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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from    to


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. Employerincorporation or organization)
    
    Identification No.)CNA PlazaChicago, Illinois
    
    60685(Address of principal executive offices)
    
    (Zip Code)


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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes þ   No o

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

Class
    
    Outstanding at November 1, 2003Common Stock, Par value $2.50
    
    
    223,617,337




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TABLE OF CONTENTS



|                                             |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION               
|                                             | 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                               
|                                             | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|                                             | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|                                             | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                         
|                                             | ITEM 2. MANAGEMENT'S DISCUSSINO AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|                                             | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                             | ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES                                                   
|PART II. OTHER INFORMATION                  
|                                             | Item 1. Legal Proceedings                                                                    
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|                                             | SIGNATURES                                                                                   
|302 Certification of Chief Executive Officer
|302 Certification of Chief Financial Officer
|906 Certification of Chief Executive Officer
|906 Certification of Chief Financial Officer



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##### Table of Contents



Item
    
    
    
    
    
    PageNumber
    
    
    
    
    
    NumberPART I. Financial Information1.
    
    Condensed
Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets at September 30,
2003 and at December 31, 2002
    
    
    3Condensed
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2003 and 2002
(Restated)
    
    
    4Condensed
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002
(Restated)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    62.
    
    Managements
Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    463.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    1094.
    
    Disclosure Controls and Procedures
    
    
    114PART II. Other Information1.
    
    Legal Proceedings
    
    
    1156.
    
    Exhibits and Reports on Form 8-K
    
    
    115Signatures
    
    
    116






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CNA FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,
    
    December 31,2003
    
    2002(In millions, except share data)AssetsInvestments:Fixed maturity securities available-for-sale, at fair value (amortized cost of $27,434 and $25,533)
    
    $
    28,747
    
    
    $
    26,275Equity securities available-for-sale, at fair value (cost of $360 and $519)
    
    
    575
    
    
    
    666Mortgage loans and real estate (less accumulated depreciation of $10 and $55)
    
    
    27
    
    
    
    57Policy loans
    
    
    178
    
    
    
    180Limited partnership investments
    
    
    1,213
    
    
    
    1,060Other invested assets
    
    
    18
    
    
    
    47Short-term investments, cost approximates fair value
    
    
    7,044
    
    
    
    7,008Total investments
    
    
    37,802
    
    
    
    35,293Cash
    
    
    178
    
    
    
    126Reinsurance receivables (less allowance for doubtful accounts of $548 and $196)
    
    
    14,569
    
    
    
    12,500Insurance receivables (less allowance for doubtful accounts of $399 and $156)
    
    
    2,767
    
    
    
    3,007Accrued investment income
    
    
    364
    
    
    
    300Receivables for securities sold
    
    
    1,222
    
    
    
    455Deferred acquisition costs
    
    
    2,662
    
    
    
    2,551Prepaid reinsurance premiums
    
    
    1,388
    
    
    
    1,345Federal income taxes recoverable (includes $696 and $0 due from Loews Corporation)
    
    
    719
    
    
    
    Deferred income taxes
    
    
    496
    
    
    
    723Property and equipment at cost (less accumulated depreciation of $777 and $771)
    
    
    338
    
    
    
    369Goodwill and other intangible assets
    
    
    172
    
    
    
    174Other assets
    
    
    1,640
    
    
    
    1,785Separate account business
    
    
    3,533
    
    
    
    3,103Total assets
    
    $
    67,850
    
    
    $
    61,731Liabilities and Stockholders EquityLiabilities:Insurance reserves:Claim and claim adjustment expense
    
    $
    32,264
    
    
    $
    27,370Unearned premiums
    
    
    5,237
    
    
    
    4,820Future policy benefits
    
    
    7,949
    
    
    
    7,409Policyholders funds
    
    
    603
    
    
    
    580Collateral on loaned securities and derivatives
    
    
    881
    
    
    
    552Payables for securities purchased
    
    
    847
    
    
    
    464Participating policyholders funds
    
    
    121
    
    
    
    119Short term debt
    
    
    512
    
    
    
    420Long term debt
    
    
    1,641
    
    
    
    1,872Reinsurance balances payable
    
    
    3,286
    
    
    
    2,763Federal income taxes payable (includes $0 and $13 due to Loews Corporation)
    
    
    
    
    
    
    29Other liabilities
    
    
    2,530
    
    
    
    2,573Separate account business
    
    
    3,533
    
    
    
    3,103Total liabilities
    
    
    59,404
    
    
    
    52,074Commitments
and contingencies (Notes F, G, I, L and M)Minority interest
    
    
    245
    
    
    
    256Stockholders equity:Preferred stock (Series H, no par value; $100,000 stated value; 12,500,000 shares authorized; 7,500
shares issued and outstanding, held by Loews Corporation)
    
    
    750
    
    
    
    750Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270 shares issued; and
223,617,337 and 223,608,868 shares outstanding)
    
    
    565
    
    
    
    565Additional paid-in capital
    
    
    1,031
    
    
    
    1,031Retained earnings
    
    
    4,986
    
    
    
    6,593Accumulated other comprehensive income
    
    
    1,013
    
    
    
    604Treasury stock (2,232,933 and 2,241,402 shares), at cost
    
    
    (69
    )
    
    
    (70
    )8,276
    
    
    
    9,473Notes receivable for the issuance of common stock
    
    
    (75
    )
    
    
    (72
    )Total stockholders equity
    
    
    8,201
    
    
    
    9,401Total liabilities and stockholders equity
    
    $
    67,850
    
    
    $
    61,731


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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)




Three months
    
    Nine monthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions, except per share data)

    

    
    
    

    

    Restated (a)

    

    
    
    

    
    Restated (a)RevenuesNet earned premiums
    
    $
    2,126
    
    
    $
    2,262
    
    
    $
    6,704
    
    
    $
    7,925Net investment income
    
    
    352
    
    
    
    364
    
    
    
    1,211
    
    
    
    1,292Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    164
    
    
    
    24
    
    
    
    466
    
    
    
    (137
    )Other revenues
    
    
    83
    
    
    
    137
    
    
    
    288
    
    
    
    465Total revenues
    
    
    2,725
    
    
    
    2,787
    
    
    
    8,669
    
    
    
    9,545Claims, Benefits and ExpensesInsurance claims and policyholders benefits
    
    
    4,032
    
    
    
    1,850
    
    
    
    7,969
    
    
    
    6,542Amortization of deferred acquisition costs
    
    
    495
    
    
    
    448
    
    
    
    1,434
    
    
    
    1,350Other operating expenses
    
    
    945
    
    
    
    375
    
    
    
    1,765
    
    
    
    1,258Interest
    
    
    33
    
    
    
    37
    
    
    
    100
    
    
    
    112Total claims, benefits and expenses
    
    
    5,505
    
    
    
    2,710
    
    
    
    11,268
    
    
    
    9,262(Loss) income from continuing operations before income tax and
minority interest
    
    
    (2,780
    )
    
    
    77
    
    
    
    (2,599
    )
    
    
    283Income tax benefit (expense)
    
    
    1,006
    
    
    
    (22
    )
    
    
    983
    
    
    
    (75
    )Minority interest
    
    
    14
    
    
    
    (1
    )
    
    
    9
    
    
    
    (11
    )(Loss) income from continuing operations
    
    
    (1,760
    )
    
    
    54
    
    
    
    (1,607
    )
    
    
    197Loss from discontinued operations, net of tax of $9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )(Loss) income before cumulative effect of a change in accounting
principle
    
    
    (1,760
    )
    
    
    54
    
    
    
    (1,607
    )
    
    
    162Cumulative effect of a change in accounting principle, net of tax
of $7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )Net (loss) income
    
    $
    (1,760
    )
    
    $
    54
    
    
    $
    (1,607
    )
    
    $
    105Basic and Diluted (Loss) Earnings Per Share(Loss) income from continuing operations
    
    $
    (7.94
    )
    
    $
    0.24
    
    
    $
    (7.39
    )
    
    $
    0.89Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.16
    )(Loss) income before cumulative effect of a change in accounting
principle
    
    
    (7.94
    )
    
    
    0.24
    
    
    
    (7.39
    )
    
    
    0.73Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.26
    )Basic and diluted (loss) earnings per share available to common
stockholders
    
    $
    (7.94
    )
    
    $
    0.24
    
    
    $
    (7.39
    )
    
    $
    0.47Weighted average outstanding common stock and common stock
equivalents
    
    
    223.6
    
    
    
    223.6
    
    
    
    223.6
    
    
    
    223.6


|(a) |  | See Note O.
|--- |  | -----------

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

4



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




Nine months ended September 30
    
    2003
    
    2002(In millions)

    

    
    
    

    

    Restated (a)Cash Flows from Operating ActivitiesNet (loss) income
    
    $
    (1,607
    )
    
    $
    105Adjustments to reconcile net (loss) income to net cash flows provided by operating activities:Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    57Change in bad debt provision for insurance and reinsurance receivables
    
    
    596
    
    
    
    20Minority interest
    
    
    (9
    )
    
    
    11Loss on disposal of property and equipment
    
    
    30
    
    
    
    17Deferred income tax provision
    
    
    
    
    
    
    (33
    )Realized investment (gains) losses, net of participating policyholders and minority interests
    
    
    (466
    )
    
    
    137Realized loss on disposition of discontinued operations, net of tax
    
    
    
    
    
    
    37Equity method (income) loss
    
    
    (157
    )
    
    
    24Amortization of bond discount
    
    
    (47
    )
    
    
    (98
    )Depreciation
    
    
    66
    
    
    
    74Changes in:Receivables
    
    
    (2,424
    )
    
    
    627Deferred acquisition costs
    
    
    (128
    )
    
    
    (130
    )Accrued investment income
    
    
    (64
    )
    
    
    2Federal income taxes recoverable/payable
    
    
    (751
    )
    
    
    713Prepaid reinsurance premiums
    
    
    (43
    )
    
    
    (196
    )Reinsurance balances payable
    
    
    523
    
    
    
    309Insurance reserves
    
    
    5,880
    
    
    
    (664
    )Other, net
    
    
    83
    
    
    
    (206
    )Total adjustments
    
    
    3,089
    
    
    
    701Net cash flows provided by operating activities
    
    
    1,482
    
    
    
    806Cash Flows from Investing ActivitiesPurchases of fixed maturity securities
    
    
    (48,158
    )
    
    
    (49,577
    )Proceeds from fixed maturity securities:Sales
    
    
    41,330
    
    
    
    48,195Maturities, calls and redemptions
    
    
    5,011
    
    
    
    2,025Purchases of equity securities
    
    
    (229
    )
    
    
    (646
    )Proceeds from sales of equity securities
    
    
    416
    
    
    
    816Change in short-term investments
    
    
    17
    
    
    
    (1,394
    )Change in collateral on loaned securities and derivatives
    
    
    328
    
    
    
    84Change in other investments
    
    
    111
    
    
    
    (146
    )Purchases of property and equipment
    
    
    (68
    )
    
    
    (61
    )Dispositions
    
    
    (46
    )
    
    
    76Other, net
    
    
    18
    
    
    
    (7
    )Net cash flows used by investing activities
    
    
    (1,270
    )
    
    
    (635
    )Net Cash Flows from Financing ActivitiesPrincipal payments on debt
    
    
    (138
    )
    
    
    (84
    )Return of policyholder account balances on investment contracts
    
    
    (18
    )
    
    
    (36
    )Other
    
    
    (4
    )
    
    
    66Net cash flows used by financing activities
    
    
    (160
    )
    
    
    (54
    )Net change in cash and cash equivalents
    
    
    52
    
    
    
    117Cash and cash equivalents, beginning of period
    
    
    126
    
    
    
    142Cash and cash equivalents, end of period
    
    $
    178
    
    
    $
    259Supplemental Disclosures of Cash Flow Information:Cash paid (received):Interest
    
    $
    133
    
    
    $
    97Federal income taxes
    
    
    (248
    )
    
    
    (627
    )Non-cash transactions:Notes receivable for the issuance of common stock
    
    
    3
    
    
    
    3


|(a) |  | See Note O.
|--- |  | -----------

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

5



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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 the
accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries,
which include property and casualty insurance companies (principally
Continental Casualty Company (CCC) and The Continental Insurance Company (CIC))
and life and group insurance companies (principally Continental Assurance
Company (CAC), Valley Forge Life Insurance Company (VFL) and CNA Group Life
Assurance Company (CNAGLA)), collectively CNA or the Company. As of September
30, 2003, Loews Corporation (Loews) owned approximately 90% of the outstanding
common stock of CNAF.

The accompanying Condensed Consolidated Financial Statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America (GAAP). Certain financial information that is normally
included in annual financial statements, including certain financial statement
footnotes, prepared in accordance with GAAP, is not required for interim
reporting purposes and has been condensed or omitted. These statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in CNAFs Form 10-K filed with the Securities and Exchange
Commission (SEC) for the year ended December 31, 2002.

The interim financial data as of September 30, 2003 and for the three and nine
months ended September 30, 2003 and 2002 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 results of operations 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.

As a result of a routine review of the Companys periodic filings by the
Division of Corporation Finance of the SEC, the Company has restated its
results of operations for the three and nine months ended September 30, 2002.
The restated financial statements reflect an adjustment to the Companys
historical accounting for its investment in life settlement contracts and the
related revenue recognition. See Note O for further discussion.

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

Note B. Accounting Pronouncements

CNA adopted Statement of Financial
Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS 142) on January 1, 2002. SFAS 142 changed the
accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach. Amortization of goodwill
and indefinite-lived intangible assets recorded in past business combinations
ceased upon adoption of SFAS 142.

During 2002, the Company completed its initial goodwill impairment testing and
recorded a $64 million pretax, or $57 million after-tax, impairment charge. In
accordance with SFAS 142, the impairment charge, which consisted of a $51
million pretax, or $48 million after-tax, charge in Specialty Lines, a $12
million pretax, or $8 million after-tax, charge in Life Operations, and a $1
million pretax, or $1 million after-tax, charge in Corporate and Other, was
recorded as a cumulative effect of a change in accounting principle as of
January 1, 2002. Goodwill and indefinite-lived intangible assets are tested
for impairment annually and when certain triggering events require such tests.

6



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

Any future impairment losses incurred will be reported in results of
operations. Goodwill of $152 million and $154 million as of September 30, 2003
and December 31, 2002 represents the excess of purchase price over fair value
of the net assets of acquired entities. Other intangible assets were $20
million as of September 30, 2003 and December 31, 2002.

In November of 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an
interpretation of FASB Statements of Financial Accounting Standards No. 5, 57,
and 107 and rescission of FASB Interpretation No. 34) (FIN 45). FIN 45
clarifies the requirements of FASB Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies (SFAS 5) relating to a guarantors
accounting for, and disclosure of, the issuance of certain types of guarantees.
FIN 45 provides for additional disclosure requirements related to guarantees
which were effective for financial periods ending after December 15, 2002. The
Company adopted the disclosure requirements of FIN 45 during the fourth quarter
of 2002. Additionally, FIN 45 outlines provisions for initial recognition and
measurement of the liability incurred in providing a guarantee. The Company
adopted the initial recognition and measurement requirements for all guarantees
as of January 1, 2003. The initial adoption of the recognition and measurement
requirements of FIN 45 did not have a significant impact on the results of
operations or equity of the Company.

In December of 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation, Transition and
Disclosure (SFAS 148). SFAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure requirements of
SFAS 123, Accounting for Stock-Based Compensation (SFAS 123),to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. CNA has adopted the disclosure provisions
of this standard for all annual and interim financial statements. The Company
has determined that it will not adopt the fair value based method of accounting
for stock-based employee compensation in 2003.

The effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation under the Companys stock-based compensation plans is illustrated
in Note C.

In January of 2003, the FASB issued
FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 (ARB 51) (FIN 46). As a general rule, ownership by the parent,
either directly or indirectly, of over 50% of the outstanding voting shares of
a subsidiary is a condition requiring the preparation of consolidated financial
statements of the parent and its subsidiary. FIN 46 clarifies the exceptions
to this general rule, as enunciated in paragraph two of ARB 51. FIN 46
requires an entity to consolidate a variable interest entity (VIE) even though
the entity does not, either directly or indirectly, own over 50% of the
outstanding voting shares.

FIN 46 defines a VIE as one in which a) the equity investment is not sufficient
to permit the entity to finance its activities without additional subordinated
financial support from other parties, which is provided through other interests
that will absorb some or all of the expected losses of the entity, or b) the
equity investors lack one or more of the following essential characteristics of
a controlling financial interest i) direct or indirect ability to make
decisions about the entitys activities through voting rights or similar rights
ii) the obligation to absorb the expected losses of the entity, if they occur
or iii) the right to receive the expected residual returns of the entity, if
they occur. The primary beneficiary of a VIE is required to consolidate the
VIE.

7



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##### Table of Contents



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

Financial statements issued after January 31, 2003 are required to disclose the
nature, purpose, activities and size of the VIE and maximum exposure to loss as
a result of its involvement with the VIE. The Company reviewed FIN 46 and is
of the opinion that at the present time, the Company is neither a primary
beneficiary of a VIE nor does it have a significant involvement with a VIE.

In April of 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 amends Statement of Financial Accounting
Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities
(SFAS 133) for certain decisions made by the FASB as part of the Derivatives
Implementation Group (DIG) process and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. SFAS 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003.
The adoption of SFAS 149 did not have a significant impact on the results of
operations or equity of the Company.

In May of 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an
issuer of financial instruments classifies and measures in its statement of
financial position certain instruments with characteristics of both liabilities
and equity. SFAS 150 modifies the accounting and financial statement
disclosures of certain financial instruments that, under previous guidance,
issuers could account for as equity. SFAS 150 affects the issuers accounting
for three types of financial instruments that are required to be accounted for
as liabilities. The Company did not have any financial instruments outstanding
to which the provisions of SFAS 150 apply; therefore, the adoption of SFAS 150
did not have any impact on the results of operations or equity of the Company.

In July of 2003, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position 03-01, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-01).
SOP 03-01 provides guidance on accounting and reporting by insurance
enterprises for certain nontraditional long-duration contracts and for separate
accounts. SOP 03-01 is effective for financial statements for fiscal years
beginning after December 15, 2003. SOP 03-01 may not be applied retroactively
to prior years financial statements, and initial application should be as of
the beginning of an entitys fiscal year. CNA will adopt SOP 03-01 as of
January 1, 2004. The Company is in the process of evaluating the effect of SOP
03-01.

8



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##### Table of Contents



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

Note C. Earnings Per Share

The computation of earnings per share was as follows.

(Loss) Earnings Per Share

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions, except per share amounts)(Loss) income from continuing operations
    
    $
    (1,760
    )
    
    $
    54
    
    
    $
    (1,607
    )
    
    $
    197Less: preferred stock dividend (accumulated but undeclared)
    
    
    (15
    )
    
    
    
    
    
    
    (45
    )
    
    
    (Loss) income from continuing operations available to common
stockholders
    
    
    (1,775
    )
    
    
    54
    
    
    
    (1,652
    )
    
    
    197Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )Net (loss) income available to common stockholders
    
    $
    (1,775
    )
    
    $
    54
    
    
    $
    (1,652
    )
    
    $
    105Weighted average outstanding common stock and common stock
equivalents
    
    
    223.6
    
    
    
    223.6
    
    
    
    223.6
    
    
    
    223.6Effect of dilutive securities, employee stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted average outstanding common stock and common
stock equivalents assuming conversions
    
    
    223.6
    
    
    
    223.6
    
    
    
    223.6
    
    
    
    223.6Basic and diluted (loss) earnings per share available to common
stockholders
    
    $
    (7.94
    )
    
    $
    0.24
    
    
    $
    (7.39
    )
    
    $
    0.47


The Company applies Accounting
Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations, in accounting
for its stock-based compensation plan. Under the recognition and measurement
principles of APB 25, no stock-based compensation cost has been recognized, as
the exercise price of the granted options equaled the market price of the
underlying stock at the grant date.

The following table illustrates the pro forma effect on net (loss) income and
(loss) earnings per share, had the Company applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation under the Companys
stock-based compensation plans.

Pro Forma Effect of SFAS 123 on Net (Loss) Income and (Loss) Earnings Per Share

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions, except per share amounts)Net (loss) income
    
    $
    (1,760
    )
    
    $
    54
    
    
    $
    (1,607
    )
    
    $
    105Less: Total stock-based compensation cost determined
under the fair value method, net of tax
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Pro forma net (loss) income
    
    $
    (1,760
    )
    
    $
    54
    
    
    $
    (1,608
    )
    
    $
    105Basic and diluted (loss) earnings per share
    
    $
    (7.94
    )
    
    $
    0.24
    
    
    $
    (7.39
    )
    
    $
    0.47Basic and diluted (loss) earnings per share, pro forma
    
    $
    (7.94
    )
    
    $
    0.24
    
    
    $
    (7.40
    )
    
    $
    0.47


9



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##### Table of Contents



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

Note D. Investments

The significant components of net investment income are presented in the
following table.

Net Investment Income

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Fixed maturity securities
    
    $
    412
    
    
    $
    461
    
    
    $
    1,254
    
    
    $
    1,404Short term investments
    
    
    14
    
    
    
    17
    
    
    
    46
    
    
    
    44Limited partnerships
    
    
    61
    
    
    
    (72
    )
    
    
    159
    
    
    
    (28
    )Equity securities
    
    
    4
    
    
    
    10
    
    
    
    13
    
    
    
    25Interest on funds withheld and other deposits
    
    
    (148
    )
    
    
    (53
    )
    
    
    (288
    )
    
    
    (168
    )Other
    
    
    20
    
    
    
    22
    
    
    
    63
    
    
    
    62Gross investment income
    
    
    363
    
    
    
    385
    
    
    
    1,247
    
    
    
    1,339Investment expense
    
    
    (11
    )
    
    
    (21
    )
    
    
    (36
    )
    
    
    (47
    )Net investment income
    
    $
    352
    
    
    $
    364
    
    
    $
    1,211
    
    
    $
    1,292


The components of net realized investment results are presented in the
following table.

Net Realized Investment Gains (Losses)

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Realized investment gains (losses):Fixed maturity securities:U.S. Government bonds
    
    $
    (145
    )
    
    $
    214
    
    
    $
    (70
    )
    
    $
    263Corporate and other taxable bonds
    
    
    177
    
    
    
    (165
    )
    
    
    303
    
    
    
    (414
    )Tax-exempt bonds
    
    
    (16
    )
    
    
    41
    
    
    
    79
    
    
    
    57Asset-backed bonds
    
    
    17
    
    
    
    14
    
    
    
    58
    
    
    
    42Redeemable preferred stock
    
    
    (4
    )
    
    
    (13
    )
    
    
    (14
    )
    
    
    (28
    )Total fixed maturity securities
    
    
    29
    
    
    
    91
    
    
    
    356
    
    
    
    (80
    )Equity securities
    
    
    31
    
    
    
    (17
    )
    
    
    89
    
    
    
    32Derivative securities
    
    
    85
    
    
    
    (44
    )
    
    
    8
    
    
    
    (78
    )Short term investments
    
    
    3
    
    
    
    
    
    
    
    13
    
    
    
    10Other invested assets
    
    
    18
    
    
    
    1
    
    
    
    1
    
    
    
    (13
    )Total realized investment gains (losses)
    
    
    166
    
    
    
    31
    
    
    
    467
    
    
    
    (129
    )Allocated to participating policyholders and minority interest
    
    
    (2
    )
    
    
    (7
    )
    
    
    (1
    )
    
    
    (8
    )Income tax (expense) benefit
    
    
    (59
    )
    
    
    (8
    )
    
    
    (161
    )
    
    
    50Net realized investment gains (losses)
    
    $
    105
    
    
    $
    16
    
    
    $
    305
    
    
    $
    (87
    )


Net realized investment results included $10 million and $144 million of
after-tax impairment losses for the three months ended September 30, 2003 and
2002 and $196 million and $346 million of after-tax impairment losses for the
nine months ended September 30, 2003 and 2002. Impairment losses of $10
million after-tax were recorded primarily in the forestry sector for the three
months ended September 30, 2003. Impairment losses of $144 million after-tax
were recorded primarily in the communications sector for the same period in
2002. Impairment losses of $196 million after-tax were recorded across several
sectors, including the airline, healthcare and energy industries, for the nine
months ended September 30, 2003. Impairment losses of $346 million after-tax
were recorded primarily in the communications sector for the same period in
2002.

10



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##### Table of Contents



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

Note E. Derivative Financial Instruments

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

Derivative Financial Instruments Recognized Gains (Losses)

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)General accountSwaps
    
    $
    98
    
    
    $
    (1
    )
    
    $
    86
    
    
    $
    11Futures sold, not yet purchased
    
    
    (20
    )
    
    
    (48
    )
    
    
    (59
    )
    
    
    (49
    )Forwards
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    (13
    )Commitments to purchase government and municipal securities
    
    
    1
    
    
    
    
    
    
    
    (17
    )
    
    
    (15
    )Equity warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Collateralized debt obligation liabilities
    
    
    5
    
    
    
    5
    
    
    
    (4
    )
    
    
    (11
    )Options embedded in convertible debt securities
    
    
    
    
    
    
    7
    
    
    
    9
    
    
    
    (57
    )Total
    
    $
    85
    
    
    $
    (37
    )
    
    $
    17
    
    
    $
    (135
    )Separate accountsFutures purchased
    
    $
    21
    
    
    $
    (114
    )
    
    $
    96
    
    
    $
    (228
    )Futures sold, not yet purchased
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Commitments to purchase government and municipal securities
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    1Options purchased
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (3
    )Options written
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Total
    
    $
    22
    
    
    $
    (117
    )
    
    $
    96
    
    
    $
    (231
    )


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

Derivative Financial Instruments

Contractual/September 30, 2003
    
    Notional(In millions)
    
    Amount
    
    Asset
    
    (Liability)General accountSwaps
    
    $
    846
    
    
    $
    
    
    
    $
    (9
    )Interest rate caps
    
    
    500
    
    
    
    
    
    
    
    Futures sold, not yet purchased
    
    
    2,805
    
    
    
    
    
    
    
    (19
    )Forwards
    
    
    34
    
    
    
    
    
    
    
    (1
    )Commitments to purchase government and municipal securities
    
    
    428
    
    
    
    
    
    
    
    (3
    )Equity warrants
    
    
    12
    
    
    
    
    
    
    
    Collateralized debt obligation liabilities
    
    
    125
    
    
    
    
    
    
    
    (17
    )Options purchased
    
    
    4
    
    
    
    
    
    
    
    Synthetic guaranteed investment contracts
    
    
    344
    
    
    
    
    
    
    
    Options embedded in convertible debt securities
    
    
    873
    
    
    
    193
    
    
    
    Total
    
    $
    5,971
    
    
    $
    193
    
    
    $
    (49
    )Separate accountsFutures purchased
    
    $
    907
    
    
    $
    
    
    
    $
    (9
    )Futures sold, not yet purchased
    
    
    13
    
    
    
    
    
    
    
    Options purchased
    
    
    40
    
    
    
    
    
    
    
    Options written
    
    
    59
    
    
    
    
    
    
    
    (1
    )Total
    
    $
    1,019
    
    
    $
    
    
    
    $
    (10
    )


11



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##### Table of Contents



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

Derivative Financial Instruments

Contractual/December 31, 2002
    
    Notional(In millions)
    
    Amount
    
    Asset
    
    (Liability)General accountSwaps
    
    $
    553
    
    
    $
    
    
    
    $
    Interest rate caps
    
    
    500
    
    
    
    
    
    
    
    Futures sold, not yet purchased
    
    
    14
    
    
    
    
    
    
    
    Forwards
    
    
    9
    
    
    
    
    
    
    
    Commitments to purchase government and municipal securities
    
    
    1,289
    
    
    
    14
    
    
    
    Equity warrants
    
    
    10
    
    
    
    8
    
    
    
    Collateralized debt obligation liabilities
    
    
    126
    
    
    
    
    
    
    
    (14
    )Options purchased
    
    
    6
    
    
    
    
    
    
    
    Synthetic guaranteed investment contracts
    
    
    481
    
    
    
    
    
    
    
    Options embedded in convertible debt securities
    
    
    843
    
    
    
    130
    
    
    
    Total
    
    $
    3,831
    
    
    $
    152
    
    
    $
    (14
    )Separate accountsFutures purchased
    
    $
    614
    
    
    $
    1
    
    
    $
    Futures sold, not yet purchased
    
    
    10
    
    
    
    
    
    
    
    Commitments to purchase government and municipal securities
    
    
    11
    
    
    
    
    
    
    
    Options purchased
    
    
    33
    
    
    
    
    
    
    
    Options written
    
    
    51
    
    
    
    
    
    
    
    (1
    )Total
    
    $
    719
    
    
    $
    1
    
    
    $
    (1
    )


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

Fair Value Hedges

The Companys hedging activities primarily involve hedging interest rate and
foreign currency risks on various assets and liabilities. For the three and
nine months ended September 30, 2003, there was no ineffective portion of fair
value hedges that resulted in realized gains or losses. The ineffective
portion of fair value hedges resulted in realized losses of less than $1
million for the three and nine months ended September 30, 2002.

