    |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Ratios:                                                                                                 |                                  |                                  |          |          |       |              |       |            |      |       |      |      |       |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Loss and loss adjustment expense |          |          | 279.0 | %            |       |            | 69.3 | %     |      |      | 183.9 | %     |       |   | 74.0 | %    
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Expense                          |          |          | 30.6  |              |       |            | 33.3 |       |      |      | 29.3  |       |       |   | 28.2 |      
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Dividend                         |          |          | 0.2   |              |       |            | 0.1  |       |      |      | 0.1   |       |       |   | 0.0  |      
|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |       |       |       |  
|                                                                                                        |                                  |                                  | Combined |          |       | 309.8        | %     |            |      | 102.7 | %    |      |       | 213.3 | %     |   |      | 102.2 | %
|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |       |       |       |  
|2001 ratios excluding corporate
covers, reserve adjustment and
restructuring and other related
charges: |                                  |                                  |          |          |       |              |       |            |      |       |      |      |       |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Loss and loss adjustment expense |                                  |          | 79.8     | %     |              |       |            |      |       |      | 82.1 | %     |       |       |   |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Expense                          |                                  |          | 26.7     |       |              |       |            |      |       |      | 26.9 |       |       |       |   |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Dividend                         |                                  |          | 0.2      |       |              |       |            |      |       |      | 0.1  |       |       |       |   |     
|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |       |       |       |  
|                                                                                                        |                                  |                                  |          | Combined |       |              | 106.7 | %          |      |       |      |      |       |       | 109.1 | % |      |       |   | 
|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |       |       |       |  

Second quarter net operating income declined by $257 million as compared with
the prior year. The after-tax impact of the reserve strengthening on Specialty
Operations was $238 million. The reserve strengthening related primarily to
medical malpractice and national-for-profit nursing home chains with
exposure in Florida and Texas. The
strengthening was necessitated by the continuing emergence of reported losses
in excess

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

of our expectations and a thorough review of claim exposures by the new
management team that was put in place during 2000. In response to these
adverse trends, Specialty Operations withdrew from writing these coverages in certain
states and have instituted major rate increases.

In addition to the impact of the reserve strengthening, net operating income
for the second quarter of 2001 decreased by $1 million related to the cost
of the 2001 accident year corporate aggregate reinsurance treaties and $1
million of restructuring and other related charges. Apart from those charges,
net operating income decreased $17 million in the second quarter of 2001 as
compared with 2000 due primarily to the decline in underwriting results and
decreased net investment income, principally resulting from a $11 million
decline in limited partnership income.

The combined ratio increased by 4.0 points to 106.7% for the second quarter of
2001 as compared with the same period in 2000 and underwriting results declined
by $10 million. This decline is due to an increase in the loss ratio of 10.5
points as a result of favorable loss development in the retrospectively rated
architects and engineers business taken in 2000 and the decreased use of
reinsurance in the current year. Partially offsetting the increase in the loss
ratio, was a 6.6 point decrease in the expense ratio. Operating expenses
remained relatively flat, while the earned premiums base increased.

Net written premiums for Specialty Operations in the second quarter of 2001
increased $34 million over the prior year as a result of increased production
in lawyers and architects and engineers products, price increases for small
not-for-profit long term care facilities and decreased use of treaty
reinsurance on the healthcare book, partially offset by $13 million of ceded
premiums related to the corporate aggregate reinsurance treaties on accident
year 2001. Net earned premiums increased $30 million primarily related to the
same reasons noted above as well as the reduction of retrospective premium accruals taken in the second quarter of 2000 because of the
favorable loss development in the retrospectively rated architects and
engineers business noted above.

In addition to the impact of the reserve strengthening recorded in the second
quarter, net operating income for the first six months of 2001 decreased by $2
million related to the cost of the 2001 accident year corporate aggregate
reinsurance treaties and $1 million of restructuring and other related charges.
Apart from those charges, net operating income for the first six months of
2001 decreased $27 million as compared with the same period in 2000 due
primarily to the decline in underwriting results and decreased net investment
income, principally as a result of a $12 million decline in limited partnership
income.

The combined ratio increased by 6.9 points to 109.1% for the first six months
of 2001 as compared with the same period in 2000 and underwriting results
declined by $28 million. This decline is due to an increase in the loss ratio
of 8.1 points as a result of favorable loss development taken in 2000 for the
architects and engineers business and decreased use of reinsurance in the
current year.

Net written premiums for Specialty Operations for the first six months of 2001
remained flat at $343 million as compared with the same period in 2000. Net
written premiums increased due to the second quarter of 2001 production
increases and the decreased use of reinsurance of $25 million, partially offset
by $18 million related to the adjustment in net written premiums (as previously
discussed on page 35 of the MD&A). Net earned premiums increased $12 million
for the first six months of 2001 as compared with the same period in 2000
primarily related to the increased production and decreased use of reinsurance
mentioned above and the reserve for retrospective premium increase
taken in the second quarter of 2000, partially offset by $19 million
of ceded premiums related to the corporate aggregate reinsurance
treaties on accident year 2001.

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

The non-medical professional liability and financial products lines of business achieved an
average of a seven percent rate increase for the second quarter of 2001 for the
contracts that renewed during the period and had a retention rate of 85% for
the second quarter of 2001 for those contracts that were up for renewal. The
medical professional liability book achieved an average rate increase of 28%
for the second quarter of 2001 for those contracts that renewed during the
period and had a retention rate of 72% for the second quarter of 2001 for those
contracts that were up for renewal.

CNA Re

Operating Results

|                                                               |                                  |          |       |              |       |            |       |      |  |   |       |      |       |   |       |   |  | 
|-------------------------------------------------------------- | -------------------------------- | -------- | ----- | ------------ | ----- | ---------- | ----- | ---- |  | - | ----- | ---- | ----- | - | ----- | - |  | 
|                                                               |                                  |          |       | Three Months |       | Six Months
|                                                               |                                  |          |       |              |       |           
|Period ended June 30                                           |                                  | 2001     |       | 2000         |       | 2001       |       | 2000
|                                                               |                                  |          |       |              |       |            |       |     
|(In millions)                                                  |                                  |          |       |              |       |            |       |      |  |   |       |      |       |   |       |  
|                                                              
|                                                              
|                                                              
|                                                              
|Net written premiums                                           |                                  | $        | 69    |              |       | $          | 176   |      |  | $ | 270   |      |       | $ | 556   |  
|                                                              
|                                                              
|                                                              
|                                                              
|Net earned premiums                                            |                                  |          | 144   |              |       |            | 270   |      |  |   | 303   |      |       |   | 513   |  
|                                                              
|                                                              
|                                                              
|                                                              
|Underwriting loss                                              |                                  |          | (611  | )            |       |            | (24   | )    |  |   | (634  | )    |       |   | (43   | )
|                                                              
|                                                              
|                                                              
|                                                              
|Net operating (loss) income                                    |                                  |          | (369  | )            |       |            | 24    |      |  |   | (351  | )    |       |   | 45    |  
|                                                              
|                                                              
|                                                              
|                                                              
|Ratios:                                                        |                                  |          |       |              |       |            |       |      |  |   |       |      |       |   |       |  
|                                                              
|                                                              
|                                                              
|                                                              
|Loss and loss adjustment expense                               |                                  |          | 479.4 | %            |       |            | 79.3  | %    |  |   | 267.2 | %    |       |   | 75.0  | %
|                                                              
|                                                              
|                                                              
|                                                              
|Expense                                                        |                                  |          | 43.5  |              |       |            | 29.5  |      |  |   | 41.3  |      |       |   | 33.4  |  
|                                                               |                                  |          |       |              |       |            |       |      |  |   |       |      |       |   |       |  
|Combined                                                       |                                  |          | 522.9 | %            |       |            | 108.8 | %    |  |   | 308.5 | %    |       |   | 108.4 | %
|                                                               |                                  |          |       |              |       |            |       |      |  |   |       |      |       |   |       |  
|2001 ratios excluding corporate covers and reserve adjustment: |                                  |          |       |              |       |            |       |      |  |   |       |      |       |   |       |  
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Loss and loss adjustment expense |          |       | 75.8         | %     |            |       |      |  |   |       | 75.6 | %     |   |       |   | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Expense                          |          |       | 38.1         |       |            |       |      |  |   |       | 38.3 |       |   |       |   | 
|                                                               |                                  |          |       |              |       |            |       |      |  |   |       |      |       |   |       |  
|                                                               |                                  | Combined |       |              | 113.9 | %          |       |      |  |   |       |      | 113.9 | % |       |   |  | 
|                                                               |                                  |          |       |              |       |            |       |      |  |   |       |      |       |   |       |  

The Company plans to dispose of the United Kingdom
subsidiaries of CNA Re, and the disposition is expected to be
completed by year end 2001 and will be subject to regulatory
approval. Future writing of all U.S. domiciled business will be
written from our operations in the U.S. European business will be
handled through facilities the Company is exploring overseas. The
Company cannot provide assurance that the United Kingdom subsidiaries
of CNA Re will be sold. Refer to the investments section on the
following pages for more information.

Second quarter net operating income declined by $393 million as compared with
the prior year. The after-tax impact of the reserve strengthening on CNA Re
was $384 million, including $37 million for asbestos, environmental pollution
and other mass tort claims. The strengthening was based upon second quarter
reviews that showed the emergence of higher than expected reported losses. The
reserve strengthening relates to a number of lines, including excess of loss
liability and professional liability in accident years 1997 to 2000.
CNA Re has focused on charging the appropriate premium for the risk
and has therefore continued to take significant underwriting and
pricing actions. As a result, premium volume
has decreased significantly.

In addition to the impact of the reserve strengthening, net operating income
for the second quarter of 2001 decreased by $1 million related to the cost
of the 2001 accident year corporate aggregate reinsurance treaties. Apart from
those charges, net operating income decreased $8 million for the second quarter
of 2001 as compared with the prior year due primarily to decreased net
investment income, principally due to a $6 million decline in limited
partnership income.

The combined ratio increased 5.1 points to 113.9% during the second quarter of
2001 as compared with the same period in 2000. An increase in the expense
ratio partially offset by a decrease in the loss ratio led to the unfavorable
change in the combined ratio. The expense ratio has increased due to a reduced
net earned premium base in the current quarter. Overall, acquisition and
underwriting expenses have decreased in the second quarter as
compared with

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

the
same period in 2000, but not at the same pace as the premium base reduction.
The decrease in the loss ratio is primarily attributable to the improvement in
current year loss experience, particularly in proportional property, property
risk excess, and proportional motor liability lines of business.

Net written premiums for CNA Re for the second quarter of 2001 decreased $107
million over the prior year as a result of $34 million of ceded premiums
related to the corporate aggregate reinsurance treaties and decisions made for
2001 not to renew contracts, including multi-year contracts, that management
believed did not meet its underwriting profitability targets. These contracts
included credit and bond, London market lineslip insurance and European
casualty facultative lines of business. Net earned premiums decreased $126
million primarily related to the same reasons noted above.

In addition to the impact of the reserve charge recorded in the second quarter,
net operating income for the first six months decreased by $1 million related
to the cost of 2001 accident year corporate aggregate reinsurance treaties.
Apart from those charges, net operating income decreased $11 million for the
first six months of 2001 as compared with the same period in 2000 due to the
decline in underwriting results and decreased net investment income, primarily
from a $6 million decline in limited partnership income.

The combined ratio increased 5.5 points to 113.9% for the six months ended June
30, 2001 as compared with the same period in 2000 and underwriting results
declined $4 million. Increases in both the loss and expense ratios led to the
unfavorable change in the combined ratio. The increase in the loss ratio was
principally the result of favorable loss development taken in 2000, which
lowered the 2000 loss ratio. Acquisition and underwriting expenses have
decreased for the first six months of 2001 compared with the same period in
2000; however, the expense ratio has increased due to a reduced net earned
premium base in the current quarter.

Net written premiums for CNA Re decreased $286 million for the first six months
of 2001 as compared with the same period in 2000 as a result of $35 million of
ceded premiums related to the corporate aggregate reinsurance treaties and
decisions made for 2001 not to renew contracts, including multi-year contracts,
that management believed did not meet its underwriting profitability targets.
Net earned premiums decreased $210 million for the first six months of 2001 as
compared with the same period in 2000 primarily related to the same reasons
noted above.



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

Global Operations

Operating Results

|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |      |       |       |   |      |       |   | 
|------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | -------- | -------- | ----- | ------------ | ----- | ---------- | ---- | ----- | ---- | ---- | ---- | ----- | ----- | - | ---- | ----- | - | 
|                                                                                                        |                                  |                                  |          |          |       | Three Months |       | Six Months
|                                                                                                        |                                  |                                  |          |          |       |              |       |           
|Period ended June 30                                                                                    |                                  | 2001                             |          | 2000     |       | 2001         |       | 2000      
|                                                                                                        |                                  |                                  |          |          |       |              |       |           
|(In millions)                                                                                           |                                  |                                  |          |          |       |              |       |            |      |       |      |      |      |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net written premiums                                                                                    |                                  | $                                | 309      |          |       | $            | 295   |            |      | $     | 590  |      |      | $     | 576   |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net earned premiums                                                                                     |                                  |                                  | 273      |          |       |              | 266   |            |      |       | 558  |      |      |       | 540   |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Underwriting loss                                                                                       |                                  |                                  | (198     | )        |       |              | (33   | )          |      |       | (208 | )    |      |       | (33   | )
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net operating (loss) income                                                                             |                                  |                                  | (138     | )        |       |              | (1    | )          |      |       | (125 | )    |      |       | 16    |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net operating (loss) income
excluding restructuring and other
related charges                           |                                  |                                  | (138     | )        |       |              | (1    | )          |      |       | (124 | )    |      |       | 16    |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Ratios:                                                                                                 |                                  |                                  |          |          |       |              |       |            |      |       |      |      |      |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Loss and loss adjustment expense |          |          | 108.7 | %            |       |            | 68.4 | %     |      |      | 84.1 | %     |       |   | 62.5 | %    
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Expense                          |          |          | 63.3  |              |       |            | 43.6 |       |      |      | 52.8 |       |       |   | 42.9 |      
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Dividend                         |          |          | 0.4   |              |       |            | 0.4  |       |      |      | 0.3  |       |       |   | 0.4  |      
|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |      |       |       |  
|                                                                                                        |                                  |                                  | Combined |          |       | 172.4        | %     |            |      | 112.4 | %    |      |      | 137.2 | %     |   |      | 105.8 | %
|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |      |       |       |  
|2001 ratios excluding corporate
covers, reserve adjustment and
restructuring and other related
charges: |                                  |                                  |          |          |       |              |       |            |      |       |      |      |      |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Loss and loss adjustment expense |                                  |          | 65.8     | %     |              |       |            |      |       |      | 63.2 | %    |       |       |   |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Expense                          |                                  |          | 63.1     |       |              |       |            |      |       |      | 52.1 |      |       |       |   |     
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Dividend                         |                                  |          | 0.4      |       |              |       |            |      |       |      | 0.3  |      |       |       |   |     
|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |      |       |       |  
|                                                                                                        |                                  |                                  |          | Combined |       |              | 129.3 | %          |      |       |      |      |      |       | 115.6 | % |      |       |   | 
|                                                                                                        |                                  |                                  |          |          |       |              |       |            |      |       |      |      |      |       |       |  

Second quarter net operating income declined by $137 million as compared with
the prior year. The after-tax impact of the reserve strengthening on Global
Operations was $87 million, including $25 million for asbestos, environmental
pollution and other mass tort claims. The remaining reserve strengthening
related to marine business as a result of a second quarter review which
indicated an increase in large claim frequency in marine cargo and hull for
accident years 1998 though 2000. In addition, Global Operations strengthened
reserves related to higher than expected losses arising from high hazard
commercial auto business. In response to these adverse trends, Global
Operations has taken rate action and reduced exposure to unprofitable marine
cargo and hull classes of business and exited the high hazard commercial auto
business.

In addition to the impact of the reserve strengthening, net operating income
for the second quarter of 2001 decreased by $1 million related to the cost of
the 2001 accident year corporate aggregate reinsurance treaties. Apart from
those charges, net operating income decreased $49 million for the second
quarter of 2001 as compared with the prior year due primarily to writing off
unrecoverable deferred acquisition costs and better aligning premium earnings
patterns with the emergence of claims in the vehicle warranty line of business
and a $3 million decline in limited partnership income.

The combined ratio increased 16.9 points to 129.3% for the second quarter of
2001 as compared with the same period in 2000 and underwriting results declined
$46 million. These changes were primarily a result of the increase in the
expense ratio, partially offset by a decrease in the loss ratio. The increase
in the expense ratio was attributable to a $55 million increase in acquisition
expenses primarily due to the write-off of unrecoverable deferred acquisition
costs in the vehicle warranty line of business. The decrease in the loss ratio
was attributable to adverse loss development in the vehicle warranty line of
business that increased the 2000 loss ratio.

42



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

Net written premiums for Global Operations for the second quarter of 2001
increased $14 million as compared with the same period in 2000. Net written
premiums increased primarily as a result of growth in the commercial casualty
and property lines in the European operations and vehicle warranty and medical
equipment contract lines, as well as production increases in surety lines.
These increases were partially offset by $9 million of additional ceded
premiums arising from the corporate aggregate reinsurance treaties, declines in
the equipment maintenance warranty line of business and increased ceded
premiums in the surety lines. Net earned premiums increased $7 million
primarily related to the same reasons noted above.

In addition to the impact of the reserve strengthening recorded in the second
quarter, net operating income for the first six months decreased by $2 million
related to the cost of the 2001 accident year corporate aggregate reinsurance
treaties and $1 million of restructuring charges and other related charges.
Apart from those charges, net operating income decreased $51 million for the
six month period of 2001 as compared with the same period in 2000 due primarily
to writing off unrecoverable deferred acquisition costs and better aligning
premium earnings patterns with the emergence of claims in the vehicle warranty
line of business and lower net investment income, primarily due to a $3 million
decline in limited partnership income.

The combined ratio increased 9.8 points to 115.6% for the first six months of
2001 as compared with the same period in 2000 and underwriting results declined
$55 million. These changes were principally due to writing off unrecoverable
deferred acquisition costs in the second quarter of 2001 for the vehicle
warranty line of business.

Net written premiums for Global Operations for the six months ended June 30,
2001 increased $14 million as compared with the same period in 2000 as a result
of growth in the commercial casualty and property lines in the European
operations. These increases were partially offset by $9 million related to the
adjustment in net written premiums (as previously discussed on page 35 of the
MD&A), $15 million of ceded premiums related to the corporate aggregate
reinsurance treaties, declines in the equipment maintenance warranty line of
business and increased ceded premiums in the surety lines. Net earned premiums
increased $18 million primarily related to the same reasons noted above.

Global Operations achieved 5% average rate increases across its businesses
during the second quarter of 2001 for the contracts that renewed during the
period. Retention rates were in the 82 percent range for those contracts which
were up for renewal. Retention rates do not apply to the Surety and Warranty
businesses.