Note F. Legal Proceedings and Contingent Liabilities

IGI Contingency

In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an
arrangement with IOA Global, Ltd. (IOA), an independent managing general agent
based in Philadelphia, Pennsylvania, to develop and manage a book of accident
and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies,
Ltd. (IGI), a personal accident reinsurance managing general underwriter, was
appointed to underwrite and market the book under the supervision of IOA.
Between April 1, 1997 and December 1, 1999, IGI underwrote a number of
reinsurance arrangements with respect to personal accident insurance worldwide
(the IGI Program). Under various arrangements, CNA Re Ltd. both assumed risks
as a reinsurer and also ceded a substantial portion of those risks to other
companies,

12



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##### Table of Contents



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

including other CNA insurance subsidiaries and ultimately to a group of
reinsurers participating in a reinsurance pool known as the Associated Accident
and Health Reinsurance Underwriters (AAHRU) Facility. CNAs Group Operations
business unit participated as a pool member in the AAHRU Facility in varying
percentages between 1997 and 1999.

CNA has determined that a portion of the premiums assumed under the IGI Program
related to United States workers compensation carve-out business. Some of
these premiums were received from John Hancock Financial Services, Inc. (John
Hancock). CNA is aware that a number of reinsurers with workers compensation
carve-out insurance exposure, including John Hancock, have disavowed their
obligations under various legal theories. If one or more such companies are
successful in avoiding or reducing their liabilities, then it is likely that
CNAs potential liability will also be reduced. Moreover, based on information
known at this time, CNA believes it has strong grounds to successfully
challenge its alleged exposure on a substantial portion of its United States
workers compensation carve-out business, including all purported exposure
derived from John Hancock, through legal action.

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

CNA has established reserves for its estimated exposure under the IGI Program,
other than that derived from John Hancock, and an estimate for recoverables
from retrocessionaires. CNA has not established any reserve for any exposure
derived from John Hancock because, as indicated, CNA believes the contract will
be rescinded.

The Company is pursuing a number of loss mitigation strategies with respect to
the entire IGI Program. Although the results of these various actions to date
support the recorded reserves, the estimate of ultimate losses is subject to
considerable uncertainty due to the complexities described above. As a result
of these uncertainties, the results of operations in future periods may be
adversely affected by potentially significant reserve additions. Management
does not believe that any such reserve additions would be material to the
equity of the Company, although results of operations may be adversely
affected. The Companys position in relation to the IGI Program was unaffected
by the sale of CNA Re Ltd. in 2002.

California Wage and Hour Litigation

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

13



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##### Table of Contents



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

however, in the opinion of management, the outcome will not materially affect
the equity of the Company, although results of operations may be adversely
affected.

Voluntary Market Premium Litigation

CNA, along with dozens of other insurance companies, is a defendant in sixteen
cases brought by large policyholders which generally allege that the
defendants, as part of an industry-wide conspiracy, included improper charges
in their retrospectively rated and other loss-sensitive insurance programs.
Among the claims asserted are violations of state antitrust laws, breach of
contract, fraud and unjust enrichment. Thirteen lawsuits were brought as class
actions in state courts, two lawsuits were brought as class actions in federal
courts, and one lawsuit has been filed in state court on behalf of 43
individually named plaintiffs. In three of the cases, the defendants won
dismissals on motions and, in four others, class certification was denied after
hearing. Plaintiffs have voluntarily dismissed their claims in six states. In
one of the federal court cases, Sandwich Chef of Texas, Inc. v. Reliance
National Indemnity Insurance Co., 202 F.R.D. 480 (S.D. Tex. 2001), revd, 319
F.3d 205 (5th Cir. 2003), cert. denied, 72 USLW 3235 (U.S. Oct 6,
2003), the
United States Court of Appeals for the Fifth Circuit reversed a decision by the
District Court for the Southern District of Texas certifying a multi-state
class. Due to the uncertainty of how the courts may interpret state and federal
law as applied to the facts of the cases, the extent of potential losses beyond
any amounts that may be accrued are not readily determinable at this time.
Based on facts and circumstances presently known, however, in the opinion of
management the outcome will not materially affect the equity of the Company,
although results of operations may be adversely affected.

Environmental Pollution and Mass Tort and Asbestos (APMT) Litigation

CNA is also a party to litigation and claims related to APMT cases arising in
the ordinary course of business. See Note G for further discussion.

Other Litigation

CNA is also a party to other litigation arising in the ordinary course of
business. Based on the facts and circumstances currently known, such other
litigation will not, in the opinion of management, materially affect the
results of operations or equity of CNA.

Note G. Claim and Claim Adjustment Expense Reserves

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

Establishing claim and claim adjustment expense reserves, including claim and
claim adjustment expense reserves for catastrophic events that have occurred,
is an estimation process. Many factors can ultimately affect the final
settlement of a claim and, therefore, the necessary reserve. Changes in the
law, results of litigation, medical costs, the cost of repair materials and
labor rates can all affect ultimate claim costs. In addition, time can be a
critical part of reserving determinations since the longer the span between the
incidence of a loss and the payment or settlement of the claim, the more
variable the ultimate settlement

14



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##### Table of Contents



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

amount can be. Accordingly, short-tail claims, such as property damage claims,
tend to be more reasonably estimable than long-tail claims, such as workers
compensation, general liability and professional liability claims. Adjustments
to prior year reserve estimates, if necessary, are reflected in the results of
operations in the period that the need for such adjustments is determined.

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

APMT Reserves

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

Establishing reserves for APMT claim and claim adjustment expenses is subject
to uncertainties that are greater than those presented by other claims.
Traditional actuarial methods and techniques employed to estimate the ultimate
cost of claims for more traditional property and casualty exposures are less
precise in estimating claim and claim adjustment expense reserves for APMT,
particularly in an environment of emerging or potential claims and coverage
issues that arise from industry practices and legal, judicial, and social
conditions. Therefore, these traditional actuarial methods and techniques are
necessarily supplemented with additional estimating techniques and
methodologies, many of which involve significant judgments that are required of
management. Accordingly, a high degree of uncertainty remains for the
Companys ultimate liability for APMT claim and claim adjustment expenses.

In addition to the difficulties described above, estimating the ultimate cost
of both reported and unreported APMT claims is subject to a higher degree of
variability due to a number of additional factors, including among others: the
number and outcome of direct actions against the Company; coverage issues,
including whether certain costs are covered under the policies and whether
policy limits apply; allocation of liability among numerous parties, some of
whom may be in bankruptcy proceedings, and in particular the application of
joint and several liability to specific insurers on a risk; inconsistent
court decisions and developing legal theories; increasingly aggressive tactics
of plaintiffs lawyers; the risks and lack of predictability inherent in major
litigation; increased filings of claims in certain states to avoid the
application of tort reform statute effective dates; a further increase in
asbestos and environmental claims which cannot now be anticipated; continued
increase in mass tort claims relating to silica and silica-containing products,
and the outcome of ongoing disputes as to coverage in relation to these claims;
a further increase of claims and claims payment that may exhaust underlying
umbrella and excess coverage at accelerated rates; and future developments
pertaining to the Companys ability to recover reinsurance for asbestos and
environmental claims.

Since 1999, CNA has performed semi-annual ground up
reviews of all open APMT
claims to evaluate the adequacy of the Companys APMT reserves. The completion
of a comprehensive ground up analysis of its APMT exposures that was previously
scheduled for the second quarter was completed in the third quarter of
2003. During the second quarter of 2003 significant resources were dedicated to the
proposed national asbestos reform litigation and to support regulatory reviews.
The Company completed its formal and comprehensive analysis of all open APMT
claims in the third quarter of 2003. In performing its comprehensive ground up
analysis, the Company considers input from its professionals with direct
responsibility for the claims, inside and outside counsel with responsibility
for representation of the Company, and its actuarial staff. These
professionals review, among many factors, the policyholders present and future
exposures, including such factors as claims volume, trial conditions,
settlement demands and defense costs; the policies issued by CNA, including
such factors as aggregate or

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

per occurrence limits, whether the policy is primary, umbrella or excess, and
the existence of policyholder retentions and/or deductibles; the existence of
other insurance; and reinsurance arrangements.

Due to the inherent uncertainties in estimating reserves for APMT claim and
claim adjustment expenses and due to the significant uncertainties previously
described related to APMT claims, the ultimate liability for these cases, both
individually and in aggregate, may exceed the recorded reserves. Any such
potential additional liability, or any range of potential additional amounts,
cannot be reasonably estimated currently, but could be material to the
Companys business, results of operations, equity, insurer financial strength
and debt ratings. Due to, among other things, the factors described above, it
may be necessary for the Company to record material changes in its APMT claim
and claim adjustment expense reserves in the future, should new information
become available or other developments emerge.

The following table provides data related to CNAs APMT claim and claim
adjustment expense reserves.

Environmental Pollution and Mass Tort and Asbestos

September 30, 2003
    
    December 31, 2002Environmental
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    Pollution andMass Tort
    
    Asbestos
    
    Mass Tort
    
    Asbestos(In millions)Gross reserves
    
    $
    872
    
    
    $
    3,434
    
    
    $
    830
    
    
    $
    1,758Ceded reserves
    
    
    (270
    )
    
    
    (1,647
    )
    
    
    (313
    )
    
    
    (512
    )Net reserves
    
    $
    602
    
    
    $
    1,787
    
    
    $
    517
    
    
    $
    1,246


Environmental Pollution and Mass Tort

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 1,244 cleanup sites have been identified by
the Environmental Protection Agency (EPA) and included on its National
Priorities List (NPL). State authorities have designated many cleanup sites as
well.

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

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

A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress during 2002 or during the first
nine months of 2003, and it is unclear what positions Congress or the
Administration will take and what legislation, if any, will result in the
future. If there is legislation, and in some circumstances even if there is no
legislation, the federal role in environmental cleanup may be significantly
reduced in favor of state action. Substantial changes in the federal statute
or the activity of the EPA may cause states to reconsider their environmental
cleanup statutes and regulations. There can be no meaningful prediction of the
pattern of regulation that would result or the possible effect upon CNAs
results of operations or equity.

As of September 30, 2003 and December 31, 2002, CNA carried approximately $602
million and $517 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and mass tort claims. There was $153 million of environmental pollution and
mass tort net prior year unfavorable claim and claim adjustment expense reserve
development for the three and nine months ended September 30, 2003 and no
environmental pollution and mass tort net claim and claim adjustment expense
reserve development for the three and nine months ended September 30, 2002.
The Company paid environmental pollution-related claims and mass tort-related
claims, net of reinsurance recoveries, of $68 million and $91 million for the
nine months ended September 30, 2003 and 2002.

CNA has increased its net environmental pollution reserves to $405 million
reflecting $72 million in unfavorable net prior year environmental pollution
reserve development in the third quarter of 2003. This increase was in part due
to the emergence of certain negative legal developments, including several
court decisions which have reduced the effectiveness of the absolute pollution
exclusion by limiting its application to traditional industrial pollution, and
which have increased the scope of damages compensable under policies of
insurance. In addition, management has noted the potential emergence of Natural
Resource Damage claims under the Comprehensive Environmental Response
Compensation and Liability Act of 1980 and other federal statutes.

CNA has made settlement of large environmental pollution exposures a management
priority. The Company has resolved a number of its large environmental accounts
by negotiating favorable settlement agreements. In its settlements, CNA sought
to resolve those exposures and obtain the broadest release language to avoid
future claims from the same policyholders seeking coverage for sites or claims
that had not emerged at the time CNA settled with its policyholder. While the
terms of each settlement agreement vary, CNA sought to obtain broad
environmental releases that include known and unknown sites, claims and
policies. The broad release provisions contained in those settlement agreements
should, in many cases, prevent future exposure from settled policyholders. It
remains uncertain, however, whether a court interpreting the language of the
settlement agreements will uphold the broad language of the agreements.

In the third quarter of 2003, the Company began to classify its environmental
pollution accounts into several categories, which include structured
settlements, coverage in place agreements and active accounts. CNA has a
structured settlement agreement with one of its policyholders for which it has
future payment obligations. Structured settlement agreements provide for
payments over multiple years as set forth in each individual agreement. As to
the one structured settlement agreement existing at September 30, 2003, CNA has
a reserve of $12 million, net of reinsurance.

CNA has also used coverage in place agreements to resolve large pollution
exposures. Coverage in place agreements are typically agreements between CNA
and its policyholders identifying the policies and the terms for payment of
pollution related liabilities. Claims payments are contingent on presentation
of adequate documentation of damages during the policy periods and other
documentation supporting the demand for claims payment. Coverage in place
agreements may have annual payment caps. At September 30, 2003, CNA had
negotiated five such agreements in which CNA committed coverage for payment of

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

claims and claim related adjustment expenses subject to documentation
requirements as set forth in the terms of each specific agreement. The Company
has evaluated these commitments and has a $12 million reserve, net of
reinsurance, as of September 30, 2003 related to coverage in place agreements.

The Company categorizes active accounts as large or small accounts in the
pollution area. CNA defines a large account as an active account with more than
$100,000 cumulative paid losses. CNA has 148 large accounts with a collective
reserve of $101 million, net of reinsurance, at
September 30, 2003. The Company
has made closing large accounts a significant management priority. Small
accounts are defined as active accounts with $100,000 or less cumulative paid
losses. CNA has 427 small accounts with a collective reserve of $60 million,
net of reinsurance, at September 30, 2003.

The Company also evaluates its environmental pollution exposures arising from
its assumed reinsurance and its participation in various pools, including
Excess & Casualty Reinsurance Association (ECRA). At September 30, 2003, CNA
has a reserve of $38 million related to these liabilities.

At September 30, 2003, CNAs unassigned IBNR reserve for environmental
pollution was $182 million, net of reinsurance. This IBNR reserve relates to
potential development on accounts that have not settled and potential future
claims from unidentified policyholders.

CNA has also increased its mass tort
net reserves
to $197 million reflecting
$81 million in mass tort net prior year reserve development, due in part to the
elevated volume of silica claims. In 2003, CNA observed a marked increase in
silica claims frequency in Mississippi, where plaintiff attorneys appear to
have filed claims to avoid the effect of a tort reform. The most significant
silica exposures identified to date include a relatively small number of
accounts with significant numbers of new claims and substantial insurance
limits issued by the Company. Establishing claim and claim adjustment expense
reserves for silica claims is subject to uncertainties because of disputes
concerning medical causation with respect to certain diseases, including lung
cancer, geographical concentration of the lawsuits asserting the claims, and
the large rise in the total number of claims without underlying epidemiological
developments suggesting an increase in disease rates or plaintiffs.

The Companys ultimate liability for its environmental pollution and mass tort
claims is impacted by several factors including ongoing disputes with
policyholders over scope and meaning of coverage terms and, in the area of
environmental pollution, court decisions that continue to restrict the scope
and applicability of the absolute pollution exclusion contained in policies
issued by the Company after 1989. Due to the inherent uncertainties described
above, including the inconsistency of court decisions, the number of waste
sites subject to cleanup, and in the area of environmental pollution, the
standards for cleanup and liability, the ultimate liability of CNA for
environmental pollution and mass tort claims may vary substantially from the
amount currently recorded.

Asbestos

CNAs property and casualty insurance subsidiaries also have exposure to
asbestos-related claims. Estimation of asbestos-related claim and claim
adjustment expense reserves involves many of the same limitations discussed
above for environmental pollution claims, such as inconsistency of court
decisions, specific policy provisions, allocation of liability among insurers
and insureds, and additional factors such as missing policies and proof of
coverage. Furthermore, estimation of asbestos-related claims is difficult due
to, among other reasons, the proliferation of bankruptcy proceedings and
attendant uncertainties, the targeting of a broader range of businesses and
entities as defendants, the uncertainty as to which other insureds may be
targeted in the future and the uncertainties inherent in predicting the number
of future claims.

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

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

Several factors are, in managements view, negatively impacting asbestos claim
trends. Plaintiff attorneys who previously sued entities who are now bankrupt
are seeking other viable targets. As a result, companies with few or no
previous asbestos claims are becoming targets in asbestos litigation and,
although they may have little or no liability, nevertheless must be defended by
their insurers. Additionally, plaintiff attorneys and trustees for future
claimants are demanding that policy limits be paid lump-sum into the bankruptcy
asbestos trusts prior to presentation of valid claims and medical proof of
these claims. The ultimate impact or success of this tactic remains uncertain.
Plaintiff attorneys and trustees for future claimants are also attempting to
devise claims payment procedures for bankruptcy trusts that would allow
asbestos claims to be paid under lax standards. This also presents the
potential for exhausting policy limits in an accelerated fashion.

In addition, management has observed an increase in the total number of
policyholders with current asbestos claims as additional defendants are added
to existing lawsuits and are named in new asbestos bodily injury lawsuits. New
asbestos bodily injury claims have also increased substantially in 2003.

Following the third quarter of 2003 ground up review, CNA has increased its
gross asbestos reserves to $3,434 million and its net asbestos reserves to
$1,787 million at September 30, 2003 reflecting $1,808 million and $642 million
in unfavorable gross and net asbestos prior year reserve development
principally due to potential losses from policies issued by CNA with high
attachment points, which previous exposure analysis indicated would not be
reached. As part of its semi-annual review, the Company examined the claims
filing trends and the projected erosion rates of underlying primary and lower
excess insurance on open asbestos accounts to determine timeframes within which
high excess policies issued by CNA could be reached. Elevated claims volumes,
together with certain adverse court decisions affecting
rapidity by which asbestos claims are paid supported the conclusion that excess
policies with high attachment points previously thought not to be exposed may
now potentially be exposed.

The Company has resolved a number of its large asbestos accounts by negotiating
favorable settlement agreements. CNA has structured settlement agreements with
seven of its policyholders for which it has future payment obligations.
Structured settlement agreements provide for payments over multiple years as
set forth in each individual agreement. At December 31, 2002, CNA had four
structured settlement agreements reserved at $118 million, net of reinsurance.
Since December 31, 2002, CNA has resolved three additional asbestos accounts
through structured settlement agreements. As to the seven structured
settlement agreements existing at September 30, 2003, payment obligations under
those settlement agreements are projected to terminate in 2016. CNA has
evaluated its exposure and the expected reinsurance recoveries under these
agreements and has a reserve of $160 million, net of reinsurance at September
30, 2003, related to remaining payment obligations under these agreements.

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

CNA, through its acquisition of CIC in 1995, assumed obligations under the
Wellington Agreement. In 1985, 47 asbestos producers and their insurers,
including CIC, executed the Wellington Agreement. The agreement intended to
resolve all issues and litigation related to coverage for asbestos exposures.
Under this agreement, signatory insurers committed scheduled policy limits and
made the limits available to pay asbestos claims based upon coverage blocks
designated by the policyholders in 1985, subject to extension by policyholders.
CIC was a signatory insurer to the Wellington Agreement. At December 31, 2002,
CNA had fulfilled its Wellington Agreement obligations as to all but five
accounts and has a reserve of $28 million, net of reinsurance, related to its
remaining Wellington obligations. At September 30, 2003, with respect to these
five remaining unpaid Wellington obligations, CNA has evaluated its exposure
and the expected reinsurance recoveries under these agreements and has a $23
million reserve, net of reinsurance.

CNA has also used coverage in place agreements to resolve large asbestos
exposures. Coverage in place agreements are typically agreements between CNA
and its policyholders identifying the policies and the terms for payment of
asbestos related liabilities. Claims payments are contingent on presentation of
adequate documentation showing exposure during the policy periods and other
documentation supporting the demand for claims payment. Coverage in place
agreements may have annual payment caps. At September 30, 2003, CNA had
negotiated 27 such agreements in which CNA committed coverage for payment of
claims and claim related adjustment expenses subject to documentation
requirements as set forth in the terms of each specific agreement. Coverage in
place agreements are evaluated based on claims filings trends and severities.
Due to adverse claims trends described in this section, management has
increased its estimate of exposure under current coverage in place agreements.
At December 31, 2002, the Company had estimated its exposure for its
twenty-three coverage in place agreements at $66 million, net of reinsurance.
Since year end 2002, CNA resolved four additional asbestos exposures through
coverage in place agreements and has also evaluated the possibility that high
excess coverages it issued could become impaired under these agreements. The
Company has evaluated these commitments and the expected reinsurance recoveries
under these agreements and has a $106 million reserve, net of reinsurance,
related to coverage in place agreements.

The Company categorizes active asbestos accounts as large or small accounts.
CNA defines a large account as an active account with more than $100,000
cumulative paid losses. The Company made closing large accounts a significant
management priority. At December 31, 2002, the Company had 150
large accounts and
has a reserve of $220 million, net of reinsurance. At September 30, 2003, CNA
has 156 large accounts with a collective reserve of $388 million, net of
reinsurance. Large accounts are typically accounts that have been long
identified as significant asbestos exposures. In its most recent ground up
reserve study, the Company observed that underlying layers of primary, umbrella
and lower layer excess policies were exhausting at accelerated rates due to
increased claims volumes, claims severities and increased defense expense
incurred in litigating claims for certain policyholders. Those accounts where
the Company had issued high excess policies were evaluated in the study to
determine potential impairment of the high excess layers of coverage.
Management concluded that high excess coverage previously thought not to be
exposed could potentially be exposed should current adverse claim trends
continue.

Small accounts are defined as active accounts with $100,000 or less cumulative
paid losses. At December 31, 2002, the Company had 939 small accounts with a
reserve of $90 million, net of reinsurance. At September 30, 2003, CNA has
1,028 small accounts, approximately 84% of its total active asbestos accounts.
Small accounts are typically representative of policyholders with limited
connection to asbestos. As entities who were historic targets in asbestos
litigation continue to file for bankruptcy protection, plaintiffs attorneys
are seeking other viable targets. As a result, companies with few or no
previous asbestos claims are becoming targets in asbestos litigation and,
although they may have little or

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

no liability, nevertheless must be defended by their insurers. As claims
filings continue to increase, costs incurred in defending small accounts are
expected to increase. The Company has evaluated small accounts and has
increased its collective reserve to $155 million, net of reinsurance, as of
September 30, 2003.

The Company also evaluates its asbestos liabilities arising from its assumed
reinsurance business and its participation in various pools. At December 31,
2002, CNA had a $91 million reserve related to these asbestos liabilities
arising from the Companys assumed reinsurance obligations and CNAs
participation in pools, including ECRA. At September 30, 2003, CNA has a $158
million net reserve related to these liabilities.

At September 30, 2003, CNAs unassigned IBNR reserve for asbestos was $742
million, net of reinsurance. This IBNR reserve relates to potential development
on accounts that have not settled and potential future claims from unidentified
policyholders. At December 31, 2002, the unassigned IBNR reserve was $584
million, net of reinsurance.

Some asbestos-related defendants have asserted that their claims for insurance
are not subject to aggregate limits on coverage. CNA has such claims from a
number of insureds. Some of these claims involve insureds facing exhaustion of
products liability aggregate limits in their policies, who have asserted that
their asbestos-related claims fall within so-called non-products liability
coverage contained within their policies rather than products liability
coverage, and that the claimed non-products coverage is not subject to any
aggregate limit. It is difficult to predict the ultimate size of any of the
claims for coverage purportedly not subject to aggregate limits or predict to
what extent, if any, the attempts to assert non-products claims outside the
products liability aggregate will succeed. The Company has attempted to manage
its asbestos exposure by aggressively seeking to settle claims on acceptable
terms. There can be no assurance that any of these settlement efforts will be
successful, or that any such claims can be settled on terms acceptable to CNA.
Where CNA cannot settle a claim on acceptable terms, the Company aggressively
litigates the claim. Adverse developments with respect to such matters could
have a material adverse effect on CNAs results of operations or equity.

Certain asbestos litigation in which CNA is currently engaged are described
below:

On February 13, 2003, CNA announced it had resolved asbestos related coverage
litigation and claims involving A.P. Green Industries, A.P. Green Services and
Bigelow  Liptak Corporation. Under the agreement, CNA will be required to
pay $74 million, net of reinsurance recoveries, over a ten year period. The
settlement resolves CNAs liabilities for all pending and future asbestos
claims involving A.P. Green Industries, Bigelow  Liptak Corporation and
related subsidiaries, including alleged non-products exposures. The
settlement has received initial bankruptcy court approval and CNA expects to
procure confirmation of a bankruptcy plan containing a channeling injunction to
protect CNA from any future claims.

CNA is engaged in insurance coverage litigation with underlying plaintiffs who
have asbestos bodily injury claims against the former Robert A. Keasbey Company
(Keasbey) in New York State court (Continental Casualty Co. v. Nationwide
Indemnity Co. et al., No. 601037/03 (N.Y. County)). Keasbey, a currently
dissolved corporation, was a seller and installer of asbestos-containing
insulation products in New York and New Jersey. Thousands of plaintiffs have
filed bodily injury claims against Keasbey; however, Keasbeys involvement at a
number of work sites is a highly contested issue. Therefore, the defense
disputes the percentage of valid claims against Keasbey. CNA issued Keasbey
primary policies for 1970-1987 and excess policies for 1972-1978. CNA has paid
an amount substantially equal to the policies aggregate limits for products
and completed operations claims. Claimants against Keasbey

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

allege, among other things, that CNA owes coverage under sections of the
policies not subject to the aggregate limits, an allegation CNA vigorously
contests in the lawsuit.

CNA has insurance coverage disputes related to asbestos bodily injury claims
against Burns & Roe Enterprises, Inc. (Burns & Roe). Originally raised in
litigation, now stayed, these disputes are currently part of In re: Burns & Roe
Enterprises, Inc., pending in the U.S. Bankruptcy Court for the District of New
Jersey, No. 00-41610. Burns & Roe provided engineering and related services in
connection with construction projects. At the time of its bankruptcy filing,
Burns & Roe faced approximately 11,000 claims alleging bodily injury resulting
from exposure to asbestos as a result of construction projects in which Burns &
Roe was involved. CNA allegedly provided primary liability coverage to Burns &
Roe from 1956-1969 and 1971-1974, along with certain project-specific policies
from 1964-1970.