43



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

Risk Management

Operating Results

|                                                                                                        |                                  |                                  |          |          |    |              |       |            |   |    |      |      |      |       |       |   |  |  |  | 
|------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | -------- | -------- | -- | ------------ | ----- | ---------- | - | -- | ---- | ---- | ---- | ----- | ----- | - |  |  |  | 
|                                                                                                        |                                  |                                  |          |          |    | Three Months |       | Six Months
|                                                                                                        |                                  |                                  |          |          |    |              |       |           
|Period ended June 30                                                                                    |                                  | 2001                             |          | 2000     |    | 2001         |       | 2000      
|                                                                                                        |                                  |                                  |          |          |    |              |       |           
|(In millions)                                                                                           |                                  |                                  |          |          |    |              |       |            |   |    |      |      |      |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net written premiums                                                                                    |                                  | $                                | (11      | )        |    | $            | 155   |            |   | $  | 206  |      |      | $     | 377   |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net earned premiums                                                                                     |                                  |                                  | (271     | )        |    |              | 162   |            |   |    | (142 | )    |      |       | 305   |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Underwriting loss                                                                                       |                                  |                                  | (894     | )        |    |              | (34   | )          |   |    | (920 | )    |      |       | (71   | )
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net operating (loss) income                                                                             |                                  |                                  | (564     | )        |    |              | 13    |            |   |    | (550 | )    |      |       | 19    |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Net operating (loss) income excluding restructuring and other
related charges                           |                                  |                                  | (563     | )        |    |              | 13    |            |   |    | (549 | )    |      |       | 19    |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Ratios:                                                                                                 |                                  |                                  |          |          |    |              |       |            |   |    |      |      |      |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Loss and loss adjustment expense |          | NM       |    |              | 92.4  | %          |   | NM |      |      | 92.0 | %    
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Expense                          |          | NM       |    |              | 28.8  |            |   | NM |      |      | 31.2 |      
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                  | Dividend                         |          | NM       |    |              | 0.0   |            |   | NM |      |      | 0.0  |      
|                                                                                                        |                                  |                                  |          |          |    |              |       |            |   |    |      |      |      |       |       |  
|                                                                                                        |                                  |                                  | Combined |          | NM |              |       | 121.2      | % |    | NM   |      |      | 123.2 | %    
|                                                                                                        |                                  |                                  |          |          |    |              |       |            |   |    |      |      |      |       |       |  
|2001 ratios excluding corporate covers, reserve adjustment and
restructuring and other related charges: |                                  |                                  |          |          |    |              |       |            |   |    |      |      |      |       |       |  
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Loss and loss adjustment expense |                                  |          | 85.0     | %  |              |       |            |   |    |      | 85.0 | %    |       |       |   | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Expense                          |                                  |          | 26.0     |    |              |       |            |   |    |      | 29.2 |      |       |       |   | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Dividend                         |                                  |          | 1.3      |    |              |       |            |   |    |      | 1.4  |      |       |       |   | 
|                                                                                                        |                                  |                                  |          |          |    |              |       |            |   |    |      |      |      |       |       |  
|                                                                                                        |                                  |                                  |          | Combined |    |              | 112.3 | %          |   |    |      |      |      |       | 115.6 | % |  |  |  | 
|                                                                                                        |                                  |                                  |          |          |    |              |       |            |   |    |      |      |      |       |       |  

NM = Not Meaningful.

Second quarter net operating income declined by $577 million as compared with
the prior year. The after-tax impact of the reserve strengthening on Risk
Management was $575 million, including $322 million for asbestos, environmental
pollution and other mass tort claims. The remaining reserve strengthening
related primarily to adverse experience in liability coverages and
retrospective premium accruals. The change in estimate was driven by adverse
indications in loss reserve and retrospective premium studies. Risk
Management has continued to focus on re-underwriting the business
with adequate price for the exposure and to achieve price increases
in 2001.

In addition to the impact of the reserve strengthening, net operating income
for the second quarter of 2001 decreased by $1 million related to the cost
of the 2001 accident year corporate aggregate reinsurance treaties and $1
million of restructuring and other related charges. Apart from those charges,
net operating income remained flat at $13 million in the second quarter of 2001
as compared with the prior year due to improved current year casualty
underwriting results, adverse development taken in 2000 of $13 million
after-tax, which for 2001 is included as part of the reserve strengthening, and
increased earnings in RSKCoSM. These quarter-over-quarter improvements were
offset by higher catastrophe losses, primarily due to $10 million for the
impact of Tropical Storm Allison, and decreased net investment income,
principally due to a $8 million decline in limited partnership income.

The combined ratio declined 8.9 points to 112.3% for the second quarter of 2001
as compared with the same period in 2000 and underwriting losses declined $16
million. The decline in the combined ratio is due to decreases in the loss and
expense ratios attributable to improved current year loss experience and
acquisition expenses in the casualty line of business and

44



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

adverse development taken in 2000 of
$23 million, including $11 million for
APMT, which for 2001 is included as part of the reserve strengthening,
partially offset by Tropical Storm Allison catastrophe losses in the property
book.

Net written premiums for Risk Management decreased $166 million for the second
quarter of 2001 as compared with the same period in 2000 as a result of $133
million of ceded premiums related to the corporate aggregate reinsurance
treaties, a change in estimate for involuntary market premium accruals and a
continued focus on re-underwriting the book of business. Net earned premiums
decreased $433 million for the second quarter of 2001 as compared with the same
period in 2000. This decline is attributable to the declines noted above and an
additional $265 million in adverse experience in retrospective premium
accruals. The change in estimate related to retrospective premium receivables
was based upon the Companys completion of comprehensive
studies of estimated
premium receivable accruals on retrospectively rated insurance policies and
involuntary market facilities. The studies included the review of all such
retrospectively rated insurance policies and the current estimate of ultimate
losses.

In addition to the impact of the reserve strengthening recorded in the second
quarter, net operating income for the first six months of 2001 decreased by $1
million related to the cost of the 2001 accident year corporate aggregate
reinsurance treaties and $1 million of restructuring and other related charges.
Apart from those charges, net operating income for the first six months of
2001 increased $8 million as compared with the same period in 2000 primarily
due to improved current year casualty underwriting results, increased earnings
in RSKCoSM and adverse development taken in 2000 for the second quarter, which
for second quarter 2001 is included as part of the reserve charge, partially
offset by decreased net investment income, principally due to a $8 million
decline in limited partnership income.

The combined ratio declined 7.6 points to 115.6% for the six months ended June
30, 2001 as compared with the same period in 2000 and underwriting losses
declined by $27 million. Decreases in the loss and expense ratios were
partially offset by an increase in the dividend ratio. The decreases in the
loss and expense ratios are attributable to improved current year loss
experience and acquisition expenses in the casualty line of business, partially
offset by Tropical Storm Allison catastrophe losses in the property book.

Net written premiums for Risk Management decreased $171 million for the first
six months of 2001 as compared with the same period in 2000 as a result of $137
million of ceded premiums related to the corporate aggregate reinsurance
treaties, a change in estimate for involuntary market premium accruals and a
continued focus on re-underwriting the book of business. Net earned premiums
decreased $447 million for the first six months of 2001 as compared with the
same period in 2000 attributable to $265 million in adverse experience in
retrospective premium accruals recorded in the second quarter reserve
strengthening as well as the declines as noted above.

45



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##### Table of Contents



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

Group Operations



Operating Results

|                     |  |              |     |            |  |      |     |      |  |   |       |  |  |   |       | 
|-------------------- |  | ------------ | --- | ---------- |  | ---- | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                     |  | Three Months |     | Six Months
|                     |  |              |     |           
|Period ended June 30 |  | 2001         |     | 2000       |  | 2001 |     | 2000
|                     |  |              |     |            |  |      |     |     
|(In millions)        |  |              |     |            |  |      |     |      |  |   |       |  |  |   |       | 
|                    
|                    
|                    
|                    
|Net earned premiums  |  | $            | 830 |            |  | $    | 878 |      |  | $ | 1,648 |  |  | $ | 1,760 | 
|                    
|                    
|                    
|                    
|Net operating income |  |              | 16  |            |  |      | 15  |      |  |   | 31    |  |  |   | 25    | 

Net earned premiums for Group Operations decreased
$48 million, or 5%, to $830
million for the second quarter of 2001 as compared with the same period in
2000. Net earned premiums declined $57 million as a result of the sale of the
Life Reinsurance business (Life Reinsurance) on December 31, 2000 and $31
million in the group reinsurance line of business primarily as a result of
terminating unprofitable contracts with independent underwriting agencies that
occurred in 2000. See Note K of the Condensed Consolidated Financial Statements
for a discussion of the Life Reinsurance transaction. These declines were
partially offset by increases of $20 million in Federal Markets, mainly due to
the mailhandlers health benefit plan, and growth of $20 million in Group
Benefits, particularly in the disability and group long-term care lines of
business.

Net operating income increased by $1 million in the second quarter of 2001 as
compared with the same period in 2000. This improvement is a result of exiting
unprofitable lines of business in 2000 offset by the loss of income resulting
from the sale of Life Reinsurance and a decline of $4 million in limited
partnership income in 2001.

Net earned premiums for Group Operations decreased $112 million, or 6%, to
$1,648 million for the six months ended June 30, 2001 as compared with the same
period in 2000. Net earned premiums declined $106 million as a result of the
sale of the Life Reinsurance and $82 million in group reinsurance line of
business primarily as a result of terminating unprofitable contracts with
independent underwriting agencies. These declines were partially offset by
increases in Federal Markets of $37 million and growth in the first six months
of 2001 of $39 million in Group Benefits, particularly in the disability and
group long-term care lines of business.

Net operating income increased by $6 million for the first six months of 2001
as compared with the same period in 2000. This improvement is a result of
exiting unprofitable lines of business which more than offset the sale of Life
Reinsurance and a $5 million decline in limited partnership income.

46



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

Life Operations

Operating Results

|                                             |  |              |       |            |  |      |     |      |  |   |       |  |  |   |       | 
|-------------------------------------------- |  | ------------ | ----- | ---------- |  | ---- | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                                             |  | Three Months |       | Six Months
|                                             |  |              |       |           
|Period ended June 30                         |  | 2001         |       | 2000       |  | 2001 |     | 2000
|                                             |  |              |       |            |  |      |     |     
|(In millions)                                |  |              |       |            |  |      |     |      |  |   |       |  |  |   |       | 
|                                            
|                                            
|                                            
|                                            
|Sales volume*                                |  | $            | 1,014 |            |  | $    | 666 |      |  | $ | 1,623 |  |  | $ | 1,683 | 
|                                            
|                                            
|                                            
|                                            
|Net earned premiums                          |  |              | 244   |            |  |      | 226 |      |  |   | 492   |  |  |   | 438   | 
|                                            
|                                            
|                                            
|                                            
|Net operating income                         |  |              | 27    |            |  |      | 49  |      |  |   | 69    |  |  |   | 92    | 
|                                            
|                                            
|                                            
|                                            
|Net operating income excluding restructuring |  |              | 38    |            |  |      | 49  |      |  |   | 80    |  |  |   | 92    | 



---

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

Sales volume for Life Operations increased $348 million, or 52%, to $1,014
million for the second quarter of 2001 as compared with the same period in
2000. Sales volume increased primarily in guaranteed investment contracts sold
to institutional customers and a growing in-force block of business in Long
Term Care products. Net earned premiums increased $18 million, or 8%, to $244
million for the second quarter of 2001 as compared with the same period in
2000. This improvement is primarily attributable to improved sales of
structured settlement annuities and Long Term Care products, partially offset
by decreased annuity sales internationally.

Excluding restructuring charges, net operating
income decreased $11 million, or
21%, to $38 million for the second quarter of 2001 as compared with the same
period in 2000. This decrease was due to lower investment performance in the
Index 500 product sold to institutions, decreased net investment income
primarily due to a $5 million decline in limited partnership income, and
increased mortality losses on universal life and term products. Sales volume
for Life Operations decreased $60 million, or 4%, to $1,623 million for the six
months ended June 30, 2001 as compared with the same period in 2000. Sales
volume for the six month period decreased in variable annuities which was
influenced in part by the decline in the stock market during the first quarter
of 2001. These declines were partially offset by the sales improvements of the
second quarter as discussed above. Net earned premiums increased $54 million,
or 12%, to $492 million for the six months ended June 30, 2001 as compared with
the same period in 2000. This improvement is primarily attributable to improved
sales of structured settlement annuities and Long Term Care products.

Excluding restructuring charges, net operating
income decreased $12 million, or
13%, to $80 million for the six months ended June 30, 2001 compared with the
same period in 2000. This decrease relates primarily to decreased net
investment income primarily due to a $13 million decline in limited partnership
income.

47



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##### Table of Contents

\

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

Corporate and Other

In addition to the $10 million benefit from the reserve strengthening, net
operating losses increased $14 million to $71 million for the second quarter of
2001 as compared with $57 million in the same period of 2000. This decrease
was primarily attributable to $20 million in restructuring and other related
charges.

In addition to the impact of the reserve strengthening, net operating losses
increased $8 million to $126 million for the first six
months of 2001 as
compared with $118 million in the same period in 2000. Included in the six
months ended June 30, 2001 was $23 million in restructuring and other related
charges.

Environmental Pollution and Other Mass Tort
and Asbestos Reserves

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

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 June 30, 2001 and December 31,
2000, CNA carried approximately $680 million and $347 million of
claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and
other mass tort claims. Unfavorable environmental pollution and other
mass tort net claim and claim adjustment expense reserve development
for the three months ended June 30, 2001 and 2000 amounted to
$449 million and $21 million. Unfavorable environmental pollution and
other mass tort net claim and claim adjustment expense reserve
development for the six months ended June 30, 2001 and 2000
amounted to $453 million and $21 million.

CNAs property-casualty insurance subsidiaries
also have exposure to asbestos claims. Estimation of asbestos claims
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 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 June 30, 2001 and December 31,
2000, CNA carried approximately $1,271 million and $603 million of
net claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported asbestos-related claims.
Unfavorable asbestos net claim and claim adjustment expense reserve
development for the three months ended June 30, 2001 and 2000
amounted to $748 million and $5 million. Unfavorable asbestos net
claim and claim adjustment expense reserve development for the six
months ended June 30, 2001 and 2000 amounted to $769 million and
$31 million. The Company made asbestos payment of $126 million and
$43 million in calendar year 2000 and the six months ended
June 30, 2001 respectively on a net basis, excluding payments
made in connection with the 1993 settlement of litigation related to
Fibreboard Corporation. CNA has attempted to manage its asbestos
exposures by aggressively resolving old accounts.

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

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

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

Investments

The components of net investment income for the three and six months ended June
30, 2001 and 2000 are presented in the following table.

Net Investment Income

|                           |        |            |     |              |     |            |     |      |     |   |     |   |     |   |       |   |     | 
|-------------------------- | ------ | ---------- | --- | ------------ | --- | ---------- | --- | ---- | --- | - | --- | - | --- | - | ----- | - | --- | 
|                           |        |            |     | Three Months |     | Six Months
|                           |        |            |     |              |     |           
|Period ended June 30       |        | 2001       |     | 2000         |     | 2001       |     | 2000
|                           |        |            |     |              |     |            |     |     
|(In millions)              |        |            |     |              |     |            |     |      |     |   |     |   |     |   |       |  
|                          
|                          
|                          
|                          
|Fixed maturity securities: |        |            |     |              |     |            |     |      |     |   |     |   |     |   |       |  
|                          
|                          
|                          
|                          
|                           | Bonds: |            |     |              |     |            |     |      |     |   |     |   |     |   |       |   |    
|                          
|                          
|                          
|                          
|                           |        | Taxable    |     | $            | 408 |            |     | $    | 369 |   |     | $ | 825 |   |       | $ | 750 | 
|                          
|                          
|                          
|                          
|                           |        | Tax-exempt |     |              | 28  |            |     |      | 58  |   |     |   | 62  |   |       |   | 116 | 
|                          
|                          
|                          
|                          
|Limited Partnerships       |        |            | (4  | )            |     |            | 102 |      |     |   | 32  |   |     |   | 158   |  
|                          
|                          
|                          
|                          
|Short-term investments     |        |            | 37  |              |     |            | 53  |      |     |   | 79  |   |     |   | 91    |  
|                          
|                          
|                          
|                          
|Other                      |        |            | (45 | )            |     |            | 28  |      |     |   | (41 | ) |     |   | 41    |  
|                           |        |            |     |              |     |            |     |      |     |   |     |   |     |   |       |  
|Gross Investment Income    |        |            | 424 |              |     |            | 610 |      |     |   | 957 |   |     |   | 1,156 |  
|                           |        |            |     |              |     |            |     |      |     |   |     |   |     |   |       |  
|Investment expense         |        |            | (13 | )            |     |            | (12 | )    |     |   | (29 | ) |     |   | (26   | )
|                           |        |            |     |              |     |            |     |      |     |   |     |   |     |   |       |  
|Net investment income      |        | $          | 411 |              |     | $          | 598 |      |     | $ | 928 |   |     | $ | 1,130 |  
|                           |        |            |     |              |     |            |     |      |     |   |     |   |     |   |       |  

During the first quarter of 2001, the Company reclassified equity method income
from limited partnership investments. This income was previously classified in
realized investment gains, net of participating policyholders and minority
interests. Effective in 2001, equity method income from limited partnership
investments is classified in net investment income, as shown in the preceding
table. Income from limited partnership investments decreased $106 million and
$126 million for the three and six month periods ended June 30, 2001 as compared
with the same periods in 2000. During the three and six month periods ended
June 30, 2000 market conditions allowed for very favorable investment results
relative to investment strategies practiced by certain partnerships held.
Investment results for the same periods in 2001 were, in general, less than
expected. In addition, certain partnerships that were very successful during
year 2000 have been dissolved and are no longer held. Also
during the first quarter of 2001, the Company reclassified interest on funds
withheld and other deposits. This

48



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

expense was previously classified in other operating expenses and is now
classified in net investment income. Interest on funds withheld and other
deposits was $86 million and $17 million for the second quarter of 2001 and
2000. Interest on funds withheld and other deposits was $122 million and $36
million for the first six months of 2001 and 2000.

The Company experienced lower net investment income for both the three and six
months ended June 30, 2001 as compared with the same period in 2000 due
primarily to decreases in limited partnership income as well as an increase in
interest on funds withheld and other deposits, partially offset by an improved
yield in the core bond portfolio. The bond segment of the investment portfolio
yielded 6.5% in the first six months of 2001 as compared with 6.4% during the
same period in 2000.

The components of net realized investment gains for the three and six months
ended June 30, 2001 and 2000 are presented in the following table.