CIC issued certain primary and excess policies to Bendix Corporation (Bendix),
now part of Honeywell International Inc. (Honeywell). Honeywell faces
approximately 71,000 pending asbestos bodily injury claims resulting from
alleged exposure to Bendix friction products. CICs primary policies allegedly
covered the period from at least 1939 (when Bendix began to use asbestos in its
friction products) to 1983, although the parties disagree about whether CICs
policies provided product liability coverage before 1940 and from 1945 to 1956.
CIC asserts that it owes no further material obligations to Bendix under any
primary policy. Honeywell alleges that two primary policies issued by CIC
covering 1969-1975 contain occurrence limits but not product liability
aggregate limits for asbestos bodily injury claims. CIC has asserted, among
other things, which even if Honeywells allegation is correct, which CNA
denies, its liability is limited to a single occurrence limit per policy or per
year, and in the alternative, a proper allocation of losses would substantially
limit its exposure under the 1969-1975 policies to asbestos claims. These and
other issues are being litigated in Continental Insurance Co., et al. v.
Honeywell International Inc., No. MRS-L-1523-00 (Morris County, New Jersey).

Policyholders have also initiated litigation directly against CNA and other
insurers in four jurisdictions: Ohio, Texas, West Virginia and Montana. In the
Ohio action, plaintiffs allege the defendants negligently performed duties
undertaken to protect the public from the effects of asbestos (Varner v. Ford
Motor Co., et al., (Cuyahoga County, Ohio)). Similar lawsuits have also been
filed in Texas against CNA, and other insurers and non-insurer corporate
defendants asserting liability for failing to warn of the dangers of asbestos
(Boson v. Union Carbide Corp., et al., (District Court of Nueces County,
Texas)). Many of the Texas claims have been dismissed as time-barred by the
applicable statute of limitations. In other claims, the Texas court recently
ruled that the carriers did not owe any duty to the plaintiffs or the general
public to advise on the effects of asbestos thereby dismissing these claims.
The time period for filing an appeal of this ruling has not expired and it
remains uncertain whether the plaintiffs will continue to pursue their causes
of action.

CNA has been named in Adams v. Aetna, Inc., et al., (Circuit Court of Kanhwha
County, West Virginia), a purported class action against CNA and other
insurers, alleging that the defendants violated West Virginias Unfair Trade
Practices Act in handling and resolving asbestos claims against their
policyholders. A direct action has also been filed in Montana (Pennock, et al.
v. Maryland Casualty, et al., First Judicial District Court of Lewis & Clark
County, Montana) by eight individual plaintiffs (all employees of W.R. Grace &
Co. (W.R. Grace)) and their spouses against CNA, Maryland Casualty and the
State of Montana. This action alleges that CNA failed to fulfill its
obligations as W.R. Graces Workers Compensation carrier because of the alleged
negligent failure of CNA to warn of or otherwise protect W.R. Grace employees from the dangers of asbestos at a W.R. Grace vermiculite mining facility in
Libby, Montana. This action is currently stayed as to CNA because of W.R.
Graces pending bankruptcy. On July 23, 2003, the stay of similar direct
action litigation against Maryland Casualty was lifted by the District Court as
to Maryland Casualty. Maryland Casualty and W.R. Grace have appealed

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

the District Courts decision to the Third Circuit Court of Appeals. The stay
of the litigation may also be lifted as to CNA.

CNA is vigorously defending these and other cases and believes that it has
meritorious defenses to the claims asserted. However, there are numerous
factual and legal issues to be resolved in connection with these claims, and it
is extremely difficult to predict the outcome or ultimate financial exposure
represented by these matters. Adverse developments with respect to any of
these matters could have a material adverse effect on CNAs business, insurer
financial strength and debt ratings and equity.

As a result of the uncertainties and complexities involved, reserves for
asbestos claims cannot be estimated with traditional actuarial techniques that
rely on historical accident year loss development factors. In establishing
asbestos reserves, CNA evaluates the exposure presented by each insured. As
part of this evaluation, CNA considers the available insurance coverage; limits
and deductibles; the potential role of other insurance, particularly underlying
coverage below any CNA excess liability policies; and applicable coverage
defenses, including asbestos exclusions. Estimation of asbestos-related claim
and claim adjustment expense reserves involves a high degree of judgment on the
part of management and consideration of many complex factors, including:
inconsistency of court decisions, jury attitudes and future court decisions;
specific policy provisions; allocation of liability among insurers and
insureds; missing policies and proof of coverage; the proliferation of
bankruptcy proceedings and attendant uncertainties; novel theories asserted by
policyholders and their counsel; 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; volatility in claim numbers and settlement demands; increases
in the number of non-impaired claimants and the extent to which they can be
precluded from making claims; the efforts by insureds to obtain coverage not
subject to aggregate limits; long latency period between asbestos exposure and
disease manifestation and the resulting potential for involvement of multiple
policy periods for individual claims; medical inflation trends; the mix of
asbestos-related diseases presented and the ability to recover reinsurance
including the impact, if any, of restructured operations of Lloyds of London
into Equitas Limited.

As of September 30, 2003 and December 31, 2002, CNA carried approximately
$1,787 million and $1,246 million of claim and claim adjustment expense
reserves, net of reinsurance recoverables, for reported and unreported
asbestos-related claims. There was $642 million in asbestos-related net claim
and claim adjustment expense prior year unfavorable reserve development for the
three and nine months ended September 30, 2003. The Company paid
asbestos-related claims, net of reinsurance, of $101 million for the nine
months ended September 30, 2003 and had net reinsurance recoveries of $12
million for the nine months ended September 30, 2002.

Other Reserves

Unfavorable net prior year development of $2,835 million, including $2,312
million of unfavorable claim and allocated claim adjustment expense reserve
development and $523 million of unfavorable premium development, was recorded
for the nine months ended September 30, 2003. The development discussed below
includes premium development due to the direct relationship of unfavorable
premium development to the corporate aggregate and other reinsurance treaties.
A brief summary of these lines of business and the associated reserve
development is discussed below.

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STANDARD LINES

Unfavorable net prior year development of $1,402 million, including $928
million of unfavorable claim and allocated claim adjustment expense reserve
development and $474 million of unfavorable premium development, was recorded
for the nine months ended September 30, 2003. Favorable net prior year
development of $105 million, including $149 million of favorable claim and
allocated claim adjustment expense reserve development and $44 million of
unfavorable premium development, was recorded for the same period in 2002. The
gross carried claim and claim adjustment expense reserve was $13,153 million
and $11,576 million at September 30, 2003 and December 31, 2002. The net
carried claim and claim adjustment expense reserve was $8,159 million and
$7,262 million at September 30, 2003 and December 31, 2002.

Approximately $495 million of unfavorable claim and allocated claim adjustment
expense reserve development was recorded related to construction defect claims
for the nine months ended September 30, 2003. Based on analyses completed
during the third quarter of 2003, it became apparent that the assumptions
regarding the number of claims, which were used to estimate the expected
losses, were no longer appropriate. The analyses indicated that the actual
number of claims reported during 2003 was higher than expected primarily in
states other than California. States where this activity is most evident
include Texas, Arizona, Nevada, Washington and Colorado. The number of claims
reported in states other than California during the first six months of 2003
was almost 35% higher than the last six months of 2002. The number of claims
reported during the last six months of 2002 increased by less than 10% from the
first six months of 2002. In California, claims resulting from additional
insured endorsements increased throughout 2003. Additional insured
endorsements are regularly included on policies provided to subcontractors.
The additional insured endorsement names general contractors and developers as
additional insureds covered by the policy. Current California case law
(Presley Homes, Inc. v American States Insurance Company,
(June 11,
2001) 90 Cal App. 4th 571,108Cal. Rptr.2d 686)   specifies that an individual subcontractor with an
additional insured obligation has a duty to defend the additional insured in
the entire action, subject to contribution or recovery later. In addition, the
additional insured is allowed to choose one specific carrier to defend the
entire action. These additional insured claims can remain open for a longer
period of time than other construction defect claims because the additional
insured defense obligation can continue until the entire case is resolved. The
adverse reserve development recorded related to construction defect claims was
primarily related to accident years 1999 and prior.

Unfavorable net prior year development of approximately $595 million, including
$518 million of unfavorable claim and allocated claim adjustment expense
reserve development and $77 million of unfavorable premium development, was
recorded for large account business including workers compensation coverages
for the nine months ended September 30, 2003. Many of the policies issued to
these large accounts include provisions tailored specifically to the individual
accounts. Such provisions effectively result in the insured being responsible
for a portion of the loss. An example of such a provision is a deductible
arrangement where the insured reimburses the Company for all amounts less than
a specified dollar amount. These arrangements often limit the aggregate amount
the insured is required to reimburse the Company. Analyses completed during
the second and third quarters of 2003, including claims handled by third party
administrators (TPA), indicated higher losses from the large accounts. In
addition, these analyses indicated that the provisions that result in the
insured being responsible for a portion would have less of an impact due to the
larger size of claims as well as the increased number of claims. The
development recorded was primarily related to accident years 2000 and prior.

Approximately $98 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development recorded for the nine months ended
September 30, 2003, resulted from a program covering facilities that provide
services to developmentally disabled individuals. This net prior year
development was due to an increase in the size of known claims and increases in
policyholder defense costs. With regard to average claim size, recent data
shows the average claim increasing at an annual rate of approximately 20%.
Prior data had shown average claim size to be level. Similar to the average
claim

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##### Table of Contents



size, recent data shows the average policyholder defense cost increasing at an
annual rate of approximately 20%. Prior data had shown average policyholder
defense cost to be level. The reserve net prior year development recorded was
primarily for accident years 2001 and prior.

Approximately $40 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development recorded for the nine months ended
September 30, 2003 was for excess workers compensation coverages due to
increasing severity. The increase in severity means that a higher percentage
of the total loss dollars will be the Companys responsibility since more
claims will exceed the point at which the Companys coverage begins. The
reserve net prior year development recorded was primarily for accident year
2000.

Approximately $73 million of unfavorable development recorded for the nine
months ended September 30, 2003 was the result of a commutation of all ceded
reinsurance treaties with Gerling Global Group of companies (Gerling), related
to accident years 1999 through 2001, including $41 million of unfavorable claim
and allocated claim adjustment expense development and $32 million of
unfavorable premium development. Further information regarding this
commutation is provided in Note H.

Unfavorable net prior year claim and allocated claim adjustment expense reserve
development of approximately $40 million recorded for the nine months ended
September 30, 2003 was related to a program covering tow truck and ambulance
operators, primarily impacting the 2001 accident year. The Company had
previously expected that loss ratios for this business would be similar to its
middle market commercial automobile liability business. During 2002, the
Company ceased writing business under this program.

Approximately $25 million of unfavorable net prior year premium development
recorded for the nine months ended September 30, 2003 was related to a second
quarter of 2003 reevaluation of losses ceded to a reinsurance contract covering
middle market workers compensation exposures. The reevaluation of losses led
to a new estimate of the number and dollar amount of claims that would be ceded
under the reinsurance contract. As a result of the reevaluation of losses, the
Company recorded approximately $36 million of unfavorable claim and allocated
claim adjustment expense reserve development, which was ceded under the
contract. The net prior year development was recorded for accident year 2000.

The following premium
and claim and allocated claim adjustment expense development was recorded in
the third quarter of 2003 as a result of the elimination of deficiencies and
redundancies in reserve positions within the segment. Unfavorable net prior
year development of approximately $210 million related to small and middle
market workers compensation exposures, and approximately $110 million related to E&S lines was recorded in the third quarter of 2003.
Offsetting these increases was $210 million of favorable net prior year
development in the property line of business, including $79 million related to
the September 11, 2001 World Trade Center Disaster and related events (WTC
event).

Also, offsetting the unfavorable premium and claim and allocated claim
adjustment expense development was a $215 million underwriting benefit from
cessions to corporate aggregate reinsurance treaties recorded in the nine
months ended September 30, 2003 of which $140 million was recorded in the third
quarter of 2003. The benefit is comprised of $480 million of ceded losses and
$265 million of ceded premiums for accident years 2000 and 2001.

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

SPECIALTY LINES

Unfavorable net prior year development of $416 million, including $400 million
of net unfavorable claim and allocated claim adjustment expense reserve
development and $16 million of unfavorable premium development, was recorded
for the nine months ended September 30, 2003. Unfavorable net prior year
development of $86 million, including $46 million of unfavorable premium
development and $40 million of unfavorable claim and allocated claim adjustment
expense reserve development, was recorded for the same period in 2002. The
gross carried claim and claim adjustment expense reserve was $6,417 million and
$5,874 million at September 30, 2003 and December 31, 2002. The net carried
claim and claim adjustment expense reserve was $3,965 million and $3,373
million at September 30, 2003 and December 31, 2002.

Approximately $50 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development recorded for the nine months ended
September 30, 2003 was related to increased severity in excess coverages
provided to facilities providing health care services. The increase in
reserves is based on reviews of individual accounts where claims had been
expected to be less than the point at which the Companys coverage applies.
The current claim trends indicate that the layers of coverage provided by the
Company will be impacted. The reserve net prior year development recorded was
primarily for accident years 2001 and prior.

Approximately $68 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development recorded for the nine months ended
September 30, 2003 was for surety coverages related to primarily workers
compensation bond exposure from accident years 1990 and prior and large losses
for accident years 1999 and 2002. Approximately $21 million of unfavorable net
prior year claim and allocated claim adjustment expense reserve development was
recorded in the surety line of business in the second quarter of 2003 as the
result of recent developments on one large claim.

Approximately $86 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development recorded for the nine months ended
September 30, 2003 was related to directors and officers exposures in CNA Pro
and Global Lines. The unfavorable net prior year reserve development was
primarily due to securities class action cases related to certain known
corporate malfeasance cases and investment banking firms. This net prior year
development recorded was primarily for accident years 2000 through 2002.

Unfavorable net prior year claim and allocated claim adjustment expense reserve
development of approximately $75 million recorded for the nine months ended
September 30, 2003 was related to a adverse arbitration decision in the second
quarter of 2003 involving a single large property and business interruption
loss. The decision was rendered against a voluntary insurance pool in which
the Company was a participant. The loss was caused by a fire which occurred in
1995. The Company no longer participates in this pool.

Approximately $47 million of losses was recorded for third quarter of 2003 as
the result of a commutation of ceded reinsurance treaties with Gerling,
relating to accident years 1999 through 2002. An additional $37 million of
losses was recorded in the second quarter of 2003 as the result of a
commutation of three ceded reinsurance treaties covering CNA HealthPro,
relating to accident years 1999 through 2001. See Note H for further
discussion.

The following
development

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

was recorded in the third quarter of 2003 as a result of the elimination of
deficiencies and redundancies in reserve positions within the segment. An
additional $50 million of unfavorable net prior year claim and allocated claim
adjustment expense reserve development was recorded related to medical
malpractice and long term care facilities. Partially offsetting this
unfavorable claim and allocated claim adjustment expense reserve development
was a $27 million underwriting benefit from cessions to corporate aggregate
reinsurance treaties. The benefit was comprised of $59 million of ceded losses
and $32 million of ceded premiums for accident years 2000 and 2001. See Note H
for further discussion of the Companys aggregate reinsurance treaties.

A $16 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties for the nine months ended September 30, 2002, comprised of
$55 million of ceded losses and $39 million of ceded premiums.

CNA RE

Unfavorable net prior year development of $148 million, including $109 million
of net unfavorable claim and allocated claim adjustment expense reserve
development and $39 million of unfavorable premium development, was recorded
for the nine months ended September 30, 2003. Unfavorable net prior year
development of $42 million, including $42 million of favorable premium
development and $84 million of unfavorable claim and allocated claim adjustment
expense reserve development, was recorded for the same period in 2002. The
gross carried claim and claim adjustment expense reserve was $2,336 million and
$2,264 million at September 30, 2003 and December 31, 2002. The net carried
claim and claim adjustment expense reserve was $1,275 million and $1,362
million at September 30, 2003 and December 31, 2002.

The unfavorable net prior year development was primarily a result of a general
change in the pattern of how losses change over time as reported by the
companies that purchase reinsurance from CNA Re. Losses have continued to show
large increases for accident years in the late 1990s and into 2000 and 2001.
These increases are greater than the increases indicated by patterns from
older accident years and have a similar effect on several lines of business.
Approximately $67 million unfavorable net prior year development recorded for
nine months ended September 30, 2003 was related to proportional liability
exposures, primarily from multi-line and umbrella treaties in accident years
1997 through 2001. Approximately $32 million of unfavorable net prior year
development recorded for the nine months ended September 30, 2003, was related
to assumed financial reinsurance for accident years 2001 and prior and
approximately $24 million of unfavorable net prior year development related to
professional liability exposures in accident years 2001 and prior.

CNA Re recorded an additional $15 million of unfavorable development for
construction defect related exposures. Because of the unique nature of this
exposure, losses have not followed expected development patterns. The
continued reporting of claims in California, the increase in the number of
claims from states other than California and a review of individual ceding
companies exposure to this type of claim resulted in an increase in the
estimated reserve.

Unfavorable net prior year claim and allocated claim adjustment expense reserve
development of approximately $25 million was recorded primarily for directors
and officers exposures. The net prior year reserve development was a result of a claims
review that was completed during the second quarter of 2003. The unfavorable
net prior year reserve development was primarily due to securities class action
cases related to certain known corporate malfeasance cases and investment
banking firms. The net prior year development recorded was for
accident years 2000 and 2001.

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

The following premium
and claim and allocated claim adjustment expense development, was recorded in
the third quarter of 2003 as a result of the elimination of deficiencies and
redundancies in the reserve positions of individual products within the
segment. Unfavorable net prior year premium and claim and allocated claim
adjustment expense development of approximately $42 million related to Surety
exposures, $32 million related to excess of loss liability exposures and $12
million related to facultative liability exposures were recorded in the third
quarter of 2003. Offsetting this unfavorable premium and claim and allocated
claim adjustment expense reserve development was approximately $55 million of
favorable development related to the WTC event. In addition, there was a $47
million underwriting benefit from cessions to corporate aggregate reinsurance
treaties for the nine months ended September 30, 2003 of which
$55 million was recorded
in the third quarter of 2003. The benefit was comprised of $104 million of
ceded losses and $57 million of ceded premiums for accident years 2000 and
2001. See Note H for further discussion of the Companys aggregate reinsurance
treaties.

A $31 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties for the nine months ended September 30, 2002. The benefit
was comprised of $93 million of ceded losses and $62 million of ceded premiums.

CORPORATE AND OTHER

Unfavorable net prior year development of $861 million, including $867 million
of net unfavorable claim and allocated claim adjustment expense reserve
development and $6 million of favorable premium development was recorded for
the nine months ended September 30, 2003. This unfavorable net prior year
development was principally driven by unfavorable claim and allocated claim
adjustment expense reserve development of $795 million related to APMT.
Unfavorable net prior year claim and allocated claim adjustment expense reserve
development of $11 million was recorded for the nine months ended September 30,
2002. Unfavorable claim and allocated claim adjustment expense reserve
development of $50 million was recorded in the third quarter of 2003 relating
to the Companys past participation in several insurance pools which is part of
the group reinsurance run-off business. The gross carried claim and claim
adjustment expense reserve was $7,386 million and $4,847 million at September
30, 2003 and December 31, 2002. The net carried claim and claim adjustment
expense reserve was $2,758 million and $2,002 million for September 30, 2003
and December 31, 2002.

Note H. Reinsurance

CNA assumes and cedes reinsurance with other insurers, reinsurers and members
of various reinsurance pools and associations. See Note L for discussion of
CNAs sale of the renewal rights for most of the treaty business of CNA Re.
CNA utilizes reinsurance arrangements to limit its maximum loss, provide
greater diversification of risk, minimize exposures on larger risks and to exit
certain lines of business.

Interest cost on reinsurance contracts accounted for on a funds withheld basis
is incurred during all periods in which a funds withheld liability exists.
Interest cost, which is included in net investment income, was $148 million and
$53 million for the three months ended September 30, 2003 and 2002 and $288
million and $168 million for the nine months ended September 30, 2003 and 2002.
The amount subject to interest crediting rates on such contracts was $2,892
million and $2,766 million at September 30, 2003 and December 31, 2002.
Certain funds withheld reinsurance contracts, including the corporate aggregate
reinsurance treaties, require interest on additional premiums arising from
ceded

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

losses as if those premiums were payable at the inception of the contract. The
amount of retroactive interest for the three months ended September 30, 2003
was $103 million as compared with $5 million in the same period of 2002. The
amount of retroactive interest, included in the totals above, for the nine
months ended September 30, 2003 was $147 million as compared with $10 million
in the same period of 2002.

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

The ceding of insurance does not discharge the primary liability of the
Company. Therefore, a credit exposure exists with respect to property and
casualty and life reinsurance ceded to the extent that any reinsurer is unable
to meet the obligations assumed under reinsurance agreements.

As disclosed in CNAFs Form 10-K filed with the SEC for the year ended December
31, 2002, the Company has reinsurance receivables from several reinsurers who
have recently experienced multiple downgrades of their financial strength
ratings, have announced that they will no longer accept new business and are
placing their books of business into run-off. One of the Companys principal
credit exposures from these recent events arose from reinsurance receivables
from Gerling Global Group of companies (Gerling).

In the second quarter of 2003, the Company commuted three CNA HealthPro
treaties with Gerling which resulted in a $37 million pretax loss. In the
third quarter of 2003, the Company commuted all remaining ceded and assumed
reinsurance contracts with four Gerling entities. The commutations resulted in
a pretax loss of $72 million which is net of a previously established allowance
for doubtful accounts of $47 million. The Company has no further exposure to
these four Gerling companies that are in run-off.

The Company has established an allowance for doubtful accounts to provide for
estimated uncollectible reinsurance receivables. The reinsurance receivable
balances were $15,117 million and $12,696 million at September 30, 2003 and
December 31, 2002. The increase in reinsurance receivables was primarily due to
ceded claim and allocated claim adjustment expenses related to APMT
and corporate aggregate reinsurance treaties. The allowance for doubtful accounts was $548 million and
$196 million at September 30, 2003 and December 31,
2002. The Company
increased the allowance $308 million for the three months ended September 30,
2003 and $348 million for the nine months ended September 30, 2003 in
recognition of deterioration of the financial strength ratings of several
reinsurers. While the Company believes the allowance for doubtful accounts is
adequate based on existing collateral and information currently available,
failure of reinsurers to meet their obligations could have a material adverse
impact on CNAs results of operations or equity.

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##### Table of Contents



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

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

Components of Earned Premiums

Nine months ended September 30
    
    Direct
    
    Assumed
    
    Ceded
    
    Net(In millions)2003Property and casualty
    
    $
    7,977
    
    
    $
    460
    
    
    $
    3,459
    
    
    $
    4,978Accident and health
    
    
    1,196
    
    
    
    78
    
    
    
    42
    
    
    
    1,232Life
    
    
    801
    
    
    
    4
    
    
    
    311
    
    
    
    494Total earned premiums
    
    $
    9,974
    
    
    $
    542
    
    
    $
    3,812
    
    
    $
    6,7042002Property and casualty
    
    $
    7,243
    
    
    $
    872
    
    
    $
    3,022
    
    
    $
    5,093Accident and health
    
    
    2,227
    
    
    
    166
    
    
    
    61
    
    
    
    2,332Life
    
    
    804
    
    
    
    (10
    )
    
    
    294
    
    
    
    500Total earned premiums
    
    $
    10,274
    
    
    $
    1,028
    
    
    $
    3,377
    
    
    $
    7,925


Life premiums are primarily from long duration contracts; property and casualty
premiums and accident and health premiums are primarily from short duration
contracts.

The Company has an aggregate reinsurance treaty related to the 1999 through
2001 accident years that covers substantially all of the Companys property and
casualty lines of business (the Aggregate Cover). The Aggregate Cover provides
for two sections of coverage. These coverages attach at defined loss ratios
for each accident year. Coverage under the first section of the Aggregate
Cover, which is available for all accident years covered by the treaty, has a
$500 million limit per accident year of ceded losses and an aggregate limit of
$1 billion of ceded losses for the three accident years. The ceded premiums
associated with the first section are a percentage of ceded losses and for each
$500 million of limit the ceded premium is $230 million. The second section of
the Aggregate Cover, which only relates to accident year 2001, provides
additional coverage of up to $510 million of ceded losses for a maximum ceded
premium of $310 million. Under the Aggregate Cover, interest charges on the
funds withheld liability accrue at 8% per annum. The aggregate loss ratio for
the three-year period has exceeded certain thresholds which requires additional
premiums to be paid and an increase in the rate at which interest charges are
accrued. This rate will increase to 8.25% per annum commencing in 2006.

During the second and third quarters of 2003, as a result of the unfavorable
development recorded related to accident years 2000 and 2001, the $500 million
limit related to the 2000 and 2001 accident years under the first section was
fully utilized and losses of $500 million were ceded under the first section of
the Aggregate Cover. In 2001, as a result of reserve additions including those
related to accident year 1999, the $500 million limit related to the 1999
accident year under the first section was fully utilized and losses of $510
million were ceded under the second section as a result of losses related to
the WTC event.

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

The pretax impact of the Aggregate Cover was as follows:

Pretax Impact of Aggregate Cover

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Ceded earned premiums
    
    $
    (223
    )
    
    $
    
    
    
    $
    (251
    )
    
    $
    Ceded claim and claim adjustment expense
    
    
    422
    
    
    
    
    
    
    
    500
    
    
    
    Interest charges
    
    
    (88
    )
    
    
    (13
    )
    
    
    (123
    )
    
    
    (38
    )Pretax benefit (expense)
    
    $
    111
    
    
    $
    (13
    )
    
    $
    126
    
    
    $
    (38
    )


In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property and
casualty lines of business in the Continental Casualty Company pool (the CCC
Cover). The loss protection provided by the CCC Cover has an aggregate limit
of approximately $761 million of ceded losses. The ceded premiums are a
percentage of ceded losses. The ceded premium related to full utilization of
the $761 million of limit is $456 million. The CCC Cover provides continuous
coverage in excess of the second section of the Aggregate Cover discussed
above. Under the CCC Cover, interest charges on the funds withheld generally
accrue at 8% per annum. The interest rate increases to 10% per annum if the
aggregate loss ratio exceeds certain thresholds. As of September 30, 2003, the
CCC Cover has been fully utilized.

The pretax impact of the CCC Cover was as follows:

Pretax Impact of CCC Cover

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Ceded earned premiums
    
    $
    (10
    )
    
    $
    (39
    )
    
    $
    (100
    )
    
    $
    (100
    )Ceded claim and claim adjustment expense
    
    
    17
    
    
    
    55
    
    
    
    143
    
    
    
    148Interest charges
    
    
    (13
    )
    
    
    (11
    )
    
    
    (48
    )
    
    
    (27
    )Pretax (expense) benefit
    
    $
    (6
    )
    
    $
    5
    
    
    $
    (5
    )
    
    $
    21


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

Pretax Impact of Aggregate Cover and CCC Cover

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Standard Lines
    
    $
    73
    
    
    $
    (13
    )
    
    $
    96
    
    
    $
    (38
    )Specialty Lines
    
    
    16
    
    
    
    8
    
    
    
    13
    
    
    
    4CNA Re
    
    
    16
    
    
    
    (3
    )
    
    
    13
    
    
    
    17Corporate and Other
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Pretax benefit (expense)
    
    $
    105
    
    
    $
    (8
    )
    
    $
    121
    
    
    $
    (17
    )


Note I.  Commitments, Contingencies and Guarantees

Commitments and Contingencies

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

In the normal course of business, CNA has obtained letters of credit in favor
of various unaffiliated insurance companies, regulatory authorities and other
entities. As of September 30, 2003 and December 31, 2002 there were
approximately $201 million and $222 million of outstanding letters of credit.

The Company is obligated to make future payments totaling $344 million for
non-cancelable operating leases expiring from 2003 through 2014 primarily for
office space and data processing, office and transportation equipment.
Estimated future minimum payments under these contracts are as follows: $23
million in 2003; $69 million in 2004; $59 million in 2005; $49 million in 2006;
and $144 million in 2007 and beyond. Additionally, the Company has entered
into a limited number of guaranteed payment contracts, primarily relating to
telecommunication services, amounting to approximately $22 million. Estimated
future minimum purchases under these contracts are as follows: $4 million in
2003; $13 million in 2004; and $5 million in 2005.