Net Realized Investment Gains

|                                                               |                            |                                   |                                 |                                 |     |              |     |            |     |     |      |       |     |     |      |     |     |      |     | 
|-------------------------------------------------------------- | -------------------------- | --------------------------------- | ------------------------------- | ------------------------------- | --- | ------------ | --- | ---------- | --- | --- | ---- | ----- | --- | --- | ---- | --- | --- | ---- | --- | 
|                                                               |                            |                                   |                                 |                                 |     | Three Months |     | Six Months
|                                                               |                            |                                   |                                 |                                 |     |              |     |           
|Period ended June 30                                           |                            | 2001                              |                                 | 2000                            |     | 2001         |     | 2000      
|                                                               |                            |                                   |                                 |                                 |     |              |     |           
|(In millions)                                                  |                            |                                   |                                 |                                 |     |              |     |            |     |     |      |       |     |     |      |    
|                                                              
|                                                              
|                                                              
|                                                              
|Realized investment gains (losses):                            |                            |                                   |                                 |                                 |     |              |     |            |     |     |      |       |     |     |      |    
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Fixed maturity securities: |                                   |                                 |                                 |     |              |     |            |     |     |      |       |     |     |      |     |    
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                            | U.S. Government bonds             |                                 | $                               | (21 | )            |     | $          | 23  |     |      | $     | 107 |     |      | $   | (3  | )   
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                            | Corporate and other taxable bonds |                                 |                                 | 2   |              |     |            | (25 | )   |      |       | (6  | )   |      |     | (50 | )   
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                            | Tax-exempt bonds                  |                                 |                                 | (15 | )            |     |            | (21 | )   |      |       | 38  |     |      |     | (47 | )   
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                            | Asset-backed bonds                |                                 |                                 | 4   |              |     |            | (41 | )   |      |       | 55  |     |      |     | (58 | )   
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                            | Redeemable Preferred Stock        |                                 |                                 | (21 | )            |     |            |    |     |      |       | (21 | )   |      |     |    |     
|                                                               |                            |                                   |                                 |                                 |     |              |     |            |     |     |      |       |     |     |      |    
|                                                               |                            |                                   | Total fixed maturity securities |                                 |     | (51          | )   |            |     | (64 | )    |       |     | 173 |      |     |     | (158 | )  
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Equity securities          |                                   |                                 | 1,015                           |     |              |     | 290        |     |     |      | 1,087 |     |     |      | 375 |    
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Derivative securities      |                                   |                                 | 8                               |     |              |     | 23         |     |     |      | 3     |     |     |      | 21  |    
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Other assets               |                                   |                                 | (403                            | )   |              |     | 20         |     |     |      | (314  | )   |     |      | 63  |    
|                                                               |                            |                                   |                                 |                                 |     |              |     |            |     |     |      |       |     |     |      |    
|                                                               |                            |                                   |                                 | Total realized investment gains |     |              | 569 |            |     |     | 269  |       |     |     | 949  |     |     |      | 301 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Allocated to participating policyholders and minority interest |                            |                                   | (1                              | )                               |     |              | 2   |            |     |     | (10  | )     |     |     | 3    |    
|                                                              
|                                                              
|                                                              
|                                                              
|Income tax expense                                             |                            |                                   | (255                            | )                               |     |              | (95 | )          |     |     | (389 | )     |     |     | (107 | )  
|                                                               |                            |                                   |                                 |                                 |     |              |     |            |     |     |      |       |     |     |      |    
|Net realized investment gains                                  |                            | $                                 | 313                             |                                 |     | $            | 176 |            |     | $   | 550  |       |     | $   | 197  |    
|                                                               |                            |                                   |                                 |                                 |     |              |     |            |     |     |      |       |     |     |      |    

Net realized investment gains increased $137 million for the second quarter of
2001 compared with the same period in 2000. This increase is primarily a
result of after-tax gains from the sale of Global Crossing Ltd common stock
(Global Crossing) and its related hedge of $633 million as compared with $157
million in 2000. Partially offsetting these gains, were estimated losses of
$320 million relating to the planned disposition of certain subsidiaries.

The Company is currently negotiating the sale of certain subsidiaries and
expects the sales to be completed prior to year-end 2001. The assets being held
for disposition include the United Kingdom subsidiaries of CNA Re and certain
other subsidiaries. The Company anticipates that it will realize losses in
connection with those sales. In determining the anticipated loss from these
sales, the Company estimated sales proceeds, transactional costs, lease
termination costs, employee related costs and the cost of certain reinsurance
transactions. The sale of the United Kingdom insurance subsidiary
will be subject
to regulatory approval.

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

The estimated after-tax realized loss recorded in connection with the planned
disposition of certain subsidiaries by segment is as follows:

|                                   |  |            |     | 
|---------------------------------- |  | ---------- | --- | 
|                                   |  | Three and 
|For the period ended June 30, 2001 |  | Six Months
|                                   |  |           
|(In millions)                      |  |            |     | 
|                                  
|                                  
|                                  
|                                  
|Agency Market Operations           |  | $          | 17  | 
|                                  
|                                  
|                                  
|                                  
|CNA Re                             |  |            | 285 | 
|                                  
|                                  
|                                  
|                                  
|Global Operations                  |  |            | 18  | 
|                                   |  |            |     | 
|Total                              |  | $          | 320 | 
|                                   |  |            |     | 

Net realized investment gains increased $353 million for the first six months
of 2001 compared with the same period in 2000. This increase is primarily a
result of after-tax gains from the sale of Global Crossing and its related hedge
of $647 million as compared with $166 million in the first six months of 2000
as well as gains of $55 million resulting from the sale of a New York real
estate property and gains from the sale of fixed maturity security investments
in the first quarter of 2001. These gains are partially offset by the estimated
losses recorded for the planned dispositions described above.

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

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

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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 table presents the carrying values of the Companys investments
at June 30, 2001 and December 31, 2000, and the change in unrealized gains
(losses) of those securities included in other comprehensive income for the six
months ended June 30, 2001.

|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   |            |      |  
|-------------------------------------------------------------------------- | --------------------------------------------------------------- | ---- | -------- | ------ | ------------ | -------- | ------ | ------ |  | - | ---------- | ---- | -
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   | Six Months
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   | Ended     
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   | June 30,  
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   | 2001      
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   | Change in 
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   | Unrealized
|                                                                           |                                                                 |      | June 30, |        | December 31, |          | Gains 
|General Account Investments                                                |                                                                 | 2001 |          | 2000   |              | (Losses)
|                                                                           |                                                                 |      |          |        |              |         
|(In millions)                                                              |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Fixed maturity securities:                                                 |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | U.S. Treasury securities and obligations of government agencies |      | $        | 6,415  |              |          | $      | 5,298  |  |   | $          | (94  | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Asset-backed securities                                         |      |          | 5,785  |              |          |        | 7,623  |  |   |            | (16  | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Tax-exempt securities                                           |      |          | 2,095  |              |          |        | 3,349  |  |   |            | (44  | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Taxable securities                                              |      |          | 12,521 |              |          |        | 10,328 |  |   |            | 170  |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Redeemable preferred stock                                      |      |          | 38     |              |          |        | 54     |  |   |            |     |  
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|Total fixed maturity securities                                            |                                                                 |      | 26,854   |        |              |          | 26,652 |        |  |   | 16         |     
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|Equity securities:                                                         |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Common stock                                                    |      |          | 1,296  |              |          |        | 2,216  |  |   |            | (933 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Non-redeemable preferred stock                                  |      |          | 279    |              |          |        | 196    |  |   |            | (9   | )
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|Total equity securities                                                    |                                                                 |      | 1,575    |        |              |          | 2,412  |        |  |   | (942       | )   
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Short-term investments                                                     |                                                                 |      | 5,882    |        |              |          | 4,723  |        |  |   |           |     
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Other investments                                                          |                                                                 |      | 1,578    |        |              |          | 1,335  |        |  |   |           |     
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|Total investments                                                          |                                                                 | $    | 35,889   |        |              | $        | 35,122 |        |  |   | (926       | )   
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|Separate account business and other                                        |                                                                 |      |          |        |              |          |        |        |  |   | 83         |     
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   |            |     
|Change in unrealized gains (losses) reported in other comprehensive income |                                                                 |      |          |        |              |          |        |        |  | $ | (843       | )   
|                                                                           |                                                                 |      |          |        |              |          |        |        |  |   |            |     

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 $384
million at June 30, 2001 compared with $1,310 million at December 31, 2000.
The unrealized position at June 30, 2001 was composed of an unrealized gain of
$90 million for fixed maturities, and an unrealized gain of $294 million for
equity securities.

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

The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 91% and 93% of which were rated as investment grade at June 30,
2001 and December 31, 2000. The following table summarizes the ratings of
CNAs general account bond portfolio at carrying value.

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

General Account Bond Ratings

|                                                 |  |          |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|------------------------------------------------ |  | -------- | ------ | - |  | ---- | --- | ------------ |  | - | ------ |  |  |  | --- | -
|                                                 |  | June 30, |        |   |  |      |     | December 31, |  |   |        | 
|                                                 |  | 2001     |        | % |  | 2000 |     | %           
|                                                 |  |          |        |   |  |      |     |             
|(In millions)                                    |  |          |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|                                                
|                                                
|                                                
|                                                
|U.S. Government and affiliated agency securities |  | $        | 7,207  |   |  |      | 27  | %            |  | $ | 8,689  |  |  |  | 32  | %
|                                                
|                                                
|                                                
|                                                
|Other AAA rated                                  |  |          | 6,806  |   |  |      | 25  |              |  |   | 7,120  |  |  |  | 27  |  
|                                                
|                                                
|                                                
|                                                
|AA and A rated                                   |  |          | 6,149  |   |  |      | 23  |              |  |   | 5,954  |  |  |  | 22  |  
|                                                
|                                                
|                                                
|                                                
|BBB rated                                        |  |          | 4,306  |   |  |      | 16  |              |  |   | 3,066  |  |  |  | 12  |  
|                                                
|                                                
|                                                
|                                                
|Below investment-grade                           |  |          | 2,348  |   |  |      | 9   |              |  |   | 1,769  |  |  |  | 7   |  
|                                                 |  |          |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|Total                                            |  | $        | 26,816 |   |  |      | 100 | %            |  | $ | 26,598 |  |  |  | 100 | %
|                                                 |  |          |        |   |  |      |     |              |  |   |        |  |  |  |     |  

At June 30, 2001 and December 31, 2000, approximately 97% and 98% of the
general account portfolio were U.S. Government agencies or were rated by
Standard & Poors (S&P) or Moodys Investors Service. The remaining bonds were
rated by other rating agencies, outside brokers or Company management.

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

Included in CNAs general account fixed maturity securities at June 30, 2001
are $5,785 million of asset-backed securities, at fair value, consisting of
approximately 49% in collateralized mortgage obligations (CMOs), 23% in U.S.
government agency issued pass-through certificates, 23% in corporate
asset-backed obligations 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.