The Company has a commitment to purchase up to a $100 million floating rate
note issued by the California Earthquake Authority in the event of an
earthquake during calendar year 2003 that results in California earthquake
related losses greater than $4.2 billion.

As of September 30, 2003 and December 31, 2002, the Company had committed
approximately $189 million and $141 million for future capital calls from
various third-party limited partnership investments in exchange for an
ownership interest in the related partnership.

The Company invests in multiple bank loan participations as part of its overall
investment strategy and has committed to additional future purchases and sales.
The purchase and sale of these investments are recorded on the date that the
legal agreements are finalized and cash settlement is made. As of September
30, 2003, the Company had commitments to purchase $72 million and commitments
to sell $37 million of various bank loan participations.

In the normal course of investing activities, CCC had committed approximately
$51 million as of September 30, 2003 to future capital calls from certain of
its unconsolidated affiliates in exchange for an ownership interest in such
affiliates.

Guarantees

The Company has provided guarantees related to irrevocable standby letters of
credit for certain of its subsidiaries. Certain of these subsidiaries have
been sold; however, the irrevocable standby letter of credit guarantees remain
in effect. The Company would be required to remit prompt payment on the
letters of credit in question if the primary obligor drew down on these letters
of credit and failed to repay such loans in accordance with the terms of the
letters of credit. The maximum potential amount of future payments that CNA
could be required to pay under these guarantees is approximately $30 million at
September 30, 2003.

The Company holds an investment in a real estate joint venture. In the normal
course of business, CNA, on a joint and several basis with other unrelated
insurance company shareholders, has committed to continue funding the operating
deficits of this joint venture. Additionally, CNA and the other unrelated
shareholders, on a joint and several basis, have guaranteed an operating lease
for an office building, which expires in 2016.

The guarantee of the operating lease is a parallel guarantee to the commitment
to fund operating deficits; consequently, the separate guarantee to the lessor
is not expected to be triggered as long as the joint venture continues to be
funded by its shareholders and continues to make its annual lease payments.

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

In the event that the other parties to the joint venture are unable to meet
their commitments in funding the operations of this joint venture, the Company
would be required to assume the obligation for the entire office building
operating lease. The maximum potential future lease payments at September 30,
2003 that the Company could be required to pay under this guarantee are
approximately $320 million. If CNA were required to assume the entire lease
obligation, the Company would have the right to pursue reimbursement from the
other shareholders and would have the right to all sublease revenues.

The Company has recorded a liability of approximately $9 million and $10
million as of September 30, 2003 and December 31, 2002 for its share of
estimated future operating deficits of this joint venture through 2016.

CNA has provided guarantees of the indebtedness of certain of its independent
insurance producers. These guarantees expire in 2008. The Company would be
required to remit prompt and complete payment when due, should the primary
obligor default. In the event of default on the part of the primary obligor,
the Company has a right to any and all shares of common stock of the primary
obligor. The maximum potential amount of future payments that CNA could be
required to pay under these guarantees is approximately $7 million at September
30, 2003.

In the ordinary course of selling business entities and assets to third
parties, the Company has agreed to indemnify purchasers for losses arising out
of breaches of representation and warranties with respect to the business
entities or assets being sold, including, in certain cases, losses arising from
undisclosed liabilities or certain named litigation. Such indemnification
provisions generally survive for periods ranging from nine months following the
applicable closing date to the expiration of the relevant statutes of
limitation. As of September 30, 2003, the aggregate amount of quantifiable
indemnification agreements in effect for sales of business entities and assets
was $375 million.

In addition, the Company has agreed to provide indemnification to third party
purchasers for certain losses associated with sold business entities or assets
that are not limited by a contractual monetary amount. As of September 30,
2003, the Company had outstanding unlimited indemnifications in connection with
the sales of certain of its business entities or assets for tax liabilities
arising prior to a purchasers ownership of an entity or asset, defects in
title at the time of sale, employee claims arising prior to closing and in some
cases losses arising from certain litigation and undisclosed liabilities.
These indemnification agreements survive until the applicable statutes of
limitation expire, or until the agreed upon contract terms expire. As of
September 30, 2003, the Company has recorded approximately $15 million of
liabilities related to these indemnification agreements.

33



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##### Table of Contents



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

Note J. Comprehensive (Loss) Income

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

Comprehensive (Loss) Income

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Net (loss) income
    
    $
    (1,760
    )
    
    $
    54
    
    
    $
    (1,607
    )
    
    $
    105Other comprehensive (loss) income:Change in unrealized gains/losses on general account investments:Holding (losses) gains arising during the period
    
    
    (664
    )
    
    
    276
    
    
    
    299
    
    
    
    119Net unrealized gains/losses at beginning of period included in
realized gains during the period
    
    
    172
    
    
    
    160
    
    
    
    341
    
    
    
    200Net change in unrealized gains/losses on general account
investments
    
    
    (492
    )
    
    
    436
    
    
    
    640
    
    
    
    319Net change in unrealized gains/losses on separate accounts and
other
    
    
    (25
    )
    
    
    37
    
    
    
    16
    
    
    
    49Foreign currency translation adjustment
    
    
    (32
    )
    
    
    (23
    )
    
    
    (11
    )
    
    
    (30
    )Allocation to participating policyholders and minority interests
    
    
    11
    
    
    
    (12
    )
    
    
    (4
    )
    
    
    (9
    )Other comprehensive (loss) income, before tax
    
    
    (538
    )
    
    
    438
    
    
    
    641
    
    
    
    329Deferred income tax benefit (expense) related to other comprehensive
(loss) income
    
    
    180
    
    
    
    (162
    )
    
    
    (233
    )
    
    
    (104
    )Other comprehensive (loss) income, net of tax
    
    
    (358
    )
    
    
    276
    
    
    
    408
    
    
    
    225Total comprehensive (loss) income
    
    $
    (2,118
    )
    
    $
    330
    
    
    $
    (1,199
    )
    
    $
    330


34



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##### Table of Contents



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

Note K. Business Segments

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

During 2002, CNA underwent management changes and strategic realignment. These
events have changed the way CNA manages its operations and makes business
decisions and, therefore, necessitated a change in the Companys reportable
segments. The financial results for the segment changes are reflected in the
following tables in this note.

The Corporate and Other segment is principally comprised of losses and expenses
related to the centralized adjusting and settlement of APMT claims, certain
run-off insurance and non-insurance operations and other operations including
interest expense on corporate borrowings.

The Company manages most of its assets on a legal entity basis, while segment
operations are conducted across legal entities. As such, only reinsurance and
insurance receivables, insurance reserves and deferred acquisition costs are
readily identifiable by individual segment. Distinct investment portfolios are
not maintained for each segment; accordingly, allocation of assets to each
segment is not performed. Therefore, net investment income and realized
investment gains or losses are allocated primarily based on each segments net
carried insurance reserves, as adjusted.

Income taxes have been allocated on the basis of the taxable income of the
segments.

In the following four tables, certain GAAP and non-GAAP financial measures are
presented to provide information used by management to monitor the Companys
operating performance. Management utilizes various financial measures to
monitor the Companys insurance operations and investment portfolio. Net
operating income, which is derived from certain income statement amounts, is
considered a non-GAAP financial measure and is used by management to monitor
performance of the Companys insurance operations. The Companys investment
portfolio is monitored through analysis of various quantitative and qualitative
factors and certain decisions related to the sale or impairment of investments
that produce realized gains and losses. Net realized investment gains and
losses, which are comprised of after-tax realized investment gains and losses
net of participating policyholders and minority interests, are a non-GAAP
financial measure.

Net operating income is calculated by excluding from net income the after-tax
effects of 1) net realized investment gains or losses, 2) gains or losses from
discontinued operations and 3) cumulative effects of changes in accounting
principles. In the calculation of net operating income, management excludes
after-tax net realized investment gains or losses because net realized
investment gains or losses related to the Companys available-for-sale
investment portfolio are largely discretionary, except for losses related to
other-than-temporary impairments, are generally driven by economic factors that
are not necessarily consistent with key drivers of underwriting performance,
and are therefore not an indication of trends in insurance operations.

The Companys investment portfolio is monitored by management through analyses
of various factors including unrealized gains and losses on securities,
portfolio duration and exposure to interest rate, market and credit risk.
Based on such analyses, the Company may impair an investment security in
accordance with its policy, or sell a security. Such activities will produce
realized gains and losses.

35



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##### Table of Contents



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

While management uses various non-GAAP financial measures to monitor various
aspects of the Companys performance, relying on any measure other than net
(loss) income, which is the most directly comparable GAAP measure to net
operating income and realized gains and losses, is not a complete
representation of financial performance. Management believes that its process
of evaluating performance through the use of these non-GAAP financial measures
provides a basis for understanding the operations and the impact on net income
as a whole. Management also believes that investors find these non-GAAP
financial measures described above useful to help interpret the underlying
trends and performance, as well as to provide visibility into the significant
components of net income.

36



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##### Table of Contents



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

For the three months ended
    
    Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    Corporate
    
    Elimi-September 30, 2003
    
    Lines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    nations
    
    Total(In millions)Net earned premiums
    
    $
    802
    
    
    $
    660
    
    
    $
    84
    
    
    $
    338
    
    
    $
    264
    
    
    $
    10
    
    
    $
    (32
    )
    
    $
    2,126Net investment income
    
    
    42
    
    
    
    64
    
    
    
    9
    
    
    
    67
    
    
    
    129
    
    
    
    41
    
    
    
    
    
    
    
    352Other revenues
    
    
    35
    
    
    
    35
    
    
    
    
    
    
    
    13
    
    
    
    21
    
    
    
    7
    
    
    
    (28
    )
    
    
    83Total operating revenues
    
    
    879
    
    
    
    759
    
    
    
    93
    
    
    
    418
    
    
    
    414
    
    
    
    58
    
    
    
    (60
    )
    
    
    2,561Claims, benefits and expenses
    
    
    2,310
    
    
    
    1,068
    
    
    
    221
    
    
    
    381
    
    
    
    402
    
    
    
    1,183
    
    
    
    (60
    )
    
    
    5,505Operating (loss) income before income tax and
minority interest
    
    
    (1,431
    )
    
    
    (309
    )
    
    
    (128
    )
    
    
    37
    
    
    
    12
    
    
    
    (1,125
    )
    
    
    
    
    
    
    (2,944
    )Income tax benefit (expense) on operating income
    
    
    514
    
    
    
    115
    
    
    
    47
    
    
    
    (12
    )
    
    
    (2
    )
    
    
    403
    
    
    
    
    
    
    
    1,065Minority interest
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Net operating (loss) income
    
    
    (917
    )
    
    
    (180
    )
    
    
    (81
    )
    
    
    25
    
    
    
    10
    
    
    
    (722
    )
    
    
    
    
    
    
    (1,865
    )Realized investment gains, net of participating
policyholders and minority interests
    
    
    54
    
    
    
    28
    
    
    
    12
    
    
    
    25
    
    
    
    33
    
    
    
    12
    
    
    
    
    
    
    
    164Income tax expense on realized investment gains
    
    
    (19
    )
    
    
    (12
    )
    
    
    (5
    )
    
    
    (8
    )
    
    
    (12
    )
    
    
    (3
    )
    
    
    
    
    
    
    (59
    )Net (loss) income
    
    $
    (882
    )
    
    $
    (164
    )
    
    $
    (74
    )
    
    $
    42
    
    
    $
    31
    
    
    $
    (713
    )
    
    $
    
    
    
    $
    (1,760
    )


37



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##### Table of Contents



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

For the three months ended
    
    Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    Corporate
    
    Elimi-September 30, 2002
    
    Lines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    nations
    
    Total(In millions)Net earned premiums
    
    $
    992
    
    
    $
    551
    
    
    $
    157
    
    
    $
    292
    
    
    $
    236
    
    
    $
    40
    
    
    $
    (6
    )
    
    $
    2,262Net investment income
    
    
    67
    
    
    
    49
    
    
    
    28
    
    
    
    65
    
    
    
    131
    
    
    
    24
    
    
    
    
    
    
    
    364Other revenues
    
    
    80
    
    
    
    33
    
    
    
    1
    
    
    
    21
    
    
    
    34
    
    
    
    5
    
    
    
    (37
    )
    
    
    137Total operating revenues
    
    
    1,139
    
    
    
    633
    
    
    
    186
    
    
    
    378
    
    
    
    401
    
    
    
    69
    
    
    
    (43
    )
    
    
    2,763Claims, benefits and expenses
    
    
    986
    
    
    
    721
    
    
    
    231
    
    
    
    332
    
    
    
    354
    
    
    
    129
    
    
    
    (43
    )
    
    
    2,710Operating income (loss) before income tax and
minority interest
    
    
    153
    
    
    
    (88
    )
    
    
    (45
    )
    
    
    46
    
    
    
    47
    
    
    
    (60
    )
    
    
    
    
    
    
    53Income tax (expense) benefit on operating income
    
    
    (48
    )
    
    
    24
    
    
    
    20
    
    
    
    (16
    )
    
    
    (16
    )
    
    
    22
    
    
    
    
    
    
    
    (14
    )Minority interest
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Net operating income (loss)
    
    
    105
    
    
    
    (65
    )
    
    
    (25
    )
    
    
    30
    
    
    
    31
    
    
    
    (38
    )
    
    
    
    
    
    
    38Realized investment (losses) gains, net of
participating policyholders and minority
interests
    
    
    (27
    )
    
    
    (15
    )
    
    
    (5
    )
    
    
    5
    
    
    
    (20
    )
    
    
    86
    
    
    
    
    
    
    
    24Income tax benefit (expense) on realized
investment gains (losses)
    
    
    10
    
    
    
    4
    
    
    
    4
    
    
    
    (1
    )
    
    
    6
    
    
    
    (31
    )
    
    
    
    
    
    
    (8
    )Net income (loss)
    
    $
    88
    
    
    $
    (76
    )
    
    $
    (26
    )
    
    $
    34
    
    
    $
    17
    
    
    $
    17
    
    
    $
    
    
    
    $
    54


38



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##### Table of Contents



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

For the nine months ended
    
    Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    Corporate
    
    Elimi-September 30, 2003
    
    Lines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    nations
    
    Total(In millions)Net earned premiums
    
    $
    2,664
    
    
    $
    1,948
    
    
    $
    371
    
    
    $
    982
    
    
    $
    783
    
    
    $
    42
    
    
    $
    (86
    )
    
    $
    6,704Net investment income
    
    
    236
    
    
    
    213
    
    
    
    55
    
    
    
    200
    
    
    
    393
    
    
    
    114
    
    
    
    
    
    
    
    1,211Other revenues
    
    
    165
    
    
    
    81
    
    
    
    1
    
    
    
    46
    
    
    
    64
    
    
    
    24
    
    
    
    (93
    )
    
    
    288Total operating revenues
    
    
    3,065
    
    
    
    2,242
    
    
    
    427
    
    
    
    1,228
    
    
    
    1,240
    
    
    
    180
    
    
    
    (179
    )
    
    
    8,203Claims, benefits and expenses
    
    
    4,695
    
    
    
    2,568
    
    
    
    502
    
    
    
    1,125
    
    
    
    1,190
    
    
    
    1,367
    
    
    
    (179
    )
    
    
    11,268Operating (loss) income before income tax and
minority interest
    
    
    (1,630
    )
    
    
    (326
    )
    
    
    (75
    )
    
    
    103
    
    
    
    50
    
    
    
    (1,187
    )
    
    
    
    
    
    
    (3,065
    )Income tax benefit (expense) on operating income
    
    
    604
    
    
    
    125
    
    
    
    32
    
    
    
    (33
    )
    
    
    (13
    )
    
    
    429
    
    
    
    
    
    
    
    1,144Minority interest
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Net operating (loss) income
    
    
    (1,026
    )
    
    
    (192
    )
    
    
    (43
    )
    
    
    70
    
    
    
    37
    
    
    
    (758
    )
    
    
    
    
    
    
    (1,912
    )Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    236
    
    
    
    94
    
    
    
    54
    
    
    
    (7
    )
    
    
    10
    
    
    
    79
    
    
    
    
    
    
    
    466Income tax (expense) benefit on realized
investment gains (losses)
    
    
    (83
    )
    
    
    (34
    )
    
    
    (16
    )
    
    
    3
    
    
    
    (4
    )
    
    
    (27
    )
    
    
    
    
    
    
    (161
    )Net (loss) income
    
    $
    (873
    )
    
    $
    (132
    )
    
    $
    (5
    )
    
    $
    66
    
    
    $
    43
    
    
    $
    (706
    )
    
    $
    
    
    
    $
    (1,607
    )As of September 30, 2003(In millions)Reinsurance receivables, net of allowance for
doubtful accounts
    
    $
    5,808
    
    
    $
    2,575
    
    
    $
    1,080
    
    
    $
    194
    
    
    $
    977
    
    
    $
    3,935
    
    
    $
    
    
    
    $
    14,569Insurance receivables, net of allowance for
doubtful accounts
    
    
    1,644
    
    
    
    440
    
    
    
    225
    
    
    
    83
    
    
    
    33
    
    
    
    342
    
    
    
    
    
    
    
    2,767Insurance reserves:Claim and claim adjustment expense
    
    $
    13,153
    
    
    $
    6,417
    
    
    $
    2,336
    
    
    $
    1,493
    
    
    $
    1,479
    
    
    $
    7,386
    
    
    $
    
    
    
    $
    32,264Unearned premiums
    
    
    2,019
    
    
    
    1,871
    
    
    
    267
    
    
    
    9
    
    
    
    155
    
    
    
    920
    
    
    
    (4
    )
    
    
    5,237Future policy benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    635
    
    
    
    6,979
    
    
    
    335
    
    
    
    
    
    
    
    7,949Policyholders funds
    
    
    83
    
    
    
    3
    
    
    
    
    
    
    
    455
    
    
    
    65
    
    
    
    (3
    )
    
    
    
    
    
    
    603Deferred acquisition costs
    
    $
    453
    
    
    $
    344
    
    
    $
    60
    
    
    $
    113
    
    
    $
    1,692
    
    
    $
    
    
    
    $
    
    
    
    $
    2,662


39



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##### Table of Contents



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

For the nine months ended
    
    Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    Corporate
    
    Elimi-September 30, 2002
    
    Lines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    nations
    
    Total(In millions)Net earned premiums
    
    $
    3,040
    
    
    $
    1,594
    
    
    $
    462
    
    
    $
    2,017
    
    
    $
    710
    
    
    $
    121
    
    
    $
    (19
    )
    
    $
    7,925Net investment income
    
    
    304
    
    
    
    184
    
    
    
    109
    
    
    
    188
    
    
    
    402
    
    
    
    105
    
    
    
    
    
    
    
    1,292Other revenues
    
    
    243
    
    
    
    120
    
    
    
    2
    
    
    
    66
    
    
    
    89
    
    
    
    55
    
    
    
    (110
    )
    
    
    465Total operating revenues
    
    
    3,587
    
    
    
    1,898
    
    
    
    573
    
    
    
    2,271
    
    
    
    1,201
    
    
    
    281
    
    
    
    (129
    )
    
    
    9,682Claims, benefits and expenses
    
    
    3,379
    
    
    
    1,855
    
    
    
    526
    
    
    
    2,161
    
    
    
    1,064
    
    
    
    406
    
    
    
    (129
    )
    
    
    9,262Operating income (loss) from continuing operations
before income tax and minority interest
    
    
    208
    
    
    
    43
    
    
    
    47
    
    
    
    110
    
    
    
    137
    
    
    
    (125
    )
    
    
    
    
    
    
    420Income tax (expense) benefit on operating income
    
    
    (53
    )
    
    
    (23
    )
    
    
    (8
    )
    
    
    (37
    )
    
    
    (48
    )
    
    
    44
    
    
    
    
    
    
    
    (125
    )Minority interest
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Net operating income (loss) from continuing
operations
    
    
    155
    
    
    
    9
    
    
    
    39
    
    
    
    73
    
    
    
    89
    
    
    
    (81
    )
    
    
    
    
    
    
    284Realized investment (losses) gains, net of
participating policyholders and minority
interests
    
    
    (51
    )
    
    
    (46
    )
    
    
    (2
    )
    
    
    (12
    )
    
    
    (62
    )
    
    
    36
    
    
    
    
    
    
    
    (137
    )Income tax benefit (expense) on realized
investment gains (losses)
    
    
    18
    
    
    
    14
    
    
    
    5
    
    
    
    4
    
    
    
    21
    
    
    
    (12
    )
    
    
    
    
    
    
    50Loss from discontinued operations, net of tax of $9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )Cumulative effect of a change in accounting
principle, net of tax of $7
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (1
    )
    
    
    
    
    
    
    (57
    )Net income (loss)
    
    $
    122
    
    
    $
    (71
    )
    
    $
    42
    
    
    $
    65
    
    
    $
    5
    
    
    $
    (58
    )
    
    $
    
    
    
    $
    105As of December 31, 2002(In millions)Reinsurance receivables, net of allowance for
doubtful accounts
    
    $
    5,097
    
    
    $
    2,678
    
    
    $
    930
    
    
    $
    201
    
    
    $
    910
    
    
    $
    2,684
    
    
    $
    
    
    
    $
    12,500Insurance receivables, net of allowance for
doubtful accounts
    
    
    1,890
    
    
    
    536
    
    
    
    240
    
    
    
    74
    
    
    
    44
    
    
    
    223
    
    
    
    
    
    
    
    3,007Insurance reserves:Claim and claim adjustment expense
    
    $
    11,576
    
    
    $
    5,874
    
    
    $
    2,264
    
    
    $
    1,400
    
    
    $
    1,409
    
    
    $
    4,847
    
    
    $
    
    
    
    $
    27,370Unearned premiums
    
    
    1,811
    
    
    
    1,763
    
    
    
    195
    
    
    
    7
    
    
    
    149
    
    
    
    908
    
    
    
    (13
    )
    
    
    4,820Future policy benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    571
    
    
    
    6,503
    
    
    
    335
    
    
    
    
    
    
    
    7,409Policyholders funds
    
    
    47
    
    
    
    3
    
    
    
    
    
    
    
    470
    
    
    
    63
    
    
    
    (3
    )
    
    
    
    
    
    
    580Deferred acquisition costs
    
    $
    421
    
    
    $
    319
    
    
    $
    47
    
    
    $
    107
    
    
    $
    1,657
    
    
    $
    
    
    
    $
    
    
    
    $
    2,551


40



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##### Table of Contents



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

The following table provides revenue by line of business for each reportable
segment.

Revenue by Line of Business

Three months
    
    Nine monthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Standard LinesProperty and Casualty
    
    $
    507
    
    
    $
    700
    
    
    $
    1,998
    
    
    $
    2,314Excess & Surplus
    
    
    426
    
    
    
    412
    
    
    
    1,303
    
    
    
    1,222Standard Lines revenue
    
    
    933
    
    
    
    1,112
    
    
    
    3,301
    
    
    
    3,536Specialty LinesProfessional Liability Insurance (CNA Pro)
    
    
    385
    
    
    
    252
    
    
    
    1,163
    
    
    
    766CNA Global
    
    
    228
    
    
    
    185
    
    
    
    679
    
    
    
    601CNA Guaranty & Credit
    
    
    7
    
    
    
    18
    
    
    
    7
    
    
    
    19Surety
    
    
    87
    
    
    
    90
    
    
    
    259
    
    
    
    251Warranty
    
    
    80
    
    
    
    73
    
    
    
    228
    
    
    
    215Specialty Lines revenue
    
    
    787
    
    
    
    618
    
    
    
    2,336
    
    
    
    1,852CNA Re
    
    
    105
    
    
    
    181
    
    
    
    481
    
    
    
    571Group OperationsGroup Benefits
    
    
    390
    
    
    
    349
    
    
    
    1,122
    
    
    
    1,004Institutional Markets & Other
    
    
    53
    
    
    
    31
    
    
    
    99
    
    
    
    98Federal Markets
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    1,157Group Operations revenue
    
    
    443
    
    
    
    383
    
    
    
    1,221
    
    
    
    2,259Life Operations revenue
    
    
    447
    
    
    
    381
    
    
    
    1,250
    
    
    
    1,139Corporate and Other revenue
    
    
    70
    
    
    
    155
    
    
    
    259
    
    
    
    317Intersegment eliminations
    
    
    (60
    )
    
    
    (43
    )
    
    
    (179
    )
    
    
    (129
    )Total revenue
    
    $
    2,725
    
    
    $
    2,787
    
    
    $
    8,669
    
    
    $
    9,545


Note L. Significant Transactions

Assumed Reinsurance Renewal Rights Sale

During October of 2003, the Company entered into an agreement to sell the
renewal rights for most of the treaty business of CNA Re to Folksamerica
Reinsurance Company (Folksamerica). Under the terms of the transaction,
Folksamerica will compensate CNA based upon the amount of premiums renewed by
Folksamerica over the next two contract renewals. Concurrently with the sale,
CNA will be withdrawing from the assumed reinsurance business and will manage
the run-off of its retained liabilities.

Third Party Risk Management Business

During the second quarter of 2003, the Company entered into an agreement,
whereby Cunningham Lindsey, U.S. (Cunningham Lindsey), a subsidiary of Lindsey
Morden Group, Inc., acquired the business of RSKCo Services, Inc. (RSKCoSM).
Included in the sale was the RSKCoSM trademarked name, as well as all claims
and other risk management services business provided by RSKCoSM that is not
sold in connection with insurance products of other CNA subsidiaries. The
Company has recorded an estimated

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

pretax loss on this sale of approximately $18 million. The business sold
represented annual revenues of approximately $40 million.

As a result of this agreement, Cunningham Lindsey assumed assets and
liabilities of $72 million and $56 million. At December 31, 2002, the assets
and liabilities of the RSKCoSM business sold were $71 million and $54 million.

National Postal Mail Handlers Union Contract Termination

During 2002, the Company sold Claims Administration Corporation and transferred
the National Postal Mail Handlers Union group benefits plan (the Mail Handlers
Plan) to First Health Group Corporation. Revenues for the Mail Handlers Plan
were $3 million for the three months ended September 30, 2002 and $1,157
million for the nine months ended September 30, 2002.

CNA Vida Disposition

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

Personal Insurance Transaction

CNA entered into a retroactive reinsurance agreement as part of the sale of the
Companys personal insurance business to The Allstate Corporation (Allstate) in
1999. CNA shares in indemnity and claim and allocated claim adjustment
expenses if payments related to losses incurred prior to October 1, 1999 on the
CNA policies transferred to Allstate exceed the claim and allocated claim
adjustment expense reserves of approximately $1 billion at the date of sale.
The Company must begin to reimburse Allstate for claim and allocated claim
adjustment expense payments when cumulative claim payments after October 1,
1999 on losses occurring prior to that date exceed the $1 billion. The
Companys remaining obligation valued under this loss sharing provision as of
October 1, 2003 will be settled, under a time schedule
established by the parites,
by agreement of the parties or by an independent actuarial review of the unpaid
claim liabilities as of that date. Cumulative payments of indemnity and
allocated loss adjustment expenses on such policies exceeded $1 billion during
the second quarter of 2003. The Company has established reserves for its
estimated liability under this loss sharing arrangement.

Note M. Related Party Transactions

CNA reimburses Loews, or pays directly to Loews employees, approximately $19
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. For the nine months
ended September 30, 2003 and 2002, CNA received from Loews $258 million and
$639 million related to federal income taxes.

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

CNA writes, at standard rates, a limited amount of insurance for Loews and its
affiliates. The total premiums from Loews and its affiliates are approximately
$4 million on an annual basis.