Short-term investments at June 30, 2001 and December 31, 2000 primarily
consisted of commercial paper and money market funds. The components of the
general account short-term investment portfolio are presented in the following
table.

Short-term investments

|                             |  |          |       |              |  |   |       | 
|---------------------------- |  | -------- | ----- | ------------ |  | - | ----- | 
|                             |  | June 30, |       | December 31,
|                             |  | 2001     |       | 2000        
|                             |  |          |       |             
|(In millions)                |  |          |       |              |  |   |       | 
|                            
|                            
|                            
|                            
|Commercial paper             |  | $        | 3,824 |              |  | $ | 3,291 | 
|                            
|                            
|                            
|                            
|U.S. Treasury securities     |  |          | 190   |              |  |   | 383   | 
|                            
|                            
|                            
|                            
|Money Market funds           |  |          | 1,465 |              |  |   | 620   | 
|                            
|                            
|                            
|                            
|Other                        |  |          | 403   |              |  |   | 429   | 
|                             |  |          |       |              |  |   |       | 
|Total short-term investments |  | $        | 5,882 |              |  | $ | 4,723 | 
|                             |  |          |       |              |  |   |       | 

CNA invests in certain derivative financial instruments primarily to reduce its
exposure to market risk (principally interest rate, equity price and foreign
currency risk). CNA considers the

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

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

Market Risk

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

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

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 which are reasonably possible over a
one-year period. The selection of the range of values chosen to represent
changes in interest rates should not be construed as the Companys prediction
of future market events, but rather an illustration of the impact of such
events.

The sensitivity analysis estimates the decline in the market value of the
Companys interest sensitive assets and liabilities that were held on June 30,
2001 and December 31, 2000 due to instantaneous parallel increases in the
period end yield curve of 100 and 150 basis points.

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

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 June 30, 2001 and December 31, 2000, with all other variables held
constant.

Equity price risk was measured assuming an instantaneous 10% and 25% decline in
the S & P 500 Index (Index) from its level at June 30, 2001 and December 31,
2000, with all other variables held constant. The Companys equity holdings
were assumed to be highly and positively correlated with the Index. At June
30, 2001, a 10% and 25% decrease in the Index would result in a $456 million
and $1,141 million decrease compared to $457 million and $1,042 million
decrease at December 31, 2000, in the market rate of the Companys equity
investments.

Of these amounts, under the 10% and 25% scenarios, $173 million and $435
million at June 30, 2001 and $167 million and $418 million at December 31, 2000
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
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

The following tables present the estimated effects on the market value of the
Companys financial instruments at June 30, 2001 and December 31, 2000, due to
an increase in interest rates of 100 basis points, a decline of 10% in foreign
currency exchange rates and a 10% decline in the Index.

|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | -------- | ------ | ------------------- | ------ | - | --- | --- | --- | - | ---- | ---- | ---- | -
|                                                          |                             |                         |        |           |        |          |        | Increase (Decrease)
|                                                          |                             |                         |        |           |        |          |        |                    
|Market Risk Scenario 1                                    |                             | Market                  |        | Interest  |        | Currency |        | Equity             
|June 30, 2001                                             |                             | Value                   |        | Rate Risk |        | Risk     |        | Risk               
|                                                          |                             |                         |        |           |        |          |        |                    
|(In millions)                                             |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|Held for Other Than Trading Purposes:                     |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|General Account:                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         | $      | 26,854    |        |          | $      | (1,350              | )      |   | $   | (61 | )   |   | $    | (76  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 1,575     |        |          |        |                    |        |   |     | (31 | )   |   |      | (153 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 5,882     |        |          |        | (4                  | )      |   |     | (1  | )   |   |      | (1   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Limited Partnerships        |                         |        | 1,326     |        |          |        | 52                  |        |   |     |    |     |   |      | (54  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other invested assets       |                         |        | 253       |        |          |        |                    |        |   |     |    |     |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest rate caps          |                         |        | 1         |        |          |        | 2                   |        |   |     |    |     |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest rate swaps         |                         |        |          |        |          |        |                    |        |   |     |    |     |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity indexed futures      |                         |        |          |        |          |        |                    |        |   |     |    |     |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        | (2        | )      |          |        | 34                  |        |   |     | 18  |     |   |      | 1    |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|                                                          |                             | Total general account   |        |           | 35,889 |          |        |                     | (1,266 | ) |     |     | (75 | ) |      |      | (283 | )
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|Separate accounts:                                        |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         |        | 2,115     |        |          |        | (114                | )      |   |     |    |     |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 182       |        |          |        |                    |        |   |     |    |     |   |      | (18  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 116       |        |          |        |                    |        |   |     |    |     |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other invested assets       |                         |        | 499       |        |          |        |                    |        |   |     |    |     |   |      | (50  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        |          |        |          |        |                    |        |   |     |    |     |   |      |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|                                                          |                             | Total separate accounts |        |           | 2,912  |          |        |                     | (114   | ) |     |     |    |   |      |      | (68  | )
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|Total all securities held for other than trading purposes |                             |                         | 38,801 |           |        |          | (1,380 | )                   |        |   | (75 | )   |     |   | (351 | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|Held for Trading purposes:                                |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|Separate accounts:                                        |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         |        | 287       |        |          |        | (7                  | )      |   |     |    |     |   |      | (6   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 10        |        |          |        |                    |        |   |     |    |     |   |      | (1   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 311       |        |          |        |                    |        |   |     |    |     |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Limited Partnerships        |                         |        | 381       |        |          |        |                    |        |   |     |    |     |   |      | (3   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity indexed futures      |                         |        |          |        |          |        | 2                   |        |   |     |    |     |   |      | (95  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        |          |        |          |        |                    |        |   |     |    |     |   |      |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|Total all securities held for trading purposes            |                             |                         | 989    |           |        |          | (5     | )                   |        |   |    |     |     |   | (105 | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|Total all securities                                      |                             |                         | 39,790 |           |        |          | (1,385 | )                   |        |   | (75 | )   |     |   | (456 | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     
|Debt (carrying value)                                     |                             | $                       | 2,468  |           |        | $        | (104   | )                   |        | $ |    |     |     | $ |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |     |     |     |   |      |     

55



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

|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | -------- | ------ | ------------------- | ------ | - | ---- | ---- | ---- | - | ---- | ---- | ---- | -
|                                                          |                             |                         |        |           |        |          |        | Increase (Decrease)
|                                                          |                             |                         |        |           |        |          |        |                    
|Market Risk Scenario 1                                    |                             | Market                  |        | Interest  |        | Currency |        | Equity             
|December 31, 2000                                         |                             | Value                   |        | Rate Risk |        | Risk     |        | Risk               
|                                                          |                             |                         |        |           |        |          |        |                    
|(In millions)                                             |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|Held for Other Than Trading Purposes:                     |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|General Account:                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         | $      | 26,652    |        |          | $      | (1,428              | )      |   | $    | (213 | )    |   | $    | (22  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 2,412     |        |          |        |                    |        |   |      | (44  | )    |   |      | (223 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 4,723     |        |          |        | (4                  | )      |   |      | (18  | )    |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Limited Partnerships        |                         |        | 1,092     |        |          |        | 43                  |        |   |      |     |      |   |      | (45  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other invested assets       |                         |        | 241       |        |          |        |                    |        |   |      |     |      |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest rate caps          |                         |        | 1         |        |          |        | 1                   |        |   |      |     |      |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest rate swaps         |                         |        |          |        |          |        |                    |        |   |      |     |      |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity indexed futures      |                         |        |          |        |          |        |                    |        |   |      |     |      |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        | 1         |        |          |        | 1                   |        |   |      | (4   | )    |   |      |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|                                                          |                             | Total general account   |        |           | 35,122 |          |        |                     | (1,387 | ) |      |      | (279 | ) |      |      | (290 | )
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|Separate accounts:                                        |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         |        | 2,293     |        |          |        | (118                | )      |   |      | (7   | )    |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 212       |        |          |        |                    |        |   |      | (1   | )    |   |      | (21  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 150       |        |          |        |                    |        |   |      |     |      |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other invested assets       |                         |        | 444       |        |          |        |                    |        |   |      |     |      |   |      | (44  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        |          |        |          |        |                    |        |   |      |     |      |   |      |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|                                                          |                             | Total separate accounts |        |           | 3,099  |          |        |                     | (118   | ) |      |      | (8   | ) |      |      | (65  | )
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|Total all securities held for other than trading purposes |                             |                         | 38,221 |           |        |          | (1,505 | )                   |        |   | (287 | )    |      |   | (355 | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|Held for Trading purposes:                                |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|Separate accounts:                                        |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         |        | 410       |        |          |        | (19                 | )      |   |      | (4   | )    |   |      | (1   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 3         |        |          |        |                    |        |   |      |     |      |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 230       |        |          |        |                    |        |   |      |     |      |   |      |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Limited Partnerships        |                         |        | 404       |        |          |        |                    |        |   |      |     |      |   |      | (3   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity indexed futures      |                         |        |          |        |          |        | 2                   |        |   |      |     |      |   |      | (98  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        | 1         |        |          |        | (6                  | )      |   |      |     |      |   |      |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|Total all securities held for trading purposes            |                             |                         | 1,048  |           |        |          | (23    | )                   |        |   | (4   | )    |      |   | (102 | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|Total all securities                                      |                             |                         | 39,269 |           |        |          | (1,528 | )                   |        |   | (291 | )    |      |   | (457 | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     
|Debt (carrying value)                                     |                             | $                       | 2,729  |           |        | $        | (114   | )                   |        | $ |     |      |      | $ |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |      |     