Under agreements entered into and
approved in November of 2003 as to fairness to minority shareholders
by a Special Review Committee of independent members of CNAFs
Board of Directors, Loews has agreed to purchase $750 million of a
new series of CNAF non-voting convertible preferred stock, having
terms that make it economically equivalent to CNAF common stock.
Proceeds from the preferred stock sale will be applied by CNA to
increase the statutory surplus of CNAs principal insurance
subsidiary, Continental Casualty Company (CCC). Under the agreements
Loews has also committed up to $500 million of additional capital
support, through the purchase of surplus notes of CCC, in the event
that certain additions to CCCs statutory capital are not
achieved by February 26, 2004 from business or asset sales and
related actions. The obligation of Loews to fulfill this commitment
is subject to certain customary closing conditions. In addition, Loews
has indicated its commitment to provide up to an additional $150
million by March 31, 2004, in a form to be determined, to support the
statutory capital of CCC depending upon the level of increase to
CCCs statutory capital in relation to business and asset sales.

On December 19, 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Preferred Issue), to Loews.
The terms of the Preferred Issue were approved by a special committee of
independent members of CNAFs Board of Directors. The Preferred Issue is
senior to CNAFs common stock as to the payment of dividends and amounts
payable upon any liquidation, dissolution or winding up. No dividends may be
declared on CNAFs common stock until all cumulative dividends on the Preferred
Issue have been paid.

CNA previously sponsored a stock ownership plan whereby the Company financed
the purchase of Company stock by certain officers, including executive
officers. Interest charged on the principal amount of these stock purchase
loans is generally equivalent to the long term applicable federal rate,
compounded semi-annually, in effect on the disbursement date of the loan.
Loans made pursuant to the plan are secured by the stock purchased and
generally have a ten-year term. The outstanding aggregate loan balance as of
September 30, 2003 and December 31, 2002 was $30 million for all participants
who were then Company officers and directors.

CNA Surety Corporation

CCC provided an excess of loss reinsurance contract to the insurance
subsidiaries of CNA Surety Corporation (CNA Surety), a 64% owned and
consolidated subsidiary of CNA, over a period that expired on December 31, 2000
(the stop loss contract). The stop loss contract limits the net loss ratios
for CNA Surety with respect to certain accounts and lines of insurance
business. In the event that CNA Suretys accident year net loss ratio exceeds
24% for 1997 through 2000 (the contractual loss ratio), the stop loss contract
requires CCC to pay amounts equal to the amount, if any, by which CNA Suretys
actual accident year net loss ratio exceeds the contractual loss ratio
multiplied by the applicable net earned premiums. The minority shareholders of
CNA Surety do not share in any losses that apply to this contract. There were
no reinsurance balances payable under this stop loss contract as of September
30, 2003 and December 31, 2002.

Effective October 1, 2002, CCC provides an excess of loss protection for new
and renewal bonds for CNA Surety for per principal exposures that exceed $60
million since October 1, 2002 in two parts  a) $40 million excess of $60
million and b) $50 million excess of $100 million for CNA Surety. This excess
of loss protection is necessary primarily to support new and renewal bonds for
contract surety accounts with bonded backlogs or work-in-process in excess of
$60 million. In consideration for the reinsurance coverage provided by the $40
million excess of $60 million contract, CNA Surety paid a quarterly premium
equal to $3 million to CCC. In consideration for the reinsurance coverage
provided by the $50 million excess of $100 million, the insurance subsidiaries
of CNA Surety paid $6 million in premium to CCC.

Effective October 1, 2003, pending state insurance department regulatory
approval, CCC entered into a $3 million excess of $12 million reinsurance
contract with CNA Surety. The reinsurance premium for the coverage provided by
the $3 million excess of $12 million contract is $0.3 million plus, if
applicable, additional premium based on paid losses.
This contract expires on December 31, 2004.

In March of 2003, CNAF entered into a credit agreement with a large national
contractor, which undertakes projects for the construction of government and
private facilities, to provide loans to the

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

contractor in a maximum aggregate
amount of $84.3 million (the Credit
Facility) as of September 30, 2003. Of the $84.3 million capacity, $74.8 million, including accrued
interest, was outstanding at September 30, 2003. The Credit Facility and all
related loans will mature in March of 2006. Advances under the Credit Facility
bear interest at the prime rate plus 6%. Payment of 3% of the interest is
deferred until the Credit Facility matures, and the remainder is to be paid
monthly in cash. Loans under the credit facility are secured by a pledge of
substantially all of the assets of the contractor and certain of its
affiliates.

In addition, in June of 2003, the Company and one of its subsidiaries provided
repayment guarantees to certain creditors of the contractor and a subsidiary of
the contractor. Such guarantees were provided in order to allow the contractor
to receive financial accommodations from a creditor and in order to comply with
certain regulatory requirements. Under the terms of the guarantees, any
payments made by the Company, or any of its subsidiaries, would be considered a
draw under the Credit Facility. As of September 30, 2003 these guarantees
amounted to $7.4 million.

CNA Surety has provided significant surety bond protection for projects by this
contractor through surety bonds underwritten by CCC or its affiliates. The
loans were provided by CNAF to help the contractor meet its liquidity needs.

In March of 2003, CNAF also purchased the contractors outstanding bank debt
for $16.4 million. The contractor retired the bank debt by paying CNAF $16.4
million, with $11.4 million of the payoff amount being funded under the new
Credit Facility and $5 million from money loaned to the contractor by its
shareholders. Under its purchase agreement with the banks, CNAF was also
required to reimburse the banks for any draws upon approximately $6.5 million
in outstanding letters of credit issued by the banks for the contractors
benefit that were due to expire between May and August of 2003. One of those
letters of credit in the amount of $3.4 million was extended,
but on September 30, 2003 was due to expire on
November 1, 2003. Any amounts paid by CNAF to the banks as reimbursements for
draws upon the banks letters of credit would become obligations of the
contractor to CNAF as draws upon the Credit Facility.

Loews has purchased a participation interest in one-third of the loans and
commitments under the new Credit Facility, on a dollar-for-dollar basis, up to
a maximum of $25 million. Although Loews does not have rights against the
contractor directly under the participation agreement, it shares recoveries and
certain fees under the Credit Facility proportionally with CNAF.

The contractor has initiated a restructuring plan that is intended to reduce
costs and improve cash flow, and a chief restructuring officer has been
appointed to manage execution of the plan. CNAF, through its affiliate CNA
Surety, intends to continue to provide surety bonds on behalf of the contractor
during this restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards. Any losses
arising from bonds issued or assumed by the insurance subsidiaries of CNA
Surety to the contractor are excluded from CNA Suretys $45 million excess of
$15 million per principal reinsurance program with unaffiliated reinsurers in
place in 2003. As a result, CNA Surety retains the first $60 million of losses
on bonds written with an effective date of September 30, 2002 and prior, and
CCC will incur 100% of losses above that retention level on bonds with
effective dates prior to September 30, 2002. Through facultative reinsurance
contracts with CCC, CNA Suretys exposure on bonds written from October 1, 2002
through September 30, 2003 has been limited to $20 million per bond.

Indemnification and subrogation rights, including rights to contract proceeds
on construction projects in the event of default, exist that reduce CNA
Suretys and ultimately the Companys exposure to loss. While CNAF believes
that the contractors restructuring efforts are expected to be successful and
provide sufficient cash flow for its operations and repayment of its borrowings
under the credit facility, the

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##### Table of Contents



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

contractors failure to achieve its restructuring plan or perform its
contractual obligations under the credit facility and underlying all of the
Companys surety bonds could have a material adverse effect on the Companys
future results of operations. If such failures occur, the Company estimates
the surety loss, net of indemnification and subrogation recoveries, and
minority interest could be up to $200 million.

Note N. Statutory Accounting Practices

CNAs insurance subsidiaries are domiciled in various jurisdictions. These
subsidiaries prepare statutory financial statements in accordance with
accounting practices prescribed or permitted by the respective jurisdictions
insurance regulators. Prescribed statutory accounting practices are set forth
in a variety of publications of the National Association of Insurance
Commissioners (NAIC) as well as state laws, regulations and general
administrative rules. The Company insurance subsidiaries follow one
significant accounting practice, related to discounting of certain non-tabular
workers compensation claims. This practice was followed by an acquired
company, and CNA received permission to eliminate the effect of the permitted
practice over a ten-year period. The impact of this permitted practice was to
increase statutory surplus by approximately $24 million at December 31, 2002.
At September 30, 2003, CNA has fully eliminated the effect of this permitted practice.

Note O. Restatement For Life Settlement Contracts

As a result of a routine review of the Companys periodic filings by the
Division of Corporation Finance of the SEC, the Company has revised the
historical accounting for its investment in life settlement contracts and the
related revenue recognition and has restated its 2002 interim financial
information for the three and nine months ended September 30, 2002. The
Company has also restated its financial statements as of December 31, 2001 and
for the years ended December 31, 2001 and 2000 in its 2002 Form 10-K.

The SEC concluded that FASB Technical Bulletin 85-4 Accounting for Purchases of
Life Insurance (FTB 85-4) should have been applied to the Companys investment
in life settlement contracts. Under FTB 85-4, the carrying value of each
contract at purchase and at the end of each reporting period is equal to the
cash surrender value of the policy. Amounts paid to purchase these contracts
that are in excess of the cash surrender value, at the date of purchase, are
expensed immediately. Periodic maintenance costs, such as premiums, necessary
to keep the underlying policy inforce are expensed as incurred and included in
other operating expense. Revenue is recognized and included in other revenue
in the Condensed Consolidated Statements of Operations when the life insurance
policy underlying the life settlement contract matures. The Companys
historical accounting was to record an asset for the amount paid to acquire the
life settlement contract along with other direct acquisition costs, and to
recognize revenue over the period the contract was held.

The effect of the restatement is as follows:

Restatement

Three months
    
    Nine monthsPreviously
    
    As
    
    Previously
    
    AsReported
    
    Restated
    
    Reported
    
    RestatedPeriod ended September 30
    
    2002
    
    2002
    
    2002
    
    2002(In millions, except per share data)Condensed consolidated statements of operations:Other revenues
    
    $
    140
    
    
    $
    137
    
    
    $
    476
    
    
    $
    465Other operating expenses
    
    
    377
    
    
    
    375
    
    
    
    1,261
    
    
    
    1,258Income tax expense
    
    
    (23
    )
    
    
    (22
    )
    
    
    (78
    )
    
    
    (75
    )Net income (a)
    
    
    54
    
    
    
    54
    
    
    
    110
    
    
    
    105Basic and Diluted earnings per share available
to common stockholders (a)
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.49
    
    
    $
    0.47


45



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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 impacting the
consolidated operations and financial condition of CNA Financial Corporation
(CNAF) and its controlled subsidiaries (collectively CNA or the Company). CNA
is one of the largest insurance organizations in the United States and, based
on 2002 statutory net written premiums, is the 11th largest property and
casualty organization.

Loews Corporation (Loews) owned approximately 90% of the outstanding common
stock of CNAF as of September 30, 2003. The following discussion should be
read in conjunction with the Condensed Consolidated Financial Statements in
Item 1 of Part 1.

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

Third Quarter 2003 Net Prior Year Development, Results of Operations and Capital Plan

The Company reported a net loss for the third quarter of 2003 of $1,760 million
compared to net income of $54 million for the same period in 2002. The third
quarter of 2003 net loss included significant reserve strengthening as a result
of recently completed reserve reviews. Significant after-tax items that
contributed to the Companys third quarter of 2003 net loss included:



| |  |  | Net prior year development of $1,495 million after-tax, which includes premium and claim and allocated claim
adjustment expense development. Of this amount, $978 million was
recorded for core reserves and $517 million was recorded for asbestos,
environmental pollution and mass tort (APMT) reserves. A detailed
discussion of the development by segment can be found in the Segment
Results sections of this Managements Discussion & Analysis (MD&A).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in the bad debt reserve for reinsurance receivables in the
amount of $200 million. This increase was recorded based on continuing
deterioration of reinsurer financial strength ratings. See the
Reinsurance section of this MD&A for a detailed discussion.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in the bad debt reserve for insurance receivables in the
amount of $132 million in Standard Lines. See the Standard Lines
section in this MD&A for a detailed discussion.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in unallocated claim and claim adjustment expense (ULAE)
reserves of $65 million. This increase was recorded in Standard Lines
($3 million), Specialty Lines ($18 million) and the Corporate and Other
($44 million) segments.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To support statutory capital impacted by the significant third quarter charges,
the Company has developed a capital plan, which includes substantial support
from Loews. The capital plan includes a number of components, including
capital support from Loews and possible sales or other dispositions of
businesses and assets. Under an agreement approved by a special committee of
independent members of CNAFs

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

Board of Directors, Loews has agreed to purchase $750 million of a new series
of CNAF non-voting convertible preferred stock, having terms that make it
economically equivalent to CNAF common stock. The conversion price is based on
current average market prices of CNAF common stock. Proceeds from the preferred
stock sale will be applied by CNA to increase the statutory surplus of CNAs
principal insurance subsidiary, Continental Casualty Company (CCC). Under the
agreement, Loews has also committed up to $500 million of additional capital
support, through the purchase of surplus notes of CCC, in the event that
certain additions to CCCs statutory capital are not achieved by February 26,
2004 from business or asset sales and related actions. The obligation of Loews
to consummate this agreement is subject to certain customary closing
conditions. In addition, Loews has indicated its commitment to provide up to
an additional $150 million by March 31, 2004, in a form to be determined, to
support the statutory capital of CCC in the event of additional shortfalls in
relation to business and asset sales. Other elements of the capital plan
include the October of 2003 sale of CNA Re renewal rights and withdrawal from
the assumed reinsurance business, CNAs previously announced initiative to
reduce operating expenses by $200 million and planned changes in the ownership
structure of certain insurance subsidiaries to align statutory capital more
efficiently. See the Loews discussion of the Liquidity and Capital
Resources section of this MD&A for further details.

Adverse trends in APMT and certain property and casualty exposures continue to
impact CNA. As noted in Reserves  Estimates and Uncertainties
below, the Company reviews its Insurance Reserves on a regular basis.
As previously announced in the Companys Form 10-Q for the period ended June
30, 2003, comprehensive reviews of construction defect claims and other
volatile exposures, and a ground up analysis of asbestos, pollution and mass
tort (APMT) exposures, were conducted in the third quarter of 2003. In
addition, an independent actuarial firm is in the process of completing a
review of the property and casualty Insurance Reserves as of December 31, 2002
of CCC and The Continental Insurance Company (CIC). The indications from these
independent reviews have been considered as part of the Companys reserving
process and provide corroboration for managements conclusions regarding the
required level of reserves.

Based on these third quarter of 2003 reserve reviews, the Company recorded
$2,299 million of pretax ($1,495 million after-tax) net unfavorable prior year development, including
$1,941 million of pretax net unfavorable claim and allocated claim adjustment
expense reserve development and $358 million of pretax unfavorable premium
development for the three months ended September 30, 2003.

47



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

The pretax third quarter of 2003 net unfavorable prior year development is
detailed by segment in the following table.

Pretax Third Quarter of 2003 Net Unfavorable Prior Year Development

Standard
    
    Specialty
    
    
    
    
    
    CorporateLines
    
    Lines
    
    CNA Re
    
    and Other
    
    Total(In millions)Pretax net
unfavorable prior
year claim and
allocated claim
adjustment expense
development
excluding the impact
of the corporate
aggregate
reinsurance
treaties:Core (Non-APMT)
    
    $
    1,100
    
    
    $
    254
    
    
    $
    179
    
    
    $
    52
    
    
    $
    1,585APMT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    795
    
    
    
    795Total
    
    
    1,100
    
    
    
    254
    
    
    
    179
    
    
    
    847
    
    
    
    2,380Premium development,
excluding the impact
of corporate
aggregate
reinsurance treaties
    
    
    130
    
    
    
    (1
    )
    
    
    (6
    )
    
    
    
    
    
    
    123Pretax third quarter
of 2003 net prior
year unfavorable
development before
impact of corporate
aggregate
reinsurance treaties
    
    
    1,230
    
    
    
    253
    
    
    
    173
    
    
    
    847
    
    
    
    2,503Pretax underwriting
benefit from
corporate aggregate
reinsurance treaties
on accident years
2000 and 2001
    
    
    (140
    )
    
    
    (27
    )
    
    
    (37
    )
    
    
    
    
    
    
    (204
    )Total pretax third
quarter of 2003 net
unfavorable prior
year development
    
    $
    1,090
    
    
    $
    226
    
    
    $
    136
    
    
    $
    847
    
    
    $
    2,299


48



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

Results of Operations

The following table summarizes key components of the results of operations.

Three months
    
    Nine monthsPeriod ended September 30
    
    2003
    
    2002(a)
    
    2003
    
    2002(a)(In millions, except per share data)RevenuesNet earned premiums
    
    $
    2,126
    
    
    $
    2,262
    
    
    $
    6,704
    
    
    $
    7,925Net investment income
    
    
    352
    
    
    
    364
    
    
    
    1,211
    
    
    
    1,292Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    164
    
    
    
    24
    
    
    
    466
    
    
    
    (137
    )Other revenues
    
    
    83
    
    
    
    137
    
    
    
    288
    
    
    
    465Total revenues
    
    
    2,725
    
    
    
    2,787
    
    
    
    8,669
    
    
    
    9,545Claims, Benefits and ExpensesInsurance claims and policyholders benefits
    
    
    4,032
    
    
    
    1,850
    
    
    
    7,969
    
    
    
    6,542Amortization of deferred acquisition costs
    
    
    495
    
    
    
    448
    
    
    
    1,434
    
    
    
    1,350Other operating expenses
    
    
    945
    
    
    
    375
    
    
    
    1,765
    
    
    
    1,258Interest
    
    
    33
    
    
    
    37
    
    
    
    100
    
    
    
    112Total claims, benefits and expenses
    
    
    5,505
    
    
    
    2,710
    
    
    
    11,268
    
    
    
    9,262(Loss) income from continuing operations before income tax and
minority interest
    
    
    (2,780
    )
    
    
    77
    
    
    
    (2,599
    )
    
    
    283Income tax benefit (expense)
    
    
    1,006
    
    
    
    (22
    )
    
    
    983
    
    
    
    (75
    )Minority interest
    
    
    14
    
    
    
    (1
    )
    
    
    9
    
    
    
    (11
    )(Loss) income from continuing operations
    
    
    (1,760
    )
    
    
    54
    
    
    
    (1,607
    )
    
    
    197Loss from discontinued operations, net of tax of $9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )(Loss) income before cumulative effect of a change in accounting
principle
    
    
    (1,760
    )
    
    
    54
    
    
    
    (1,607
    )
    
    
    162Cumulative effect of a change in accounting principle, net of tax
of $7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )Net (loss) income
    
    $
    (1,760
    )
    
    $
    54
    
    
    $
    (1,607
    )
    
    $
    105Basic and Diluted (Loss) Earnings Per Share(Loss) income from continuing operations
    
    $
    (7.94
    )
    
    $
    0.24
    
    
    $
    (7.39
    )
    
    $
    0.89Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.16
    )(Loss) income before cumulative effect of a change in accounting
principle
    
    
    (7.94
    )
    
    
    0.24
    
    
    
    (7.39
    )
    
    
    0.73Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.26
    )Basic and diluted (loss) earnings per share available to common
stockholders
    
    $
    (7.94
    )
    
    $
    0.24
    
    
    $
    (7.39
    )
    
    $
    0.47Weighted average outstanding common stock and common stock
equivalents
    
    
    223.6
    
    
    
    223.6
    
    
    
    223.6
    
    
    
    223.6




|(a) |  | As previously disclosed in the Companys
2002 Form 10-K, as a result of the routine review of the Companys periodic filings
by the Division of Corporation Finance of the Securities and Exchange
Commission (SEC), the Company has revised the historical accounting for
its investment in life settlement contracts and the related revenue
recognition and has restated its 2002 interim financial information for
the three and nine months ended September 30, 2002. The
Companys 2002 Form 10-K as well as Note O of the Condensed
Consolidated Financial Statements, in Item 1 of Part 1, provides a
discussion of the historical and current accounting for life settlement
contracts.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The adjustment related to life settlement contracts reduced net income
for the nine months ended September 30, 2002 by $5 million. There was no
impact on net income for the three months ended September 30, 2002. This
MD&A gives effect to the restatement of the Condensed Consolidated
Financial Statements for the three and nine months ended September 30,
2002.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Three Month Comparison

Net results decreased $1,814 million for the three
months ended September 30,
2003 as compared with the same period in 2002. The decline in net results was
due principally to increased net unfavorable prior year development of $1,478
million after-tax ($2,274 million pretax), primarily driven by $1,495 million
after-tax ($2,299 million pretax) of net unfavorable development recorded for
the three months ended September 30, 2003 in the Property and Casualty Segments
and Corporate and Other Segment. In addition, net results for the three months
ended September 30, 2003 included a $332 million after-tax ($511 million
pretax) increase in the bad debt provisions for insurance and reinsurance
receivables, a $12 million after-tax ($18 million pretax) increase in
catastrophe losses, a $68 million after-tax ($104 million pretax) increase in
insurance related assessments, a $65 million after-tax ($100 million pretax)
increase in ULAE reserves, increased dividend development of $26 million
after-tax ($40 million pretax), and increased interest expense of $64 million
after-tax ($98 million pretax) related to additional cessions to the corporate
aggregate and other reinsurance treaties. These items were partially offset by
an $89 million after-tax increase in net realized investment gains.

Net unfavorable prior year development of $2,302 million, including $1,943
million of unfavorable claim and allocated claim adjustment expense reserve
development and $359 million of unfavorable premium development, was recorded
for the three months ended September 30, 2003 for all of CNAs segments. Net
unfavorable prior year development of $28 million, including $52 million of
unfavorable premium development and $24 million of favorable claim and
allocated claim adjustment expense reserve development, was recorded for the
three months ended September 30, 2002.

An $100 million increase in ULAE reserves was recorded for the three months
ended September 30, 2003. This increase was based on a study completed during
the third quarter of 2003. The study included evaluation of an average cost
approach to estimating ULAE to paid loss approach. The average cost method
reflects trends in average ULAE costs, future inflation rates, claim closure
patterns and staffing levels. ULAE includes loss adjustment expenses that
cannot be specifically allocated to a claim, such as the overall cost of claims
administration.

During the third quarter of 2003, the Company recorded a $73 million pretax
increase in the liability for certain insurance related assessments. The
increase was in recognition of the growing level of guaranty fund assessments
in 2003, the recently announced increased estimates for the Reliance National
Indemnity Insurance Company insolvency exposure, and exposure to additional
insolvencies in 2003 that impact the assessment calculation.

Net realized investment results increased $89 million after-tax for the three
months ended September 30, 2003 as compared with the same period in 2002. This
change was driven primarily by increased realized results related to derivative
securities and a reduction in impairment losses for other-than-temporary
declines in market values for fixed maturity and equity securities. Partially
offsetting these increases were decreased realized results from the sales of
fixed maturity securities.

Net earned premiums decreased $136 million for the three months ended September
30, 2003 as compared with the same period in 2002. The decrease in net earned
premiums was due primarily to additional ceded premiums to corporate aggregate
reinsurance treaties and other reinsurance treaties resulting from unfavorable
net prior year reserve development. Partially offsetting these items were rate
increases and new business, primarily in Standard Lines, Specialty Lines and
Group Operations.

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

Nine Month Comparison

Net results decreased $1,712 million for the nine months ended September 30,
2003 as compared with the same period in 2002. The decline in net results was
due primarily to increased unfavorable net prior year development of $1,800
million ($2,774 million pretax), a $54 million after-tax ($82 million pretax)
increase in catastrophe losses and a $65 million after-tax ($100 million
pretax) increase in ULAE reserves. In addition, net results for the nine
months ended September 30, 2003 included a $383 million after-tax ($590 million
pretax) increase in the bad debt provision for insurance and reinsurance
receivables, a $68 million after-tax ($104 million pretax) increase in
insurance related assessments, a $26 million after-tax ($40 million pretax)
increase in dividend development and increased interest expense of $90 million
after-tax ($137 million pretax) related to additional cessions to the corporate
aggregate and other reinsurance treaties. These items were partially offset by
a $392 million after-tax increase in net realized investment results. Net
income for the nine months ended September 30, 2002 also includes a $35 million
after-tax loss from discontinued operations and a $57 million after-tax charge
for the cumulative effect of a change in accounting principle.

Net unfavorable prior year development of $2,835 million, including $2,312
million of unfavorable claim and allocated claim adjustment expense reserve
development and $523 million of unfavorable premium development, was recorded
for the nine months ended September 30, 2003. Net unfavorable prior year
development of $61 million, including $16 million of unfavorable claim and
allocated claim adjustment expense reserve development and $45 million of
unfavorable premium development, was recorded for the nine months ended
September 30, 2002.

Net realized investment results increased $392 million after-tax for the nine
months ended September 30, 2003 as compared with the same period in 2002. This
change was due primarily to a $150 million after-tax reduction in impairment
losses for other-than-temporary declines in market values for fixed maturity
and equity securities and increased realized results related to fixed maturity
and derivative securities. See the Investments section of this MD&A for
further details.

The loss from discontinued operations of $35 million after-tax for the nine
months ended September 30, 2002 related to the results of CNA Vida, CNAs
Chilean-based life insurer, which was sold during 2002.

The cumulative effect of a change in accounting principle in 2002 related to
the adoption of Statement of Financial Accounting Standards
No. 142, Goodwill
and Other Intangible Assets (SFAS 142). During 2002, the Company completed its
initial goodwill impairment testing and recorded a $57 million after-tax ($64
million pretax) impairment charge. The impairment charge consisted of a $48
million after-tax ($51 million pretax) charge in Specialty Lines, an $8 million
after-tax ($12 million pretax) charge in Life Operations, and a $1 million
after-tax ($1 million pretax) charge in Corporate and Other. Goodwill and
indefinite-lived intangible assets are tested for impairment annually and when
certain triggering events require such tests.

Net earned premiums decreased $1,221 million for the nine months ended
September 30, 2003 as compared with the same period in 2002. The decrease in
net earned premiums was due primarily to the July 1, 2002 transfer of the
National Postal Mail Handlers Union group benefits plan (the Mail Handlers
Plan) to First Health Corporation. Net earned premiums for the Mail Handlers
Plan were $1,151 million for the nine months ended September 30, 2002. Net
earned premium was also impacted by ceded premiums to corporate aggregate
reinsurance treaties and other reinsurance treaties resulting from unfavorable
net prior year reserve development. Partially offsetting these items were rate
increases and new business, primarily in Standard Lines, Specialty Lines and
Group Operations.

51



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

Critical Accounting Estimates

The preparation of the Condensed Consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States
of America (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the Condensed Consolidated
Financial Statements and the amounts of revenues and expenses reported during
the period. Actual results may differ from those estimates.

CNAs Condensed Consolidated Financial Statements and accompanying notes have
been prepared in accordance with GAAP and have been applied on a consistent
basis. CNA continually evaluates the accounting policies and estimates used to
prepare the Condensed Consolidated Financial Statements. In general,
managements estimates are based on historical experience, evaluation of
current trends, information from third party professionals and various other
assumptions that are believed to be reasonable under the known facts and
circumstances.

The accounting estimates discussed below are considered by management to be
critical to an understanding of CNAs Condensed Consolidated Financial
Statements as their application places the most significant demands on
managements judgment. Due to the inherent uncertainties involved with this
type of judgment, actual results could differ significantly from estimates and
have a material impact on the Companys results of operations or equity.

Insurance Reserves

Insurance reserves are established for both short and long-duration insurance
contracts. Short-duration contracts are primarily related to property and
casualty policies where the reserving process is based on actuarial estimates
of the amount of loss, including amounts for known and unknown claims.
Long-duration contracts typically include traditional life insurance and long
term care products and are estimated using actuarial estimates about mortality
and morbidity, as well as assumptions about expected investment returns.
Changes in estimates of claim and allocated claim adjustment expense reserves
and premium accruals for prior accident years are defined as development within
this MD&A. These changes can be favorable or unfavorable. The inherent risks
associated with the reserving process are discussed in Reserves  Estimates
and Uncertainties below.