56



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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 tables present the estimated effects on the market value of the
Companys financial instruments at June 30, 2001 and December 31, 2000, due to
an increase in interest rates of 150 basis points, a decline of 20% in foreign
currency exchange rates and a 25% decline in the Index.

|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | -------- | ------ | ------------------- | ------ | - | ---- | ---- | ---- | - | ------ | ---- | ---- | -
|                                                          |                             |                         |        |           |        |          |        | Increase (Decrease)
|                                                          |                             |                         |        |           |        |          |        |                    
|Market Risk Scenario 2                                    |                             | Market                  |        | Interest  |        | Currency |        | Equity             
|June 30, 2001                                             |                             | Value                   |        | Rate Risk |        | Risk     |        | Risk               
|                                                          |                             |                         |        |           |        |          |        |                    
|(In millions)                                             |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|Held for Other Than Trading Purposes:                     |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|General Account:                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         | $      | 26,854    |        |          | $      | (1,992              | )      |   | $    | (121 | )    |   | $      | (189 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 1,575     |        |          |        |                    |        |   |      | (61  | )    |   |        | (382 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 5,882     |        |          |        | (5                  | )      |   |      | (3   | )    |   |        | (1   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Limited Partnerships        |                         |        | 1,326     |        |          |        | 78                  |        |   |      |     |      |   |        | (136 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other invested assets       |                         |        | 253       |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest rate caps          |                         |        | 1         |        |          |        | 4                   |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest rate swaps         |                         |        |          |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity indexed futures      |                         |        |          |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        | (2        | )      |          |        | 51                  |        |   |      | 35   |      |   |        | 2    |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                          |                             | Total general account   |        |           | 35,889 |          |        |                     | (1,864 | ) |      |      | (150 | ) |        |      | (706 | )
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Separate accounts:                                        |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         |        | 2,115     |        |          |        | (164                | )      |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 182       |        |          |        |                    |        |   |      |     |      |   |        | (46  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 116       |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other invested assets       |                         |        | 499       |        |          |        |                    |        |   |      |     |      |   |        | (125 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        |          |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                          |                             | Total separate accounts |        |           | 2,912  |          |        |                     | (164   | ) |      |      |     |   |        |      | (171 | )
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Total all securities held for other than trading purposes |                             |                         | 38,801 |           |        |          | (2,028 | )                   |        |   | (150 | )    |      |   | (877   | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Held for Trading purposes:                                |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|Separate accounts:                                        |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         |        | 287       |        |          |        | (10                 | )      |   |      |     |      |   |        | (16  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 10        |        |          |        |                    |        |   |      |     |      |   |        | (3   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 311       |        |          |        |                    |        |   |      |     |      |   |        | (1   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Limited Partnerships        |                         |        | 381       |        |          |        |                    |        |   |      |     |      |   |        | (6   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity indexed futures      |                         |        |          |        |          |        | 3                   |        |   |      |     |      |   |        | (238 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        |          |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Total all securities held for trading purposes            |                             |                         | 989    |           |        |          | (7     | )                   |        |   |     |      |      |   | (264   | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Total all securities                                      |                             |                         | 39,790 |           |        |          | (2,035 | )                   |        |   | (150 | )    |      |   | (1,141 | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Debt (carrying value)                                     |                             | $                       | 2,468  |           |        | $        | (151   | )                   |        | $ |     |      |      | $ |       |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     

57



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##### Table of Contents



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

|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | -------- | ------ | ------------------- | ------ | - | ---- | ---- | ---- | - | ------ | ---- | ---- | -
|                                                          |                             |                         |        |           |        |          |        | Increase (Decrease) |        |   |      |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |     
|Market Risk Scenario 2                                    |                             | Market                  |        | Interest  |        | Currency |        | Equity             
|December 31, 2000                                         |                             | Value                   |        | Rate Risk |        | Risk     |        | Risk               
|                                                          |                             |                         |        |           |        |          |        |                    
|(In millions)                                             |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|Held for Other Than Trading Purposes:                     |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|General Account:                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         | $      | 26,652    |        |          | $      | (2,180              | )      |   | $    | (427 | )    |   | $      | (56  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 2,412     |        |          |        |                    |        |   |      | (88  | )    |   |        | (456 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 4,723     |        |          |        | (6                  | )      |   |      | (36  | )    |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Limited Partnerships        |                         |        | 1,092     |        |          |        | 65                  |        |   |      |     |      |   |        | (112 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other invested assets       |                         |        | 241       |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest rate caps          |                         |        | 1         |        |          |        | 2                   |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest rate swaps         |                         |        |          |        |          |        | (1                  | )      |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity indexed futures      |                         |        |          |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        | 1         |        |          |        | 1                   |        |   |      | (7   | )    |   |        |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                          |                             | Total general account   |        |           | 35,122 |          |        |                     | (2,119 | ) |      |      | (558 | ) |        |      | (624 | )
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Separate accounts:                                        |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         |        | 2,293     |        |          |        | (171                | )      |   |      | (15  | )    |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 212       |        |          |        |                    |        |   |      | (1   | )    |   |        | (53  | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 150       |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other invested assets       |                         |        | 444       |        |          |        |                    |        |   |      |     |      |   |        | (111 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        |          |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                          |                             | Total separate accounts |        |           | 3,099  |          |        |                     | (171   | ) |      |      | (16  | ) |        |      | (164 | )
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Total all securities held for other than trading purposes |                             |                         | 38,221 |           |        |          | (2,290 | )                   |        |   | (574 | )    |      |   | (788   | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Held for Trading purposes:                                |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|Separate accounts:                                        |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Fixed maturity securities   |                         |        | 410       |        |          |        | (28                 | )      |   |      | (7   | )    |   |        | (1   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity securities           |                         |        | 3         |        |          |        |                    |        |   |      |     |      |   |        | (1   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Short-term investments      |                         |        | 230       |        |          |        |                    |        |   |      |     |      |   |        |     |     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Limited Partnerships        |                         |        | 404       |        |          |        |                    |        |   |      |     |      |   |        | (7   | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity indexed futures      |                         |        |          |        |          |        | 3                   |        |   |      |     |      |   |        | (245 | )   
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other derivative securities |                         |        | 1         |        |          |        | (9                  | )      |   |      |     |      |   |        |     |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|                                                         
|                                                         
|                                                         
|                                                         
|Total all securities held for trading purposes            |                             |                         | 1,048  |           |        |          | (34    | )                   |        |   | (7   | )    |      |   | (254   | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Total all securities                                      |                             |                         | 39,269 |           |        |          | (2,324 | )                   |        |   | (581 | )    |      |   | (1,042 | )   
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     
|Debt (carrying value)                                     |                             | $                       | 2,729  |           |        | $        | (166   | )                   |        | $ |     |      |      | $ |       |     
|                                                          |                             |                         |        |           |        |          |        |                     |        |   |      |      |      |   |        |     

Liquidity and Capital Resources

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

For the six months ended June 30, 2001, net cash used in operating activities
was $893 million as compared with $755 million for the same period in 2000.
The decline related primarily to increased payments of income taxes, partially
offset by decreased paid claims and claim adjustment expenses.

For the six months ended June 30, 2001, net cash inflows from investment
activities was $1,171 million as compared with $1,142 million for the same
period in 2000. Cash flows from investing activities were principally related
to purchases and sales of invested assets, and were relatively consistent year
over year.

58



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##### Table of Contents



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

For the six months ended June 30, 2001, net cash used in financing activities
was $299 million as compared with $356 million for the same period in 2000.
Cash flows from financing activities include proceeds from the issuance of debt
or equity securities, outflows for dividends or repayment of debt and outlays
to reacquire equity instruments. For the six months ended June 30, 2001, CNA
reduced its commercial paper borrowings by $227 million, including reductions
totaling $100 million in the second quarter.

CNA expects to commence a rights offering of its common stock in the third
quarter of 2001 and expects to raise approximately $1 billion pursuant to the
offering. The proceeds from the rights offering are expected to be used to
increase the capital of the property-casualty insurance companies. CNAs common shareholders of
record on August 23, 2001 will receive rights for each common share they own
that will entitle the holder of rights to purchase CNA common shares at a
specified price. Loews Corporation, the holder of approximately 87% of CNAs
shares intends to exercise its rights to purchase common shares and to purchase any
shares that are not subscribed for by other shareholders, subject to customary
conditions. The number of shares of common stock that CNA will offer in the
rights offering, the number of rights distributed in respect of each common
share, the number of rights that will be required to purchase a common share,
the exercise price per share and how long the rights offering will be open will
be determined on or before the record date.

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

As of April 30, 2001, CNAF replaced its $750 million revolving credit facility
(the Prior Facility) with a new $500 million revolving credit facility (the New
Facility). No loans were outstanding under either the Prior Facility or the
New Facility at any time during 2001. The Prior Facility was scheduled to
expire on May 10, 2001. The New Facility is split into two parts, a $250
million component with a 364-day expiration date (with an option by CNAF to
turn this part of the New Facility into a one-year term loan) and a $250
million component with a 3-year expiration date. The Company pays a facility
fee to the lenders of the New Facility for having funds available for loans
under both components. The facility fee on the 364-day component is 12.5 basis
points (which is the same as the fee on the expiring revolver) while the fee on
the 3-year component is 15 basis points. The facility is subject to
certain restrictive covenants.

In addition to the facility fees, if the Company borrows under the New
Facility, the Company at its current debt rating will pay an interest rate on
outstanding loans equal to the London Interbank Offering Rate (LIBOR) plus 50
basis points for the 364-day component and LIBOR plus 47.5 basis points for the
3-year component. If the Companys debt ratings are down graded one level, the
Company will pay an interest rate on the outstanding loans equal to the LIBOR
plus 60 basis points for the 364-day component and LIBOR plus 57.5 basis points
for the 3-year component.

If the Company has outstanding loans equaling more than 50% of the amounts
available under the New Facility, the Company also will pay a utilization fee
of 12.5 basis points on such loans.