Reinsurance

Amounts recoverable from reinsurers are estimated in a manner consistent with
claim and claim adjustment expense reserves or future policy benefit reserves
and are reported as a receivable in the Condensed Consolidated Balance Sheets.
The cost of reinsurance related to long-duration contracts is accounted for
over the life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies. The ceding of
insurance does not discharge the primary liability of the Company. An
estimated allowance for doubtful accounts is recorded on the basis of periodic
evaluations of balances due from reinsurers, reinsurer solvency, managements
experience and current economic conditions. Further information on reinsurance
is provided in Reinsurance below.

Valuation of Investments and Impairment of Securities

The Companys investment portfolio is subject to market declines below book
value that may be other-than-temporary. The Company has an Impairment
Committee (the Impairment Committee), which

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

reviews the investment portfolio on a quarterly basis, with ongoing analysis as
new information becomes available. Any decline in value that is determined to
be other-than-temporary is recorded as a realized loss in the period in which
the determination occurred. Further information on the Companys investments
is provided in Investments below.

Individual Long Term Care
Products

The Companys reserves and
deferred acquisition costs for its individual long term care product
offerings are based on certain assumptions including morbidity,
policy persistency and interest rates. Actual experience may differ
from these assumptions. The recoverability of deferred acquisition
costs and the adequacy of the reserves are contingent on actual
experience related to these key assumptions and other factors
including potential future premium increases and future health care
cost trends. The results of operations and/or equity may be
materially, adversely affected if actual experience varies
significantly from these assumptions.

Reserves  Estimates and Uncertainties

The Company maintains reserves to cover its estimated ultimate unpaid liability
for claim and claim adjustment expenses and future policy benefits, including
the estimated cost of the claims adjudication process, for claims that have
been reported but not yet settled and claims that have been incurred but not
reported. Claim and claim adjustment expense and future policy benefit
reserves are reflected as liabilities on the Condensed Consolidated Balance
Sheets under the heading Insurance Reserves. Adjustments to prior year
reserve estimates, if necessary, are reflected in the results of operations in
the period that the need for such adjustments is determined.

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

Among the many uncertain future events about which the Company makes
assumptions and estimates, many of which have become increasingly
unpredictable, are claims severity, frequency of claims, mortality, morbidity,
expected interest rates, inflation, claims handling and case reserving policies
and procedures, underwriting and pricing policies, changes in the legal and
regulatory environment and the lag time between the occurrence of an insured
event and the time it is ultimately settled, referred to in the insurance
industry as the tail. These factors must be individually considered in
relation to the Companys evaluation of each type of business. Many of these
uncertainties are not precisely quantifiable, particularly on a prospective
basis, and require significant management judgment.

Given the factors described above, it is not possible to quantify precisely the
ultimate exposure represented by claims and related litigation. As a result,
the Company regularly reviews the adequacy of its reserves and reassesses its
reserve estimates as historical loss experience develops, additional claims are
reported and settled and additional information becomes available in subsequent
periods.

In addition, the Company is subject to the uncertain effects of emerging or
potential claims and coverage issues that arise as industry practices and
legal, judicial, social and other environmental conditions change. These
issues have had, and may continue to have, a negative effect on the Companys
business by either extending coverage beyond the original underwriting intent
or by increasing the number or size of claims. Recent examples of emerging or
potential claims and coverage issues include:



| |  |  | increases in the number and size of water damage claims, including
those related to expenses for testing and remediation of mold
conditions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in the number and size of claims relating to injuries
from medical products, and exposure to lead;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | changes in interpretation of the named insured provision with
respect to the uninsured/underinsured motorist coverage in commercial
automobile policies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

53



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##### Table of Contents



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



| |  |  | the effects of recently uncovered accounting and financial
reporting scandals and other major corporate governance failures which
have resulted in an increase in the number and size of claims,
including director and officer and errors and omissions insurance
claims;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a growing trend of plaintiffs targeting insurers in class action
litigation relating to claims handling and other practices;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in the number of construction defect claims, including
claims for a broad range of additional insured endorsements on
policies; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in the number of claims alleging
abuse by members of the clergy.
| | - |  | --------------------------------------------------------------------------

The future impact of these and other unforeseen emerging or potential claims
and coverage issues is difficult to predict and could materially adversely
affect the adequacy of the Companys claim and claim adjustment expense
reserves and could lead to future reserve additions. See the Consolidated
Operations and Segment Results sections of this MD&A for a discussion of
changes in reserve estimates and the impact on the Companys results of
operations.

The Companys experience has been that establishing reserves for casualty
coverages relating to APMT claim and claim adjustment expenses is subject to
uncertainties that are greater than those presented by other claims.
Estimating the ultimate cost of both reported and unreported APMT claims is
subject to a higher degree of variability due to a number of additional
factors, including among others:



| |  |  | coverage issues, including whether certain costs are covered under
the policies and whether policy limits apply;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | allocation of liability among numerous parties some of whom may be
in bankruptcy proceedings and, in particular, the application of joint
and several liability to specific insurers on a risk;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inconsistent court decisions and developing legal theories;
| | - |  | -----------------------------------------------------------



| |  |  | increasingly aggressive tactics of plaintiffs lawyers;
| | - |  | -------------------------------------------------------



| |  |  | increased filings of claims in certain states to avoid the
application of tort reform statute effective dates;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | the risks and lack of predictability inherent in major litigation;
| | - |  | ------------------------------------------------------------------



| |  |  | a further increase or decrease in asbestos and environmental claims
which cannot now be anticipated;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | continued increase in mass tort claims relating to silica and
silica-containing products, and the outcome of ongoing disputes as to
coverage in relation to these claims;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the role the exhaustion of primary limits for certain accounts and
increased demands on any umbrella or excess policies the Company has
issued;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the number and outcome of direct actions against the Company; and
| | - |  | -----------------------------------------------------------------

54



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



| |  |  | future developments pertaining to the Companys ability to recover
reinsurance for asbestos and environmental claims.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

It is also not possible to predict changes in the legal and legislative
environment and the impact on the future development of APMT claims. This
development will be affected by future court decisions and interpretations, as
well as changes in applicable legislation. It is difficult to predict the
ultimate outcome of large coverage disputes until settlement negotiations near
completion and significant legal questions are resolved or, failing settlement,
until the dispute is adjudicated. This is particularly the case with
policyholders in bankruptcy where negotiations often involve a large number of
claimants and other parties and require court approval to be effective. A
further uncertainty exists as to whether a national privately financed trust to
replace litigation of asbestos claims with payments to claimants from the trust
will be established and approved through federal legislation, and, if
established and approved, whether it will contain funding requirements in
excess of the Companys carried loss reserves.

Due to the factors described above, among others, establishing reserves for
APMT claim and claim adjustment expenses is subject to uncertainties that are
greater than those presented by other claims. Traditional actuarial methods
and techniques employed to estimate the ultimate cost of claims for more
traditional property and casualty exposures are less precise in estimating
claim and claim adjustment reserves for APMT, particularly in an environment of
emerging or potential claims and coverage issues that arise from industry
practices and legal, judicial and social conditions. Therefore, these
traditional actuarial methods and techniques are necessarily supplemented with
additional estimating techniques and methodologies, many of which involve
significant judgments that are required of management. Due to the inherent
uncertainties in estimating reserves for APMT claim and claim adjustment
expenses and the degree of variability due to, among other things, the factors
described above, the Company may be required to record material changes in its
claim and claim adjustment expense reserves in the future, should new
information become available or other developments emerge. See the
Environmental Pollution and Mass Tort and Asbestos Reserves section of this
MD&A for additional information relating to APMT claims and reserves.

The Companys recorded Insurance Reserves, including APMT reserves, reflect
managements best estimate as of a particular point in time based upon known
facts, current law and managements judgment. In light of the many
uncertainties associated with establishing the estimates and making the
assumptions necessary to establish reserve levels, the Company reviews its
reserve estimates on a regular basis and makes adjustments in the period that
the need for such adjustments is determined. These reviews have resulted in
the Company identifying information and trends that have caused the Company to
increase its reserves in prior periods and could lead to the identification of
a need for additional material increases in claim and claim adjustment expense
reserves, which could materially adversely affect the Companys results of
operations, equity, business, insurer financial strength and debt ratings (see
the Ratings section of this MD&A).

Reinsurance

CNA assumes and cedes reinsurance with other insurers, reinsurers and members
of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of
risk, minimize exposures on larger risks and to exit certain lines of business.

Interest cost on reinsurance contracts accounted for on a funds withheld basis
is incurred during all periods in which a funds withheld liability exists.
Interest cost, which is included in net investment income, was $148 million and
$53 million for the three months ended September 30, 2003 and 2002 and

55



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

$288 million and $168 million for the nine months ended September 30, 2003 and
2002. The amount subject to interest crediting rates on such contracts was
$2,892 million and $2,766 million at September 30, 2003 and December 31, 2002.
Certain funds withheld reinsurance contracts, including the corporate aggregate
reinsurance treaties, require interest on additional premiums arising from
ceded losses as if those premiums were payable at the inception of the
contract. The amount of retroactive interest, included in the totals above,
for the three months ended September 30, 2003 was $103 million as compared with
$5 million in the same period of 2002. The amount of retroactive interest,
included in the totals above, for the nine months ended September 30, 2003 was
$147 million as compared with $10 million in the same period of 2002.

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

The ceding of insurance does not discharge the primary liability of the
Company. Therefore, a credit exposure exists with respect to property and
casualty and life reinsurance ceded to the extent that any reinsurer is unable
to meet the obligations assumed under reinsurance agreements.

In certain circumstances, including significant deterioration of a reinsurers
financial strength ratings, the Company may engage in commutation discussions
with individual reinsurers. The outcome of such discussions may result in a
lump sum settlement that is less than the recorded receivable, net of any
applicable allowance for doubtful accounts. Losses arising from commutations
could have an adverse material impact on the Companys results of operations or
equity.

As disclosed in CNAFs Form 10-K filed with the SEC for the year ended December
31, 2002, the Company has reinsurance receivables from several reinsurers who
have recently experienced multiple downgrades of their financial strength
ratings, have announced that they will no longer accept new business and are
placing their books of business into run-off. One of the Companys principal
credit exposures from these recent events arises from reinsurance receivables
from Gerling Global (Gerling).

In the second quarter of 2003, the Company commuted three CNA HealthPro
treaties with Gerling which resulted in a $37 million pretax loss. The Company
estimates that these commutations will reduce pretax interest expense related
to these treaties by approximately $4 million over the balance of 2003 and $11
million in 2004.

In the third quarter of 2003, the Company commuted all remaining ceded and
assumed reinsurance contracts with four Gerling entities. The commutations
resulted in a pretax loss of $72 million, which was net of a previously
established allowance for doubtful accounts of $47 million. The Company has
no further exposure to the Gerling companies that are in run-off.

The Company has established an allowance for doubtful accounts to provide for
estimated uncollectible reinsurance receivables. The reinsurance receivable
balances were $15,117 million and $12,696 million at September 30, 2003 and
December 31, 2002. The increase in reinsurance receivables was primarily due to
ceded claim and allocated claim adjustment expenses related to APMT
and corporate aggregate reinsurance treaties. The allowance for doubtful accounts was $548 million and
$196 million at September 30, 2003 and December 31,
2002. The Company increased
the allowance by $308 million for the three months ended September 30, 2003 and
$348 million for the nine months ended September 30, 2003 in recognition of
deterioration of the financial strength ratings of several reinsurers,
including Trenwick Group Ltd. (Trenwick) and Commercial Risk Reinsurance
Company Ltd. In addition, in the third quarter of 2003 the Company updated its
reinsurance bad debt model based on recently published studies of reinsurer
insolvencies. While the Company believes the allowance for

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

doubtful accounts is adequate based on existing collateral and information
currently available, failure of reinsurers to meet their obligations could have
a material adverse impact on CNAs results of operations and equity.

The Company has an aggregate reinsurance treaty related to the 1999 through
2001 accident years that covers substantially all of the Companys property and
casualty lines of business (the Aggregate Cover). The Aggregate Cover provides
for two sections of coverage. These coverages attach at defined loss ratios
for each accident year. Coverage under the first section of the Aggregate
Cover, which is available for all accident years covered by the treaty, has a
$500 million limit per accident year of ceded losses and an aggregate limit of
$1 billion of ceded losses for the three accident years. The ceded premiums
associated with the first section are a percentage of ceded losses and for each
$500 million of limit the ceded premium is $230 million. The second section of
the Aggregate Cover, which only relates to accident year 2001, provides
additional coverage of up to $510 million of ceded losses for a maximum ceded
premium of $310 million. Under the Aggregate Cover, interest charges on the
funds withheld liability accrue at 8% per annum. The aggregate loss ratio for
the three-year period has exceeded certain thresholds which requires additional
premiums to be paid and an increase in the rate at which interest charges are
accrued. This rate will increase to 8.25% per annum commencing in 2006.

During the second and third quarters of 2003, as a result of the unfavorable
development recorded related to accident years 2000 and 2001, the $500 million
limit related to the 2000 and 2001 accident years under the first section was
fully utilized and losses of $500 million were ceded under the first section of
the Aggregate Cover. In 2001, as a result of reserve additions including those
related to accident year 1999, the $500 million limit related to the 1999
accident year under the first section was fully utilized and losses of $510
million were ceded under the second section as a result of losses related to
the September 11, 2001 World Trade Center Disaster and related events (WTC
event).

The pretax impact of the Aggregate Cover was as follows:

Pretax Impact of Aggregate Cover

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Ceded earned premiums
    
    $
    (223
    )
    
    $
    
    
    
    $
    (251
    )
    
    $
    Ceded claim and claim adjustment expense
    
    
    422
    
    
    
    
    
    
    
    500
    
    
    
    Interest charges (included in net investment income)
    
    
    (88
    )
    
    
    (13
    )
    
    
    (123
    )
    
    
    (38
    )Pretax benefit (expense)
    
    $
    111
    
    
    $
    (13
    )
    
    $
    126
    
    
    $
    (38
    )


In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property and
casualty lines of business in the Continental Casualty Company pool (the CCC
Cover). The loss protection provided by the CCC Cover has an aggregate limit
of approximately $761 million of ceded losses. The ceded premiums are a
percentage of ceded losses. The ceded premium related to full utilization of
the $761 million of limit is $456 million. The CCC Cover provides continuous
coverage in excess of the second section of the Aggregate Cover discussed
above. Under the CCC Cover, interest charges on the funds withheld generally
accrue at 8% per annum. The interest rate increases to 10% per annum if the
aggregate loss ratio exceeds certain thresholds. As of September 30, 2003, the
CCC Cover has been fully utilized.

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

The pretax impact of the CCC Cover was as follows:

Pretax Impact of CCC Cover

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Ceded earned premiums
    
    $
    (10
    )
    
    $
    (39
    )
    
    $
    (100
    )
    
    $
    (100
    )Ceded claim and claim adjustment expense
    
    
    17
    
    
    
    55
    
    
    
    143
    
    
    
    148Interest charges (included in net investment income)
    
    
    (13
    )
    
    
    (11
    )
    
    
    (48
    )
    
    
    (27
    )Pretax (expense) benefit
    
    $
    (6
    )
    
    $
    5
    
    
    $
    (5
    )
    
    $
    21


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

Pretax Impact of Aggregate Cover and CCC Cover

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Standard Lines
    
    $
    73
    
    
    $
    (13
    )
    
    $
    96
    
    
    $
    (38
    )Specialty Lines
    
    
    16
    
    
    
    8
    
    
    
    13
    
    
    
    4CNA Re
    
    
    16
    
    
    
    (3
    )
    
    
    13
    
    
    
    17Corporate and Other
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Pretax benefit (expense)
    
    $
    105
    
    
    $
    (8
    )
    
    $
    121
    
    
    $
    (17
    )


Terrorism Exposure

CNA and the insurance industry incurred substantial losses related to the WTC
event. For the most part, the industry was able to absorb the loss of capital
from these losses, but the capacity to withstand the effect of any additional
terrorism events was significantly diminished.

The Terrorism Risk Insurance Act of 2002 (the Act), has established a program
within the Department of the Treasury under which the federal government will
share the risk of loss by commercial property and casualty insurers arising
from future terrorist attacks with the insurance industry. The Act expires on
December 31, 2005. Each participating insurance company must pay a deductible,
ranging from 7% of direct earned premiums from commercial insurance lines in
2003 to 15% in 2005, before federal government assistance becomes available.
For losses in excess of a companys deductible, the federal government will
cover 90% of the excess losses, while companies retain the remaining 10%.
Losses covered by the program will be capped annually at $100 billion; above
this amount, insurers are not liable for covered losses and Congress is to
determine the procedures for and the source of any payments. Amounts paid by
the federal government under the program over certain phased limits are to be
recouped by the Department of the Treasury through policy surcharges, which
cannot exceed 3% of annual premium.

The Company is required to participate in the program, but it does not cover
life or health insurance products. State law limitations applying to premiums
and policies for terrorism coverage are not generally affected under the
program, but they are pre-empted in relation to prior approval requirements for
rates and forms. The Act has required insurers to offer terrorism coverage
through 2004. The Secretary of the Department of the Treasury has discretion
to extend this offer requirement until December 31, 2005.

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

While the Act provides the property and casualty industry with an increased
ability to withstand the effect of a terrorist event through 2005, given the
unpredictability of the nature, targets, severity or frequency of potential
terrorist events, the Companys results of operations or equity could
nevertheless be materially adversely impacted by them. The Company is
attempting to mitigate this exposure through its underwriting practices, policy
terms and conditions (where applicable) and the use of reinsurance. In
addition, under state laws, the Company is generally prohibited from excluding
terrorism exposure from its primary workers compensation, individual life and
group life and health policies. In those states that mandate property
insurance coverage of damage from fire following a loss, the Company is also
prohibited from excluding terrorism exposure under such coverage.

Reinsurers obligations for terrorism-related losses under reinsurance
agreements are not covered by the Act. The Companys current reinsurance
arrangements either exclude terrorism coverage or significantly limit the level
of coverage.

Restructuring

As discussed in the Companys 2002 Form 10-K, the Company finalized and
approved two separate restructuring plans in 2001. The first plan related to
the Companys Information Technology operations (the IT Plan). The second plan
related to restructuring the property and casualty segments and Life
Operations, discontinuation of the variable life and annuity business and
consolidation of real estate locations (the 2001 Plan).

No restructuring and other related charges related to the IT Plan were incurred
for the three and nine months ended September 30, 2003 and 2002. During 2003,
$1 million in payments were charged against the liability. As of September 30,
2003, the accrued liability relating to employee termination and related
benefit costs was $4 million. The remaining accrual is expected to be paid
through 2004.

No restructuring and other related charges related to the 2001 Plan were
incurred for the three and nine months ended September 30, 2003 and 2002.
During 2003, $14 million in payments for occupancy and employee related costs
and $1 million of loss on disposal of property costs were charged against the
liability. As of September 30, 2003, the accrued liability, relating primarily
to lease termination costs, was $22 million. Of the remaining accrual,
approximately $3 million is expected to be paid in the fourth quarter of 2003.

Expense Initiatives

The Company announced a $200 million expense reduction initiative in the second
quarter of 2003. The primary components of the initiative are a reduction of
the workforce by approximately five percent, lower commissions and other
acquisition costs, principally related to workers compensation, and reduced
spending in other areas. Strategies expected to realize such savings have
begun to be implemented and will continue through 2004. Approximately
$16
million of severance and related costs has been recorded for the nine months
ended September 30, 2003 related to the expense reduction initiatives.

Non-GAAP Financial Measures

This MD&A discusses certain GAAP and non-GAAP financial measures to provide
information used by management to monitor the Companys operating performance.
Management utilizes various financial measures to monitor the Companys
insurance operations and investment portfolio. Underwriting results, which are
derived from certain income statement amounts, are considered non-GAAP
financial measures

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

and are used by management to monitor performance of the Companys insurance
operations. The Companys investment portfolio is monitored through analysis
of various quantitative and qualitative factors and certain decisions are made
related to the sale or impairment of investments that will produce realized
gains and losses. Net realized investment gains and losses, which are
comprised of after-tax realized investment gains and losses net of
participating policyholders and minority interests are a non-GAAP financial
measure.

Underwriting results are computed as net earned premiums less net incurred
claims and the cost incurred to settle these claims, acquisition expenses,
underwriting expenses and dividend expenses. Management uses underwriting
results and operating ratios to monitor its insurance operations results
without the impact of certain factors, including investment income, other
revenues, other expenses, minority interest, income tax benefit (expense) and
net realized investment gains or losses. Management excludes these factors in
order to analyze the direct relationship between the net earned premiums and
the related claims and the cost incurred to settle these claims, acquisition
expenses, underwriting expenses and dividend expenses.

Management excludes after-tax net realized investment gains or losses when
analyzing the insurance operations because net realized investment gains or
losses related to the Companys available-for-sale investment portfolio are
largely discretionary, except for losses related to other-than-temporary
impairments, and are generally driven by economic factors that are not
necessarily consistent with key drivers of underwriting performance.

Operating ratios are calculated using insurance results and are used by the
insurance industry and regulators such as state departments of insurance and
the National Association of Insurance Commissioners for financial regulation
and as a basis of comparison among companies. The ratios discussed in this
MD&A are calculated using GAAP financial results and include the loss and loss
adjustment expense ratio (loss ratio) as well as the expense, dividend and
combined ratios. The loss ratio is the percentage of net incurred claim and
claim adjustment expenses to net earned premiums. The expense ratio is the
percentage of underwriting and acquisition expenses, including the amortization
of deferred acquisition costs, to net earned premiums. The dividend ratio is
the ratio of dividends incurred to net earned premiums. The combined ratio is
the sum of the loss, expense and dividend ratios.

The Companys investment portfolio is monitored by management through analyses
of various factors including unrealized gains and losses on securities,
portfolio duration and exposure to interest rate, market and credit risk.
Based on such analyses, the Company may impair an investment security in
accordance with its policy, or sell a security. Such activities will produce
realized gains and losses.

While management uses various non-GAAP financial measures to monitor various
aspects of the Companys performance, relying on any measure other than net
income, which is the most directly comparable GAAP measure to underwriting
results and realized gains and losses, is not a complete representation of
financial performance. Management believes that its process of evaluating
performance through the use of these non-GAAP financial measures provides a
basis for understanding the operations and the impact to net income as a whole.
Management also believes that investors find these non-GAAP financial measures
described above useful to help interpret the underlying trends and performance,
as well as to provide visibility into the significant components of net income.

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

Throughout this MD&A, business segment results are discussed using Underwriting
Results, which as described above is a non-GAAP measure. The following
reconciliation provides the differences between Underwriting Income (Loss) and
Net Income (Loss).

Reconciliation of Underwriting Loss to Net Loss

Three months ended
    
    Standard
    
    SpecialtySeptember 30, 2003
    
    Lines
    
    Lines
    
    CNA Re(In millions)Underwriting loss
    
    $
    (1,470
    )
    
    $
    (379
    )
    
    $
    (137
    )Net investment income
    
    
    42
    
    
    
    64
    
    
    
    9Other revenues
    
    
    35
    
    
    
    35
    
    
    
    Other expenses
    
    
    (38
    )
    
    
    (29
    )
    
    
    Loss before income tax benefit, minority interest and net realized investment gains
    
    
    (1,431
    )
    
    
    (309
    )
    
    
    (128
    )Income tax benefit
    
    
    514
    
    
    
    115
    
    
    
    47Minority interest
    
    
    
    
    
    
    14
    
    
    
    Loss before net realized investment gains
    
    
    (917
    )
    
    
    (180
    )
    
    
    (81
    )Realized investment gains, net of participating policyholders and minority interest
    
    
    54
    
    
    
    28
    
    
    
    12Income tax expense on realized investment gains
    
    
    (19
    )
    
    
    (12
    )
    
    
    (5
    )Net loss
    
    $
    (882
    )
    
    $
    (164
    )
    
    $
    (74
    )


Reconciliation of Underwriting Income (Loss) to Net Income (Loss)

Three months ended
    
    Standard
    
    SpecialtySeptember 30, 2002
    
    Lines
    
    Lines
    
    CNA Re(In millions)Underwriting income (loss)
    
    $
    81
    
    
    $
    (139
    )
    
    $
    (72
    )Net investment income
    
    
    67
    
    
    
    49
    
    
    
    28Other revenues
    
    
    80
    
    
    
    33
    
    
    
    1Other expenses
    
    
    (75
    )
    
    
    (31
    )
    
    
    (2
    )Income (loss) before income tax (expense) benefit, minority interest and net
realized investment losses
    
    
    153
    
    
    
    (88
    )
    
    
    (45
    )Income tax (expense) benefit
    
    
    (48
    )
    
    
    24
    
    
    
    20Minority interest
    
    
    
    
    
    
    (1
    )
    
    
    Income (loss) before net realized investment losses
    
    
    105
    
    
    
    (65
    )
    
    
    (25
    )Realized investment losses, net of participating policyholders and minority interest
    
    
    (27
    )
    
    
    (15
    )
    
    
    (5
    )Income tax benefit on realized investment losses
    
    
    10
    
    
    
    4
    
    
    
    4Net income (loss)
    
    $
    88
    
    
    $
    (76
    )
    
    $
    (26
    )


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

Reconciliation of Underwriting Loss to Net Loss

Nine months ended
    
    Standard
    
    SpecialtySeptember 30, 2003
    
    Lines
    
    Lines
    
    CNA Re(In millions)Underwriting loss
    
    $
    (1,876
    )
    
    $
    (548
    )
    
    $
    (131
    )Net investment income
    
    
    236
    
    
    
    213
    
    
    
    55Other revenues
    
    
    165
    
    
    
    81
    
    
    
    1Other expenses
    
    
    (155
    )
    
    
    (72
    )
    
    
    Loss before income tax benefit, minority interest and net realized investment gains
    
    
    (1,630
    )
    
    
    (326
    )
    
    
    (75
    )Income tax benefit
    
    
    604
    
    
    
    125
    
    
    
    32Minority interest
    
    
    
    
    
    
    9
    
    
    
    Loss before net realized investment gains
    
    
    (1,026
    )
    
    
    (192
    )
    
    
    (43
    )Realized investment gains, net of participating policyholders and minority interest
    
    
    236
    
    
    
    94
    
    
    
    54Income tax expense on realized investment gains
    
    
    (83
    )
    
    
    (34
    )
    
    
    (16
    )Net loss
    
    $
    (873
    )
    
    $
    (132
    )
    
    $
    (5
    )


Reconciliation of Underwriting Loss to Net Income (Loss)

Nine months ended
    
    Standard
    
    SpecialtySeptember 30, 2002
    
    Lines
    
    Lines
    
    CNA Re(In millions)Underwriting loss
    
    $
    (123
    )
    
    $
    (174
    )
    
    $
    (62
    )Net investment income
    
    
    304
    
    
    
    184
    
    
    
    109Other revenues
    
    
    243
    
    
    
    120
    
    
    
    2Other expenses
    
    
    (216
    )
    
    
    (87
    )
    
    
    (2
    )Income before income tax expense, minority interest and net realized investment
(losses) gains
    
    
    208
    
    
    
    43
    
    
    
    47Income tax expense
    
    
    (53
    )
    
    
    (23
    )
    
    
    (8
    )Minority interest
    
    
    
    
    
    
    (11
    )
    
    
    Income before net realized investment losses
    
    
    155
    
    
    
    9
    
    
    
    39Realized investment losses, net of participating policyholders and minority interest
    
    
    (51
    )
    
    
    (46
    )
    
    
    (2
    )Income tax benefit on realized investment losses
    
    
    18
    
    
    
    14
    
    
    
    5Income (loss) from continuing operations
    
    
    122
    
    
    
    (23
    )
    
    
    42Cumulative effect of a change in accounting principle, net of tax of $3
    
    
    
    
    
    
    (48
    )
    
    
    Net income (loss)
    
    $
    122
    
    
    $
    (71
    )
    
    $
    42


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##### Table of Contents



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

Segment Results

During 2002, CNA underwent management changes and strategic realignment. These
events have changed the way CNA manages its operations and makes business
decisions and, therefore, necessitated a change in the Companys reportable
segments. The financial results for the segment changes are reflected
throughout this MD&A.

The following discussion is of the results of operations for the Companys
operating segments.

STANDARD LINES

The following table details the results of operations for Standard Lines.

Results of Operations

Three Months
    
    Nine MonthsPeriod ended September 30
    
    2003
    
    2002
    
    2003
    
    2002(In millions)Net written premiums
    
    $
    834
    
    
    $
    1,033
    
    
    $
    2,828
    
    
    $
    3,172Net earned premiums
    
    
    802
    
    
    
    992
    
    
    
    2,664
    
    
    
    3,040Underwriting (loss) gain
    
    
    (1,470
    )
    
    
    81
    
    
    
    (1,876
    )
    
    
    (123
    )(Loss) income before net realized investment gains (losses)
    
    
    (917
    )
    
    
    105
    
    
    
    (1,026
    )
    
    
    155Net realized investment gains (losses)
    
    
    35
    
    
    
    (17
    )
    
    
    153
    
    
    
    (33
    )Net (loss) income
    
    
    (882
    )
    
    
    88
    
    
    
    (873
    )
    
    
    122RatiosLoss and loss adjustment expense
    
    
    194.8
    %
    
    
    60.6
    %
    
    
    116.6
    %
    
    
    72.1
    %Expense
    
    
    81.0
    
    
    
    28.6
    
    
    
    50.6
    
    
    
    30.0Dividend
    
    
    7.5
    
    
    
    2.6
    
    
    
    3.2
    
    
    
    1.9Combined
    
    
    283.3
    %
    
    
    91.8
    %
    
    
    170.4
    %
    
    
    104.0
    %


Three Month Comparison

Net written premiums for Standard Lines decreased $199 million and net earned
premiums decreased $190 million for the three months ended September 30, 2003
as compared with the same period in 2002. These decreases were due primarily
to increased ceded premiums, including premiums ceded to corporate aggregate
and other reinsurance treaties, as a result of net unfavorable prior year claim
and allocated claim adjustment expense reserve development. Premiums also
decreased as a result of a shift in the mix of business to deductible policies,
which generally have lower premiums. Partially offsetting these declines were
increased premiums across most Property & Casualty (P&C) and Excess & Surplus
(E&S) lines as a result of new business initiatives and rate increases.

Standard Lines averaged rate increases of 16% and 28% for the three months
ended September 30, 2003 and 2002 for the contracts that renewed during the
period. Retention rates of 71% and 68% were achieved for those contracts that
were up for renewal.

Net results decreased $970 million for the three months ended September 30,
2003 as compared with the same period in 2002. The decrease in net results was
primarily driven by increased unfavorable net prior year development
of $798 million
after-tax ($1,228 million pretax), a $3 million after-tax ($5 million pretax)
increase in ULAE reserves, an increase in the bad debt provision for insurance
and reinsurance receivables of $168 million after-tax ($258 million pretax) and
an increase in certain insurance related assessments of $48 million after-tax
($74 million pretax), and increased interest expense of $51 million

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

after-tax ($79 million pretax) related to additional cessions to the corporate
aggregate and other reinsurance treaties. Partially offsetting these items was
an increase in net realized investment gains and limited partnership income.
See the Investments section of this MD&A for further discussion on net
investment income and net realized investment gains (losses).

The combined ratio increased 191.5 points and underwriting results decreased
$1,551 million for the three months ended September 30, 2003 as compared with
the same period in 2002. This change was due to increases in the loss, expense
and dividend ratios. The loss ratio increased 134.2 points due principally to
the unfavorable net prior year development, discussed below, and an $29 million
pretax increase in catastrophe losses, including $12 million relating to
Hurricane Claudette and Hurricane Isabel, for the three months ended September
30, 2003 as compared with the same period in 2002. Catastrophe losses were $34
million for the three months ended September 30, 2003 as compared with $5
million for the three months ended September 30, 2002. Partially offsetting
these declines was an improvement in the current net accident year loss ratio.

Unfavorable net prior year development of $1,090 million, including $800
million of unfavorable claim and allocated claim adjustment expense reserve
development and $290 million of unfavorable premium development, was recorded
for the three months ended September 30, 2003. Favorable net prior year
development of $138 million, including $178 million of favorable claim and
allocated claim adjustment expense reserve development and $40 million of
unfavorable premium development, was recorded for the same period in 2002.

Approximately $495 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development was recorded related to
construction defect claims. Based on analyses completed during the third
quarter of 2003, it became apparent that the assumptions regarding the number
of claims, which were used to estimate the expected losses, were no longer
appropriate. The analyses indicated that the actual number of claims reported
during 2003 was higher than expected primarily in states other than California.
States where this activity is most evident include Texas, Arizona, Nevada,
Washington and Colorado. The number of claims reported in states other than
California during the first six months of 2003 was nearly 35% higher than the
last six months of 2002. The number of claims reported during the last six
months of 2002 increased by less than 10% from the first six months of 2002.
In California, claims resulting from additional insured endorsements increased
throughout 2003. Additional insured endorsements are regularly included on
policies provided to subcontractors. The additional insured endorsement names
general contractors and developers as additional insureds covered by the
policy. Current California case law (Presley Homes, Inc. v. American
States Insurance Company, (June 11, 2001) 90 cal App. 4th
571, 108 Cal. Rptr. 2d 686) specifies that an
individual subcontractor with an additional insured obligation has a duty to
defend the additional insured in the entire action, subject to contribution or
recovery later. In addition, the additional insured is allowed to choose one
specific carrier to defend the entire action. These additional insured claims
can remain open for a longer period of time than other construction defect
claims because the additional insured defense obligation can continue until the
entire case is resolved. The recorded net prior year development related to
construction defect claims was primarily for accident years 1999 and prior.

Unfavorable net prior year claim and allocated claim adjustment expense
development of approximately $285 million, was recorded for large account
business including workers compensation coverages. Many of the policies issued
to these large accounts include provisions tailored specifically to the
individual accounts. Such provisions effectively result in the insured being
responsible for a portion of the loss. An example of such a provision is a
deductible arrangement where the insured reimburses the Company for all amounts
less than a specified dollar amount. These arrangements often limit the
aggregate amount the insured is required to reimburse the Company. Analyses
completed during the third quarter of 2003 included claims handled by third
party administrators (TPA), which indicated higher losses from large

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

accounts including an increase in the amounts of losses in excess of
policyholder deductibles. The net prior year development was recorded
primarily for accident years 2000 and prior.

Approximately $77 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development resulted from a program covering
facilities that provide services to developmentally disabled individuals. This
net prior year development was due to an increase in the size of known claims
and increases in policyholder defense costs. Recent data shows the average
claim size increasing at an annual rate of approximately 20%. Prior data had
shown average claim size to be level. Similar to the average claim size,
recent data shows the average policyholder defense cost increasing at an annual
rate of approximately 20%. Prior data had shown average policyholder defense
cost to be level. The net prior year reserve development recorded was primarily
for accident years 2001 and prior.

Approximately $40 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development resulted from excess workers
compensation coverages due to increasing severity. The increase in severity
means that a higher percentage of the total loss dollars will be the Companys
responsibility since more claims will exceed the point at which the Companys
coverage begins. The net prior year reserve development recorded was primarily
for accident year 2000.

Approximately $73 million of unfavorable development was recorded as the result
of a commutation of all ceded reinsurance treaties with Gerling, related to
accident years 1999 through 2001, including $41 million of unfavorable claim
and allocated claim adjustment expense development and $32 million of
unfavorable premium development. Further information regarding this
commutation is provided in the Reinsurance section of this MD&A.

The following net prior year development was recorded in the third quarter of
2003 as a result of the elimination of deficiencies and redundancies in reserve
positions of individual products within the segment. Unfavorable net prior
year development of approximately $210 million related to small and middle
market workers compensation exposures and $110 million related to
E&S lines was recorded in the third quarter of 2003.
Offsetting this unfavorable net prior year development was favorable
net prior year development of approximately $210 million in the property line
of business, including $79 million related to the September 11, 2001 World
Trade Center Disaster and related events (WTC event).

Also, offsetting the net prior year unfavorable development was a $140 million underwriting
benefit from cessions to corporate aggregate reinsurance treaties. The benefit
is comprised of $300 million of ceded losses and $160 million of ceded premiums
for accident years 2000 and 2001. See the Reinsurance section of this MD&A for
further discussion of the Companys aggregate reinsurance treaties.

In the third quarter of 2002, $108 million of favorable net prior year
development was recorded, which was attributable to participation in the
Workers Compensation Reinsurance Bureau (WCRB), a reinsurance pool, and
residual markets. The favorable net prior year loss reserve development for
WCRB is the result of information received from the WCRB which indicated that
the Companys net required reserves for accident years 1970 through 1996 were
$60 million less than the carried reserves. In addition, during the third
quarter of 2002, the Company commuted accident years 1965 through 1969 for a
payment of approximately $5 million to cover carried reserves of approximately
$13 million, resulting in further favorable development of $8 million. The
favorable residual market net prior year loss reserve development was the
result of lower than expected paid loss activity during recent periods for
older accident years.

In addition, Standard Lines had favorable net prior year development, primarily
in the package liability and auto liability lines of business due to claims
initiatives in the third quarter of 2002. These claims

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

initiatives included specialized training on specific areas of the claims
adjudication process, enhanced claims litigation management, enhanced
adjuster-level metrics to monitor performance and more focused metric-based
claim file review and oversight. Based on managements best estimate of the
reduction in ultimate claim costs, approximately $100 million of favorable net
prior year development was recorded in the third quarter of 2002.

The expense ratio increased 52.4 points primarily due to increased expenses and
the decreased net earned premium base. Expenses were unfavorably impacted by
an increase in the bad debt provision for reinsurance receivables of $55
million and in the bad debt provision for insurance receivables of $203
million. Based on the Companys credit exposures to reinsurance receivables,
an increase in the bad debt provision was deemed appropriate. See the
Reinsurance section of this MD&A for additional information regarding the
increase in the bad debt provision for reinsurance receivables. The increase
in the bad debt provision for insurance receivables was primarily the result of
a review of Professional Employer Organization (PEO) accounts as well as
certain accounts that have been turned over to third parties for collection.
During 2002, Standard Lines ceased writing coverages for PEO businesses, with
the last contracts expiring on June 30, 2003. The review analyzed ultimate
amounts collectable and the associated collateral held by the Company. Upon
completion of the review, it was determined that the ultimate loss estimates
were larger than previously expected, which increased the amount of
uncollateralized receivables. Based on these factors, an increase in the
provision was recorded.

Additionally, expenses increased as a result of a $44 million increase in
certain insurance-related assessments, which were recorded in the third quarter
of 2003 as compared with a $30 million reduction in accruals for certain
insurance-related assessments resulting from changes, due to legislation, in
the basis on which the assessments were calculated recorded in the third
quarter of 2002. Also increasing the expense ratio was approximately $15
million of expenses related to eBusiness initiatives in 2003. The 2002
eBusiness expenses were included in the Corporate and Other segment.

The dividend ratio increased 4.9 points for the three months ended September
30, 2003 as compared with the same period in 2002 due to increased net prior
year unfavorable dividend development. Unfavorable dividend development of $46
million was primarily related to workers compensation products for the three
months ended September 30, 2003. A review was completed in the third quarter
indicating dividend development that was higher than prior expectations. This
development was recorded for accident years 2002 and prior.

Nine Month Comparison

Net written premiums for Standard Lines decreased $344 million and net earned
premiums decreased $376 million for the nine months ended September 30, 2003 as
compared with the same period in 2002. These decreases were due primarily to
increased ceded premiums, including premiums ceded to corporate aggregate and
other reinsurance treaties, as a result of net unfavorable prior year
development. Partially offsetting these declines were rate increases and
increased new business in P&C and E&S.

Standard Lines averaged rate increases of 18% and 29% for the nine months ended
September 30, 2003 and 2002 for the contracts that renewed during the period.
Retention rates of 72% and 67% were achieved for those contracts that were up
for renewal.

Net results decreased $995 million for the nine months ended September 30, 2003
as compared with the same period in 2002. The decrease in net results was
primarily driven by increased unfavorable net prior year development of $980
million after-tax ($1,507 million pretax), an increase in the bad debt
provision for insurance and reinsurance receivables of $193 million after-tax
($297 million pretax), an increase in

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

certain insurance related assessments of $48 million after-tax ($74 million
pretax), and decreased net investment income primarily due to increased
interest expense of $78 million after-tax ($120 million pretax) related to
additional cessions to the corporate aggregate and other reinsurance treaties.
Partially offsetting this decrease was an increase in net realized investment
gains and limited partnership income. See the Investments section of this MD&A
for further discussion on net investment income and net realized gains
(losses).

The combined ratio increased 66.4 points and underwriting results decreased
$1,753 million for the nine months ended September 30, 2003 as compared with
the same period in 2002. This change was due to increases in the loss, expense
and dividend ratios. The loss ratio increased 44.5 points due principally to
the increase in unfavorable net prior year development in the nine months ended
September 30, 2003 as compared with the same period in 2002, as discussed
below, and $95 million of catastrophe losses which occurred during the nine
months ended September 30, 2003. Catastrophe losses were $14 million for the
nine months ended September 30, 2002. Partially offsetting these declines was
an improvement in the current accident year loss ratio.

Unfavorable net prior year development of $1,402 million, including $928
million of unfavorable claim and allocated claim adjustment expense reserve
development and $474 million of unfavorable premium development, was recorded
for the nine months ended September 30, 2003. Favorable net prior year
development of $105 million, including $149 million of favorable claim and
allocated claim adjustment expense reserve development and $44 million of
unfavorable premium development, was recorded for the same period in 2002. The
gross carried claim and claim adjustment expense reserve was $13,153 million
and $11,576 million at September 30, 2003 and December 31, 2002. The net
carried claim and claim adjustment expense reserve was $8,159 million and
$7,262 million at September 30, 2003 and December 31, 2002.

In addition to the development recorded in the third quarter of 2003 discussed
in the three month comparison, unfavorable net prior year development of
approximately $310 million, including $233 million of unfavorable claim and
allocated claim adjustment expense reserve development and $77 million of
unfavorable premium development, was recorded for large account business in the
second quarter of 2003, primarily driven by workers compensation exposures.
This development resulted from the completion of reserve reviews for large
account business where the insured is often responsible for a portion of the
losses, and claims are handled by the Company. Initial reserves for this
business are set based on the expected losses associated with the individual
accounts covered and the terms of the individual plans. Based on analyses
completed during the second quarter of 2003, it became apparent that the
assumptions regarding the number and size of the losses, which were used to
estimate the expected losses, were no longer appropriate. The analyses showed
that the actual number of claims and the average claim size were larger than
expected. The development recorded was for accident years prior to 2002.

Approximately $21 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development during the first and second quarters of 2003 resulted from a program covering
facilities that provide services to developmentally disabled
individuals. This development was due to an increase
in the size of known claims and increases in policyholder defense costs. The
reserve development recorded was for accident years prior to 2001.

Unfavorable net prior year claim and allocated claim adjustment expense reserve
development of approximately $40 million was recorded for a program covering
tow truck and ambulance operators, primarily impacting the 2001 accident year,
of which, $36 million was recorded in the second quarter of 2003 and $4 million
was recorded in the third quarter of 2003. The Company had previously
expected

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

that loss ratios for this business would be similar to its middle market
commercial automobile liability business. During 2002, the Company ceased
writing business under this program.

Approximately $25 million of unfavorable net prior year premium development was
recorded related to a second quarter 2003 reevaluation of losses ceded to a
reinsurance contract covering middle market workers compensation exposures
recorded in the second quarter of 2003. The reevaluation of losses led to a
new estimate of the number and dollar amount of claims that would be ceded
under the reinsurance contract. As a result of the reevaluation of losses, the
Company recorded approximately $36 million of unfavorable claim and allocated
claim adjustment expense net prior year reserve development, which was ceded
under this contract. The development was recorded for accident year 2000.

Offsetting these unfavorable net prior year developments was a $75 million
underwriting benefit from cessions to corporate aggregate reinsurance treaties
recorded in the first and second quarters of 2003. The first and second
quarter 2003 benefit is comprised of $180 million of ceded losses and $105
million of ceded premiums for accident years 2000 and 2001. See the
Reinsurance section of this MD&A for further discussion of the Companys
aggregate reinsurance treaties.

Favorable net prior year claim and allocated claim adjustment expense reserve
development was also recorded in property lines, primarily in the first quarter
of 2003. The favorable reserve development was principally from accident years
2001 and 2002 and was the result of the lower than expected number of large
losses in recent years.

The expense ratio increased 20.6 points due to increased expenses and decreased
net earned premiums for the nine months ended September 30, 2003 as compared
with the same period in 2002. Expenses were unfavorably impacted by an
increase in the bad debt expense reserve for reinsurance receivables of $55
million. Based on the Companys credit exposures to reinsurance receivables,
an increase in the bad debt reserve was deemed appropriate. See the
Reinsurance section of this MD&A for additional information regarding the
increase in reinsurance receivables. The Company also recorded a $242 million
increase in the bad debt reserve for insurance receivables, as discussed in the
three month comparison. Additionally, acquisition expenses increased as a
result of a $44 million increase in certain insurance related assessments
recorded in the third quarter of 2003 as compared with $30 million reduction in
accruals for certain insurance-related assessments resulting from changes, due
to legislation, in the basis on which the assessments were calculated recorded
in the third quarter of 2002. Also increasing the expense ratio was
approximately $47 million of expenses related to eBusiness in 2003. The 2002
eBusiness expenses were included in the Corporate and Other segment.

The dividend ratio increased 1.3 points for the nine months ended September 30,
2003 as compared with the same period in 2002 due to increased net prior year
unfavorable dividend development. The $46 million of unfavorable dividend
development was primarily related to workers compensation products in the three
months ended September 30, 2003. A review was completed in the third quarter
indicating dividend development that was higher than prior expectations.
This development recorded was for accident years 2002 and prior.

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

SPECIALTY LINES

The following table details the results of operations for Specialty Lines.

Results of Operations

|                                                            |                                  |      |              |       |             |      |      |       |   |   |       |       |   |   |       |       |  
|----------------------------------------------------------- | -------------------------------- | ---- | ------------ | ----- | ----------- | ---- | ---- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                                            |                                  |      | Three Months |       | Nine Months
|                                                            |                                  |      |              |       |            
|Period ended September 30                                   |                                  | 2003 |              | 2002  |             | 2003 |      | 2002 
|                                                            |                                  |      |              |       |             |      |      |      
|(In millions)                                               |                                  |      |              |       |             |      |      |       |   |   |       |       |   |   |       |      
|Net written premiums                                        |                                  | $    | 719          |       |             | $    | 628  |       |   | $ | 2,064 |       |   | $ | 1,740 |      
|Net earned premiums                                         |                                  |      | 660          |       |             |      | 551  |       |   |   | 1,948 |       |   |   | 1,594 |      
|Underwriting loss                                           |                                  |      | (379         | )     |             |      | (139 | )     |   |   | (548  | )     |   |   | (174  | )    
|(Loss) income before net realized investment gains (losses) |                                  |      | (180         | )     |             |      | (65  | )     |   |   | (192  | )     |   |   | 9     |      
|Net realized investment gains (losses)                      |                                  |      | 16           |       |             |      | (11  | )     |   |   | 60    |       |   |   | (32   | )    
|Net loss                                                    |                                  |      | (164         | )     |             |      | (76  | )     |   |   | (132  | )     |   |   | (71   | )    
|Ratios                                                      |                                  |      |              |       |             |      |      |       |   |   |       |       |   |   |       |       |  
|                                                            | Loss and loss adjustment expense |      |              | 110.1 | %           |      |      | 90.7  | % |   |       | 91.2  | % |   |       | 77.6  | %
|                                                            | Expense                          |      |              | 47.1  |             |      |      | 34.4  |   |   |       | 36.8  |   |   |       | 33.2  |  
|                                                            | Dividend                         |      |              | 0.2   |             |      |      | 0.2   |   |   |       | 0.1   |   |   |       | 0.1   |  
|                                                            |                                  |      |              |       |             |      |      |       |   |   |       |       |   |   |       |       |  
|                                                            | Combined                         |      |              | 157.4 | %           |      |      | 125.3 | % |   |       | 128.1 | % |   |       | 110.9 | %
|                                                            |                                  |      |              |       |             |      |      |       |   |   |       |       |   |   |       |       |  

Three Month Comparison

Net written premiums for Specialty Lines increased $91 million and net earned
premiums increased $109 million for the three months ended September 30, 2003
as compared with the same period in 2002. These increases were driven by
production of new business and significant rate increases in most CNA Pro lines
of business, improvements in CNA Global lines, most notably new business in
Europe and rate increases in Canada, increased sales of vehicle warranties, and
decreased ceded premiums related to corporate aggregate reinsurance treaties.
These improvements were partially offset by the absence of premiums related to
the Guaranty & Credit business which was exited in 2003.

Specialty Lines averaged rate increases of 21% and 30% for the three months
ended September 30, 2003 and 2002 for the contracts that renewed during the
period. Retention rates of 80% and 77% were achieved for those contracts that
were up for renewal.

Net results decreased $88 million for the three months ended September 30, 2003
as compared with the same period in 2002. The decrease in net results was
primarily driven by increased unfavorable net prior year development of $92
million after-tax ($142 million pretax), including premium and claim and
allocated claim adjustment expense development, an increase in the bad debt
provision for reinsurance receivables of $51 million after-tax ($79 million
pretax), and increased interest expense of $4 million after-tax ($5 million
pretax) related to additional cessions to the corporate aggregate reinsurance
treaties. These declines were partially offset by increased net realized
investment results and increased net investment income. See the Investments
section of this MD&A for further discussion on net investment income and net
realized gains (losses).

The combined ratio increased 32.1 points and underwriting results decreased by
$240 million for the three months ended September 30, 2003 as compared with the
same period in 2002. This change was due to increases in the loss and expense
ratios. The loss ratio increased 19.4 points due principally to increased net
prior year development of $142 million recorded for the three months ended
September 30, 2003 as compared with the same period in 2002. Additionally, the
loss ratio was negatively impacted by a $28 million increase in ULAE reserves
and $49 million of current accident year losses for Surety related to

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

large losses in the third quarter of 2003. These items were partially offset
by decreased catastrophe losses of $9 million and the impact of higher net
earned premiums. Catastrophe losses were $8 million for the three months ended
September 30, 2003 compared to $17 million for the three months ended September
30, 2002.

Unfavorable net prior year development of $226 million, including $195 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $31 million of unfavorable premium development, was recorded for the three
months ended September 30, 2003. Unfavorable net prior year development of $84
million, including $36 million of unfavorable premium development and $48
million of unfavorable claim and allocated claim adjustment expense reserve
development, was recorded for the same period in 2002.

Approximately $50 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development was recorded relating to increased
severity in excess coverages provided to facilities providing health care
services. The development was based on reviews of individual accounts where
claims had been expected to be less than the point at which the Companys
coverage applies. The current claim trends now indicate that the layers of
coverage provided by the Company will be impacted. The reserve development
recorded was primarily for accident years 2001 and prior.

Approximately $47 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development was recorded for Surety
for workers compensation bond exposure from accident years 1990 and prior and
large losses for accident years 1999 and 2002.

Approximately $36 million of unfavorable net prior year claim and allocated
claim adjustment expense development was recorded for directors and officers
exposures in CNA Pro and Global Lines. The unfavorable net prior year reserve
development was primarily due to securities class action cases related to
certain known corporate malfeasance cases and investment banking firms. The
reserve development recorded was primarily for accident years 2000 and 2001.

Approximately $47 million of losses were recorded as the result of a
commutation of ceded reinsurance treaties with Gerling, relating to accident
years 1999 through 2002. Further information regarding this commutation is
provided in the Reinsurance section of this MD&A.

The following development was recorded in the third quarter of 2003 as a result
of the elimination of deficiencies and redundancies in reserve positions of
individual products within the segment. An additional $50 million of
unfavorable net prior year claim and allocated claim adjustment expense reserve
development was recorded related to medical malpractice and long term care
facilities. Offsetting this net prior year unfavorable reserve development was
a $27 million underwriting benefit from cessions to corporate aggregate
reinsurance treaties. The benefit was comprised of $59 million of ceded losses
and $32 million of ceded premiums for accident years 2000 and 2001. See the
Reinsurance section of this MD&A for further discussion of the Companys
aggregate reinsurance treaties. Unfavorable net prior year development of $84
million, including $48 million of unfavorable claim and allocated claim
adjustment expense reserve development and $36 million of unfavorable premium
development, was recorded for the three months ended September 30, 2002
primarily in CNA HealthPro, voluntary pools and the European operations.

Unfavorable claim and allocated claim adjustment expense net prior year reserve
development of approximately $150 million for CNA HealthPro in the third
quarter of 2002 was due principally to medical malpractice excess products
provided to hospitals and physicians and coverages provided to long term care
facilities, principally nursing homes. Approximately $100 million of
unfavorable development was related to assumed excess products and loss
portfolio transfers, and was primarily driven by

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

unexpected increases in the number of excess claims in recent accident years.
CNA HealthPro no longer writes loss portfolio transfers and assumed excess
products. The remaining $50 million of the net prior year loss reserve
development was related to long-term care facilities primarily as a result of a
review completed during the third quarter of 2002 that indicated that the
average value of claims closed during the first several months of 2002 had
increased by more then 50% when compared to claims closed during 2001. In
response to those trends, CNA HealthPro reduced its writings of national
for-profit nursing home chains.

Offsetting this unfavorable net prior year reserve development was
approximately $100 million of favorable net prior year reserve development on
programs providing professional liability coverage to accountants, lawyers and
realtors recorded in the third quarter of 2002. Reviews of this business found
that the average claim size for older accident years had not been increasing as
expected. Previous reviews had expected claim size trend of 5% to 6%.

A $16 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties for the three months ended September 30, 2002, comprised
of $55 million of ceded losses and $39 million of ceded premiums.

The expense ratio increased 12.7 points due primarily to increased expenses.
Expenses were unfavorably impacted by an increase in the bad debt provision for
reinsurance receivables of $79 million. See the Reinsurance section of this
MD&A for additional information regarding the increase in reinsurance
receivables. Additionally, acquisition expenses increased as a result of an
increase in certain insurance related assessments of $14 million recorded in
the third quarter of 2003 and a $1 million reduction in accruals for certain
insurance-related assessments resulting from changes due to legislation, in the
basis on which the assessments were calculated recorded in the third quarter of
2002. These items were partially offset by the increased net earned premiums
base.

Nine Month Comparison

Net written premiums for Specialty Lines increased $324 million and net earned
premiums increased $354 million for the nine months ended September 30, 2003 as
compared with the same period in 2002. These increases were due primarily to
rate increases and new business, principally in CNA Pro.

Specialty Lines averaged rate increases of 25% for both the nine months ended
September 30, 2003 and 2002 for the contracts that renewed during the period.
Retention rates of 79% and 77% were achieved for those contracts that were up
for renewal.

Net results decreased $61 million for the nine months ended September 30, 2003
as compared with the same period in 2002. The decrease in net results was
primarily due to increased unfavorable net prior year development of $211
million after-tax ($330 million pretax) and an increase in the bad debt
provision for reinsurance receivables of $51 million after-tax ($79 million
pretax) and increased interest expense of $4 million after-tax ($5 million
pretax) related to additional cessions to the corporate aggregate reinsurance
treaties. Net income for 2002 also included a $48 million after-tax ($51
million pretax) cumulative effect of a change in accounting principle charge
related to goodwill impairment. These declines were partially offset by
improved current accident year results and increased net realized investment
results. See the Investments section of this MD&A for further discussion of
net investment income and net realized gains (losses).