59



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

The New Facility is used for general corporate purposes including
support for the commercial paper program, which currently has $400 million of
loans outstanding. There are currently no bank loans drawn under the facility.

Following the announcement of second quarter 2001
earnings, the Companys commercial paper rating was placed under
review by S&P. During the period of this review, which is expected to
be finalized by the end of third quarter 2001, the Company may redeem
or hold its outstanding commercial paper loans as they mature using internal
funds.

The table below reflects ratings issued by A.M. Best, S&P, Moodys and
Fitch as of August 10, 2001 for the Continental Casualty Company (CCC) Pool,
the Continental Insurance Company (CIC) Pool and the Continental Assurance
Company (CAC) Pool. Also rated were CNAFs senior debt and commercial paper and
The Continental Corporations (Continental) senior debt.

|          |  |                   |    |                    |  |             |   |      |    |       |   |        |  |              |    |        |  |      |  |  |  |  |  | 
|--------- |  | ----------------- | -- | ------------------ |  | ----------- | - | ---- | -- | ----- | - | ------ |  | ------------ | -- | ------ |  | ---- |  |  |  |  |  | 
|          |  |                   |    |                    |  |             |   |      |    |       |   |        |  | Debt Ratings
|          |  |                   |    |                    |  |             |   |      |    |       |   |        |  |             
|          |  | Insurance Ratings |    | CNAF               |  |             |   |     
|          |  |                   |    |                    |  | Continental
|          |  |                   |    |                    |  | CAC Pool    |   |      |    |       |   | Senior |  | Commercial   |    | Senior
|          |  | CCC Pool          |    | Financial Strength |  | CIC Pool    |   | Debt |    | Paper |   | Debt  
|          |  |                   |    |                    |  |             |   |      |    |       |   |       
|A.M. Best |  |                   | A  |                    |  |             | A |      |    |       | A |        |  | BBB          |    | AMB-2  |  | BBB-
|         
|         
|         
|         
|Fitch     |  |                   | A  |                    |  | AA-         |   | NR   |    | BBB   |   | NR     |  | NR          
|         
|         
|         
|         
|Moodys   |  |                   | A2 |                    |  | A2*         |   |      | A3 |       |   | Baa1   |  |              | P2 |        |  | Baa2
|         
|         
|         
|         
|S&P       |  |                   | A  |                    |  | AA-         |   |      | A- |       |   | BBB    |  |              | A2 |        |  | BBB-



---

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

On August 2, 2001 each of the four rating agencies A.M. Best, S&P, Moodys and
Fitch issued press releases specifying their rating action for each of the
Pools, rated debt and commercial paper.

A.M. Best affirmed the ratings of the CCC and CAC pools at A, upgraded the
CIC pool from A- to A and removed the negative outlook. A.M. Best
initiated debt ratings for CNAFs senior debt at BBB, CNAFs commercial paper
at AMB-2, and Continentals senior debt at BBB-. S&P placed all of CNAs rated
entities, debt and commercial paper, with the exception of CNA Surety, on CreditWatch with
negative implications pending a further review with CNA management. Moodys
placed the CCC Pool under review for possible downgrade and affirmed the
ratings of the CIC and CAC Pools at A2 with stable and negative
outlooks, respectively. Moodys further
affirmed CNAFs commercial paper rating at P2 and placed the CNAF senior debt
currently rated at Baa1 and Continentals senior debt at Baa2 under review.
Moodys expects the review will take approximately one month and lead to either
a confirmation or a one-notch downgrade. Fitch downgraded the rating of the
CCC Pool from A+ to A and changed the outlook from negative to stable.
Fitch further affirmed the AA- rating of the CAC Pool with a stable outlook.
Fitch further downgraded CNAF s senior debt rating from BBB+ to BBB and
moved the negative rating outlook to stable.

The Companys intention to raise capital
through the previously mentioned rights offering was communicated to
the rating agencies and regulators and was considered by them in
conjunction with their respective actions.

A.M. Best, S&P and Moodys lowered the ratings associated with the separately
rated London based entity, CNA Reinsurance Company Limited (CNA Re UK).
Current ratings for CNA Re UK are as follows: A.M. Best: A- (under review with
negative implications); S&P: BBB- (CreditWatch; negative); and Moodys: Baa2
(under review; direction uncertain).

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.

Accounting Pronouncements

On April 1, 2001 the Company adopted Emerging Issues Task Force (EITF) Issue
No. 99-20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets(EITF 99-20).
EITF 99-20 establishes how a transferor that retains an interest in securitized
financial assets or an enterprise that purchases a beneficial interest in
securitized financial assets should account for interest income and impairment.
This issue did not have a significant impact on the results of operations or
equity of the Company.

In the first quarter of 2001, the Company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 133,
Accounting for Derivative

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

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

Effective January 1, 2001, the Company adopted the Codification of Statutory
Accounting Principles (Codification) for preparing its statutory-basis
financial statements. Codification is intended to standardize regulatory
accounting and reporting to state insurance departments. However, statutory
accounting principles will continue to be established by individual state laws
and permitted practices. The states in which CNAFs insurance subsidiaries
conduct business required adoption of Codification (with certain
modifications). The Companys adoption of Codification, as modified, resulted
in an increase in statutory capital and surplus as of January 1, 2001 of $24
million, which primarily relates to deferred tax assets, partially offset by
insurance-related assessments and pension-related liabilities.

Additionally, CNAs property-casualty companies implemented a change, effective
January 1, 2001, in the timing of recording written premiums for policies with
future effective dates. This change was made in conjunction with changes
required by Codification related to the recording of written premiums. The
effect of this change was to reduce net written premiums by $118 million for
the six months ended June 30, 2001. This change has no impact on net earned
premiums or net income.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations(SFAS 141). SFAS 141 requires companies to use the
purchase method of accounting for business combinations initiated after June
30, 2001 and prohibits the use of the pooling-of-interests method of
accounting. CNA will adopt this standard for any future business combinations.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets(SFAS 142). SFAS 142 changes the
accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach. Amortization of goodwill
and indefinite-lived intangible assets, including goodwill recorded in past
business combinations, will cease upon adoption of SFAS 142, which for CNA will
be January 1, 2002. The Company is in the process of quantifying the impact
this new standard will have on its operations and intangible assets.

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

61



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##### Table of Contents



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

statements in this quarterly report include expected losses in the Companys
insurance business, including losses for asbestos, environmental pollution and
other mass tort claims; the Companys expectations to commence a rights
offering, any terms of the rights offering and the participation by Loews
Corporation in the rights offering; the Companys expectations concerning its
revenues, earnings, expenses and investment activities; expected cost savings
and other results from the Companys restructuring activities; and expected
proceeds and terms of, and other matters concerning, the Companys planned
disposition of its U.K. reinsurance business. Forward-looking statements, by
their nature, are subject to a variety of risks and uncertainties that could
cause actual results to differ materially from the results expected in the
forward-looking statement. Many of these risks and uncertainties cannot be
controlled by the Company. Some examples of these risks and uncertainties are:



| |  | general economic and business conditions;                                                                                                                                                                                                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | changes in financial markets such as fluctuations in interest rates, credit conditions and currency, commodity and stock
prices;                                                                                                                                                                                                
| 
| |  | changes in foreign, political, social and economic conditions;                                                                                                                                                                                                                                                                  
| 
| |  | regulatory initiatives and compliance with governmental regulations, judicial decisions and rulings;                                                                                                                                                                                                                            
| 
| |  | the impact of competitive products, policies and pricing and the competitive environment in which the Company operates;                                                                                                                                                                                                         
| 
| |  | product and policy demand and market responses;                                                                                                                                                                                                                                                                                 
| 
| |  | development of claims and the impact on loss reserves;                                                                                                                                                                                                                                                                          
| 
| |  | the performance of reinsurance companies under reinsurance contracts with us;                                                                                                                                                                                                                                                   
| 
| |  | results of financing efforts;                                                                                                                                                                                                                                                                                                   
| 
| |  | changes in our composition of operation segments;                                                                                                                                                                                                                                                                               
| 
| |  | exposure to liabilities due to claims made by insured and others relating to asbestos remediation and health-based asbestos
impairments, and exposure to liabilities for environmental pollution and other mass tort claims; the sufficiency of the
Companys loss reserves and the possibility of future increases in reserves;
| 
| |  | limitations upon the Companys ability to receive dividends from its insurance subsidiaries imposed by state regulatory
agencies and minimum risk-based capital standards established by the National Association of Insurance Commissioners;                                                                                   
| 
| |  | the possibility of downgrades 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 report. The Company does not have any obligation to update
or revise any forward-looking statement contained in this prospectus supplement
and the accompanying prospectus, even if our expectations or any related facts
or circumstances change.

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##### Table of Contents






CNA FINANCIAL CORPORATION
Part II Other Information




Item 6. Exhibits and Reports on Form 8-K

Exhibits

|                             |  |         |       | 
|---------------------------- |  | ------- | ----- | 
|                             |  | Exhibit
|Description of Exhibit       |  | Number 
|                             |  |        
|Three Year Credit Agreement  |  |         | 10.12 | 
|                             |  |         |       | 
|No. 364-Day Credit Agreement |  |         | 10.13 | 

Reports on Form 8-K

None




SIGNATURES

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

|                      |                           |                                                                           
|--------------------- | ------------------------- | --------------------------------------------------------------------------
|                      | CNA FINANCIAL CORPORATION
|                     
|                     
|                     
|                     
|                      |                           |                                                                           
|                     
|                     
|                     
|                     
|Date: August 14, 2001 | By:                       | /s/ ROBERT V. DEUTSCH                                                     
|                      |                           |                                                                           
|                      |                           | Robert V. Deutsch
  Executive Vice President and
  Chief Financial Officer

63