In addition, 2002 net results included a non-recurring currency translation
gain on U.S. dollar denominated investments held by an Argentine subsidiary.
The Argentine government changed its local

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

currency and required conversion of all U.S. denominated investments to
Argentine Pesos. This conversion resulted in a translation gain of $18
million, which was partially offset by a write-off of the goodwill of that
entity in the amount of $10 million.

The combined ratio increased 17.2 points and underwriting results decreased by
$374 million for the nine months ended September 30, 2003 as compared with the
same period in 2002. The change was due to increases in the loss and expense
ratios. The loss ratio increased 13.6 points due principally to increased
unfavorable net prior year development, as discussed below.

Unfavorable net prior year development of $416 million, including $400 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $16 million of unfavorable premium development, was recorded for the nine
months ended September 30, 2003. Unfavorable net prior year development of $86
million, including $46 million of unfavorable premium development and $40
million of unfavorable claim and allocated claim adjustment expense reserve
development, was recorded for the same period in 2002. The gross carried claim
and claim adjustment expense reserve was $6,417 million and $5,874 million at
September 30, 2003 and December 31, 2002. The net carried claim and claim
adjustment expense reserve was $3,965 million and $3,373 million at September
30, 2003 and December 31, 2002.

In addition to the unfavorable net prior year development recorded in the third
quarter of 2003 as discussed in the three month comparison, approximately $50
million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development was recorded for directors and officers exposures
in the second quarter of 2003. The unfavorable net prior year reserve
development was a result of a claims review that was completed during the
second quarter of 2003. The unfavorable net prior year reserve development was
primarily due to securities class action cases related to certain known
corporate malfeasance cases and investment banking firms. The unfavorable net
prior year reserve development recorded was primarily for accident years 2001
and 2002.

Approximately $21 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development was recorded in the Surety line of
business as the result of adverse developments on one large claim in the second
quarter of 2003.

Unfavorable net prior year claim and allocated claim adjustment expense reserve
development of approximately $75 million was recorded in the second quarter of
2003 related to adverse arbitration decision involving a single large property
and business interruption loss. The decision was rendered against a voluntary
insurance pool in which the Company was a participant. The loss was caused by
a fire which occurred in 1995. The Company no longer participates in this
pool.

Approximately $37 million of losses were recorded in the second quarter of 2003
as the result of a commutation of three ceded reinsurance treaties covering CNA
HealthPro, related to accident years 1999 through 2001. Further information
regarding this commutation is provided in the Reinsurance section of this MD&A.

The expense ratio increased 3.6 points due primarily to increased acquisition
expenses. Expenses were unfavorably impacted by an increase in the bad debt
provision for reinsurance receivables of $79 million. See the Reinsurance
section of this MD&A for additional information regarding the increase in
reinsurance receivables. Additionally, acquisition expenses increased as a
result of an increase in certain insurance related assessments of $14 million
recorded in the third quarter of 2003 as compared with $1 million reduction in
accruals for certain insurance-related assessments resulting from changes due
to

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

legislation, in the basis on which the assessments were calculated recorded in
the third quarter of 2002. These items were partially offset by the increased
net earned premium base.

CNA RE

The following table details the results of operations for CNA Re.

Results of Operations

|                                                            |                                  |      |              |       |             |      |     |       |   |   |      |       |   |   |     |       |  
|----------------------------------------------------------- | -------------------------------- | ---- | ------------ | ----- | ----------- | ---- | --- | ----- | - | - | ---- | ----- | - | - | --- | ----- | -
|                                                            |                                  |      | Three Months |       | Nine Months
|                                                            |                                  |      |              |       |            
|Period ended September 30                                   |                                  | 2003 |              | 2002  |             | 2003 |     | 2002 
|                                                            |                                  |      |              |       |             |      |     |      
|(In millions)                                               |                                  |      |              |       |             |      |     |       |   |   |      |       |   |   |     |      
|Net written premiums                                        |                                  | $    | 109          |       |             | $    | 167 |       |   | $ | 437  |       |   | $ | 494 |      
|Net earned premiums                                         |                                  |      | 84           |       |             |      | 157 |       |   |   | 371  |       |   |   | 462 |      
|Underwriting loss                                           |                                  |      | (137         | )     |             |      | (72 | )     |   |   | (131 | )     |   |   | (62 | )    
|(Loss) income before net realized investment gains (losses) |                                  |      | (81          | )     |             |      | (25 | )     |   |   | (43  | )     |   |   | 39  |      
|Net realized investment gains (losses)                      |                                  |      | 7            |       |             |      | (1  | )     |   |   | 38   |       |   |   | 3   |      
|Net (loss) income                                           |                                  |      | (74          | )     |             |      | (26 | )     |   |   | (5   | )     |   |   | 42  |      
|Ratios                                                      |                                  |      |              |       |             |      |     |       |   |   |      |       |   |   |     |       |  
|                                                            | Loss and loss adjustment expense |      |              | 211.4 | %           |      |     | 115.4 | % |   |      | 100.0 | % |   |     | 81.2  | %
|                                                            | Expense                          |      |              | 51.9  |             |      |     | 30.6  |   |   |      | 35.3  |   |   |     | 32.2  |  
|                                                            |                                  |      |              |       |             |      |     |       |   |   |      |       |   |   |     |       |  
|                                                            | Combined                         |      |              | 263.3 | %           |      |     | 146.0 | % |   |      | 135.3 | % |   |     | 113.4 | %
|                                                            |                                  |      |              |       |             |      |     |       |   |   |      |       |   |   |     |       |  

During October of 2003, CNA sold most of the renewal rights for all treaty
business to Folksamerica Reinsurance Company (Folksamerica), a wholly owned
subsidiary of White Mountains Insurance Group, Ltd. of Hamilton, Bermuda.
Under the terms of the transaction, Folksamerica will compensate CNA based upon
the amount of premiums renewed by Folksamerica over the next two contract
renewals. Concurrent with the sale, CNA announced its withdrawal from the
assumed reinsurance business. CNA will manage the run-off of its retained
liabilities. The guaranteed minimum under the renewal rights contract will be
recorded in the fourth quarter of 2003 along with severance and other related
costs.

Three Month Comparison

Net written premiums for CNA Re decreased $58 million and net earned premiums
decreased $73 million for the three months ended September 30, 2003 as compared
with the same period in 2002. These decreases were due primarily to increased
ceded premiums related to corporate aggregate reinsurance treaties, a decrease
in new business in surplus and standard lines and reduced favorable premium
development on prior underwriting years.

Net results decreased $48 million for the three months ended September 30, 2003
as compared with the same period in 2002. The decrease in net results was
primarily due to increased unfavorable net prior year development of $45
million after-tax ($69 million pretax), and decreased net investment income due
principally to increased interest expense of $9 million after-tax ($14 million
pretax) related to additional cessions to the corporate aggregate reinsurance
treaties, partially offset by increased net realized gains. See the
Investments section of this MD&A for further discussion on net investment
income and net realized gains (losses).

The combined ratio increased 117.3 points and underwriting results declined $65
million for the three months ended September 30, 2003 as compared with the same
period in 2002. This change was due to

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

increases in the loss and expense ratios. The loss ratio increased 96.0 points
due principally to increased net prior year development, as discussed below.
Partially offsetting this was improvement in the current accident year loss
ratio and a decrease in catastrophe losses. Catastrophe losses included $10
million for Hurricane Claudette and Hurricane Isabel for the three months ended
September 30, 2003 compared with $17 million recorded for other catastrophes
during the same period in 2002. The expense ratio increased 21.3 points
primarily as a result of the decreased net earned premium base, partially
offset by the absence of the unfavorable expense ratio impact from CNA Re U.K.,
which was sold in the fourth quarter of 2002. See the Companys 2002 Form 10-K
for additional information regarding the sale of CNA Re U.K.

Unfavorable net prior year development of $136 million, including $99 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $37 million of unfavorable premium development, was recorded for the three
months ended September 30, 2003. Unfavorable net prior year development of $67
million, including $92 million of unfavorable claim and allocated claim
adjustment expense reserve development and $25 million of favorable premium
development, was recorded during the same period in 2002.

The unfavorable net prior year development in 2003 is largely driven by a
change in the reporting pattern of losses as reported by the companies that
purchase reinsurance from CNA Re. Losses have continued to show large
increases for accident years in the late 1990s and into 2000 and 2001. These
increases are greater than the increases indicated by patterns from older
accident years and have a similar effect on several lines of business.
Unfavorable net prior year development of approximately $67 million was
recorded related to proportional liability exposures, primarily from multi-line
and umbrella treaties in accident years 1997 through 2001. Approximately $32
million of unfavorable net prior year development related to assumed financial
reinsurance covers in accident years 2001 and prior and approximately $24
million of unfavorable net prior year development related to professional
liability exposures in accident years 2001 and prior was recorded in the three
months ended September 30, 2003.

CNA Re recorded an additional $15 million of unfavorable net prior year
development for construction defect related exposures in the third quarter of
2003. Because of the unique nature of this exposure, losses will not follow
normal development patterns. The continued reporting of claims in California,
the increase in the number of claims from states other than California and a
review of individual ceding companies exposure to this type of claim resulted
in an increase in the estimated reserve.

The following development was recorded in the third quarter of 2003 as a
result of the elimination of deficiencies and redundancies in reserve positions
of individual products within the segment. Unfavorable net prior year
development of approximately $42 million related to surety exposures, $32
million related to excess of loss liability exposures and $12 million related
to facultative liability exposures were recorded in the third quarter of 2003.
Offsetting this unfavorable net prior year development was approximately $55
million of favorable development related to the WTC event. In addition, there
was a $37 million underwriting benefit from cessions to corporate aggregate
reinsurance treaties. This benefit was comprised of $80 million of ceded
losses and $43 million of ceded premiums for accident years 2000 and 2001. See
the Reinsurance section of this MD&A for further discussion of the Companys
aggregate reinsurance treaties.

Nine Month Comparison

Net written premiums for CNA Re decreased $57 million and net earned premiums
decreased $91 million for the nine months ended September 30, 2003 as compared
with the same period in 2002. The decrease in net earned premiums was due
primarily to reduced levels of premium from prior underwriting years

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

and the absence of CNA Re U.K. Partially offsetting these items were decreased
cessions related to corporate aggregate reinsurance treaties and rate increases
achieved in 2003.

Net results decreased $47 million for the nine months ended September 30, 2003
as compared with the same period in 2002. The decrease in net results was
primarily related to the decline in underwriting results and decreased net
investment income due primarily to a reduction of invested assets resulting
from the sale of CNA Re U.K. and increased interest expense of $8 million
after-tax ($12 million pretax) related to additional cessions to the corporate
aggregate reinsurance treaties. Partially offsetting these items was an
increase in net realized investment results. See the Investments section of
this MD&A for further discussion on net investment income and net realized
gains (losses).

The combined ratio increased 21.9 points and underwriting results decreased $69
million for the nine months ended September 30, 2003 as compared with the same
period in 2002. This change was due to increases in the loss and expense
ratios. The loss ratio increased 18.8 points due principally to increased
unfavorable net prior year development. Catastrophe losses were $21 million
for the nine months ended September 30, 2003 for Texas tornados, Midwest rain
storms and Hurricanes Isabel and Claudette. Catastrophe losses were $17
million for the nine months ended September 30, 2002. Partially offsetting
these declines was improvement in the current net accident year loss ratio.
The expense ratio increased 3.1 points primarily due to the reduced net earned
premium base, partially offset by the absence of the unfavorable expense ratio
impact from CNA Re U.K.

Unfavorable net prior year development of $148 million, including $109 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $39 million of unfavorable premium development, was recorded for the nine
months ended September 30, 2003. Unfavorable net prior year development of $42
million, including $84 million of unfavorable claim and allocated claim
adjustment expense reserve development offset by $42 million of favorable
premium development, was recorded for the same period in 2002. The gross
carried claim and claim adjustment expense reserve was $2,336 million and
$2,264 million at September 30, 2003 and December 31, 2002. The net carried
claim and claim adjustment expense reserve was $1,275 million and $1,362
million at September 30, 2003 and December 31, 2002.

In addition to the net prior year development recorded in the third quarter of
2003 as discussed in the three month comparison, unfavorable net prior year
claim and allocated claim adjustment expense reserve development of
approximately $25 million was recorded primarily for directors and officers
exposures in the second quarter of 2003. The unfavorable net prior year
reserve development was a result of a claims review in the second quarter of
2003 of securities class action cases related to certain known corporate
malfeasance cases and investment banking firms. The unfavorable net prior year
reserve development was recorded for accident years 2000 and 2001.

Offsetting this unfavorable net prior year reserve development was a $10
million underwriting benefit from cessions to corporate aggregate reinsurance
treaties for the second quarter of 2003. The benefit was comprised of $24
million of ceded losses and $14 million of ceded premiums for accident years
2000 and 2001. See the Reinsurance section of this MD&A for further discussion
of the Companys aggregate reinsurance treaties. A $31 million underwriting
benefit was recorded for the corporate aggregate reinsurance treaties for the
nine months ended September 30, 2002. The benefit was comprised of $93 million
of ceded losses and $62 million of ceded premiums, related primarily to the WTC
event discussed below.

During the first quarter of 2002, CNA Re revised its estimate of premiums and
losses related to the WTC event. In estimating CNA Res WTC event losses, the
Company performed a treaty-by-treaty analysis of exposure. The Companys
original loss estimate was based on a number of assumptions including the

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

loss to the industry, the loss to individual lines of business and the market
share of CNA Res cedants. Information that became available in the first
quarter of 2002 resulted in CNA Re increasing its estimate of WTC event related
premiums and losses on its property facultative and property catastrophe
business. The impact of increasing the estimate of gross WTC event losses by
$144 million was fully offset on a net of reinsurance basis (before the impact
of the CCC Cover) by higher reinstatement premiums and a reduction of return
premiums. As a result of the increased losses, additional cessions to the CCC
Cover were recorded.

Recent concerns about reinsurance security, prompted in part by rating agency
downgrades of several reinsurers financial strength ratings, have impacted the
reinsurance marketplace. Many ceding companies are seeking provisions for the
collateralization of assumed reserves in the event of a financial strength
ratings downgrade or other triggers. CNA Re has been impacted by this trend
and has entered into several contracts with rating or other triggers. See the
Ratings section of this MD&A for more information.

GROUP OPERATIONS

The following table details the results of operations for Group Operations.

Results of Operations

|                                                     |  |              |     |             |  |      |     |      |  |   |     |   |  |   |       |  
|---------------------------------------------------- |  | ------------ | --- | ----------- |  | ---- | --- | ---- |  | - | --- | - |  | - | ----- | -
|                                                     |  | Three Months |     | Nine Months
|                                                     |  |              |     |            
|Period ended September 30                            |  | 2003         |     | 2002        |  | 2003 |     | 2002
|                                                     |  |              |     |             |  |      |     |     
|(In millions)                                        |  |              |     |             |  |      |     |      |  |   |     |   |  |   |       |  
|Net earned premiums                                  |  | $            | 338 |             |  | $    | 292 |      |  | $ | 982 |   |  | $ | 2,017 |  
|Income before net realized investment gains (losses) |  |              | 25  |             |  |      | 30  |      |  |   | 70  |   |  |   | 73    |  
|Net realized investment gains (losses)               |  |              | 17  |             |  |      | 4   |      |  |   | (4  | ) |  |   | (8    | )
|Net income                                           |  |              | 42  |             |  |      | 34  |      |  |   | 66  |   |  |   | 65    |  

Three Month Comparison

Net earned premiums for Group Operations increased $46 million for the three
months ended September 30, 2003 as compared with the same period in 2002. The
increase in net earned premiums was due primarily to growth in disability,
specialty medical, life and accident, and long term care products within Group
Benefits due to new sales and rate increases.

Group Operations achieved rate increases that averaged approximately 5% for
both the three months ended September 30, 2003 and 2002 for the disability,
accident and life lines of business within Group Benefits for those contracts
that were renewed during the period. Premium persistency rates of
approximately 86% and 87% were achieved for those contracts that were up for
renewal for the three months ended September 30, 2003 and 2002.

Net income increased by $8 million for the three months ended September 30,
2003 as compared with the same period in 2002. The increase in net income
related primarily to increased net realized investment gains, favorable
development related to a $10 million after-tax release of WTC event reserves,
favorable results in the specialty medical line, and the impact of growth in
Group Benefits premiums. These items were partially offset by a change in the
discount rate on prior year disability and life waiver of premium reserves from
6.5% to 6.0%, resulting in a $14 million after-tax decrease in net income. The
change in discount rate reflects the decreasing portfolio yield and the current
investment environment. The third quarter of 2003 also reflects the absence of
$9 million after-tax of non-recurring fee income received in the third quarter
of 2002 related to transfer of the Mail Handlers Plan. See the Investments
section of this MD&A for further discussion on net realized investment gains
(losses).

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

Nine Month Comparison

Net earned premiums for Group Operations decreased $1,035 million for the nine
months ended September 30, 2003 as compared with the same period in 2002. The
decrease in net earned premiums was due primarily to the transfer of the Mail
Handlers Plan. The Mail Handlers Plan contributed $1,151 million of premiums
for the nine months ended September 30, 2002. This was partially offset by
premium growth in the disability, specialty medical, life and accident and long
term care products within Group Benefits due to increased new sales and rate
increases.

Group Operations achieved rate increases that averaged approximately 6% and 5%
for the nine months ended September 30, 2003 and 2002 for the disability,
accident and life lines of business within Group Benefits for those contracts
that were renewed during the period. Premium persistency rates of
approximately 86% and 82% were achieved for those contracts that were up for
renewal for the nine months ended September 30, 2003 and 2002.

Net income increased by $1 million for the nine months ended September 30, 2003
as compared with the same period in 2002. The increase in net income related
primarily to decreased net realized investment losses, the absence of
unfavorable net results related to the variable products business which was
sold to The Phoenix Companies, Inc. in the third quarter of 2002, improved
operating results in the single premium group annuity (SPGA) product, favorable
development related to a $10 million after-tax release of WTC event reserves,
favorable results in the specialty medical line, and the impact of premium
growth within Group Benefits. These items were partially offset by the absence
of net income related to the Mail Handlers Plan, including the non-recurring
fee income received in the third quarter of 2002 and a change in the discount
rate on prior year disability and life waiver of premium reserves from 6.5% to
6.0%, resulting in a $14 million after-tax decrease in net income. The change
in discount rate reflects the decreasing portfolio yield and the current
investment environment. See the Investments section of this MD&A for further
discussion on net investment income and net realized gains (losses).

LIFE OPERATIONS

The following table details the results of operations for Life Operations.

Results of Operations

|                                                     |  |              |     |             |  |      |     |      |  |   |     |  |  |   |     |  
|---------------------------------------------------- |  | ------------ | --- | ----------- |  | ---- | --- | ---- |  | - | --- |  |  | - | --- | -
|                                                     |  | Three Months |     | Nine Months
|                                                     |  |              |     |            
|Period ended September 30                            |  | 2003         |     | 2002        |  | 2003 |     | 2002
|                                                     |  |              |     |             |  |      |     |     
|(In millions)                                        |  |              |     |             |  |      |     |      |  |   |     |  |  |   |     |  
|Net earned premiums                                  |  | $            | 264 |             |  | $    | 236 |      |  | $ | 783 |  |  | $ | 710 |  
|Income before net realized investment gains (losses) |  |              | 10  |             |  |      | 31  |      |  |   | 37  |  |  |   | 89  |  
|Net realized investment gains (losses)               |  |              | 21  |             |  |      | (14 | )    |  |   | 6   |  |  |   | (41 | )
|Net income                                           |  |              | 31  |             |  |      | 17  |      |  |   | 43  |  |  |   | 5   |  

Three Month Comparison

Net earned premiums for Life Operations increased $28 million for the three
months ended September 30, 2003 as compared with the same period in 2002. The
increase in net earned premiums was due primarily to higher sales of structured
settlement annuities, and an increase in renewal premiums due to inforce growth
in long term care products, partially offset by reduced first year premiums as
a result of exiting the individual long term care market, as discussed below.

Net income increased by $14 million for the three months ended September 30,
2003 as compared with the same period in 2002. The increase in net income
related primarily to increased net realized investment results and a $2 million
improvement in net results for life settlement contracts. Partially

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

offsetting these items was unfavorable individual long term care morbidity due
to the increased frequency of claims during the third quarter of 2003, the
write-off of capitalized software costs of $3 million, and decreased net
investment income. See the Investments section of this MD&A for further
discussion on net investment income and net realized gains (losses).

Nine Month Comparison

Net earned premiums for Life Operations increased $73 million for the nine
months ended September 30, 2003 as compared with the same period in 2002. The
increase in net earned premiums was due primarily to higher sales of structured
settlement annuities, growth in life insurance products and individual long
term care product inforce blocks, partially offset by declines in new business
due to exiting the individual long term care market.

During the second quarter of 2003, the Company completed a review of its
individual long term care product offerings. The focus of the review was to
determine whether the current products provide adequate pricing flexibility
under the range of reasonably possible claims experience levels. Based on the
review and current market conditions, the Company decided to significantly
reduce new sales of this product and certain infrastructure costs, and recorded
$4 million pretax of associated severance costs in the second quarter of 2003.
Premium will continue to be received on inforce business, but the actions to
reduce new business will lower the rate of overall premium growth for this
line. The Company does not expect these actions to have a material adverse
impact on the results of operations.

Net income increased by $38 million for the nine months ended September 30,
2003 as compared with the same period in 2002. The increase in net income
related primarily to increased net realized investment gains, the absence of
the cumulative effect of a change in accounting principle of $8 million
recorded in 2002 relating to write-down of impaired goodwill, and a $6 million
improvement in net results for life settlement contracts. Partially offsetting
these items were unfavorable individual long term care morbidity due to
increased severity and claim frequency, the write-off of capitalized software
costs of $8 million and lower net investment income. Also contributing to the
decrease were severance costs related to the individual long term care product.
See the Investments section of this MD&A for further discussion on net
investment income and net realized gains (losses).

CORPORATE AND OTHER

The following table details the results of operations for the Corporate and
Other segment, including APMT and intrasegment eliminations.

Results of Operations

|                                                     |  |              |      |             |  |      |     |      |  |   |      |   |  |   |     |  
|---------------------------------------------------- |  | ------------ | ---- | ----------- |  | ---- | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                                     |  | Three Months |      | Nine Months
|                                                     |  |              |      |            
|Period ended September 30                            |  | 2003         |      | 2002        |  | 2003 |     | 2002
|                                                     |  |              |      |             |  |      |     |     
|(In millions)                                        |  |              |      |             |  |      |     |      |  |   |      |   |  |   |     |  
|Revenues, including pretax realized investment gains |  | $            | 10   |             |  | $    | 112 |      |  | $ | 80   |   |  | $ | 188 |  
|Loss before net realized investment gains            |  |              | (722 | )           |  |      | (38 | )    |  |   | (758 | ) |  |   | (81 | )
|Net realized investment gains                        |  |              | 9    |             |  |      | 55  |      |  |   | 52   |   |  |   | 24  |  
|Net (loss) income                                    |  |              | (713 | )           |  |      | 17  |      |  |   | (706 | ) |  |   | (58 | )

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

Three Month Comparison

Revenues decreased $102 million for the three months ended September 30, 2003
as compared with the same period in 2002. The decrease in revenues was due
primarily to decreased pretax realized investment gains and reduced net earned
premiums in group reinsurance due to the exit of this business in 2002.

Net results decreased $730 million for the three months ended September 30,
2003 as compared with the same period in 2002. The decrease in net results was
due primarily to a $545 million after-tax increase in unfavorable net prior
year development, a $44 million after-tax increase in ULAE reserves, a $112
million after-tax increase in the bad debt provision for reinsurance
receivables, a $10 million after-tax increase in certain insurance related
assessments, and a decrease in net realized investment gains. The 2003 net
results were favorably impacted by the absence of eBusiness expenses, which beginning in 2003 were included in the property and
casualty operating segments of the Company. See the Investments section of
this MD&A for further discussion on net investment income and net realized
gains (losses).

Unfavorable net prior year claim and allocated claim adjustment expense reserve
development of $847 million was recorded for the three months ended September
30, 2003. This development was primarily driven by $795 million of unfavorable
net prior year claim and allocated claim adjustment expense reserve development
related to APMT. See the APMT Reserves section of this MD&A for a further
discussion of APMT development. Unfavorable net prior year claim and allocated
claim adjustment expense reserve development of $50 million was recorded
related to the Companys past participation in several insurance pools which is
part of the group reinsurance run-off business. Unfavorable net prior year
claim and allocated claim adjustment expense reserve development of $8 million
was recorded for the three months ended September 30, 2002.

Nine Month Comparison

Revenues decreased $108 million for the nine months ended September 30, 2003 as
compared with the same period in 2002. The decrease in revenues was due
primarily to reduced revenues from CNA UniSource and reduced net earned
premiums in group reinsurance, partially offset by increased pretax realized
investment gains.

Net results declined $648 million for the nine months ended September 30, 2003
as compared with the same period in 2002. The decrease in net results was due
primarily to a $552 million after-tax increase in unfavorable net prior year
development, a $44 million after-tax increase in ULAE reserves, a $10 million
after-tax increase in certain insurance related assessments, and a $138 million
after-tax increase in the bad debt provision for reinsurance receivables. The
2003 net results were favorably impacted by increased net realized investment
gains and the absence of eBusiness expenses. See the
Investments section of this MD&A for further discussion on net investment
income and net realized gains (losses).

Unfavorable net prior year development of $861 million, including $867 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $6 million of favorable premium development was primarily driven by
unfavorable development of $795 million related to APMT. See the APMT Reserves
section of this MD&A for a further discussion of APMT development. Unfavorable
net prior year claim and allocated claim adjustment expense reserve development
of $11 million was recorded for the nine months ended September 30, 2002. The
gross carried claim and claim adjustment expense reserve was $7,386 million and
$4,847 million at September 30, 2003 and December 31, 2002.

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

The net carried claim and claim adjustment expense reserve was $2,758 million
and $2,002 million for September 30, 2003 and December 31, 2002.

CNA entered into a retroactive reinsurance agreement as part of the sale of the
Companys personal insurance business to The Allstate Corporation (Allstate) in
1999. CNA shares in indemnity and claim and allocated claim adjustment
expenses if payments related to losses incurred prior to October 1, 1999 on the
CNA policies transferred to Allstate exceed the claim and allocated claim
adjustment expense reserves of approximately $1 billion at the date of sale.
The Company must begin to reimburse Allstate for claim and allocated claim
adjustment expense payments when cumulative claim payments after October 1,
1999 on losses occurring prior to that date exceed the $1 billion. The
Companys remaining obligation valued under this loss sharing provision as of
October 1, 2003 will be settled, under a time schedule
established by the parties, by agreement of the parties or by an
independent actuarial review of the unpaid claim liabilities as of that date.
Cumulative payments of indemnity and allocated loss adjustment expenses on such
policies exceeded $1 billion during the second quarter of 2003. The Company
has established reserves for its estimated liability under this loss sharing
arrangement.

APMT Reserves

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

Establishing reserves for APMT claim and claim adjustment expenses is subject
to uncertainties that are greater than those presented by other claims.
Traditional actuarial methods and techniques employed to estimate the ultimate
cost of claims for more traditional property and casualty exposures are less
precise in estimating claim and claim adjustment expense reserves for APMT,
particularly in an environment of emerging or potential claims and coverage
issues that arise from industry practices and legal, judicial, and social
conditions. Therefore, these traditional actuarial methods and techniques are
necessarily supplemented with additional estimating techniques and
methodologies, many of which involve significant judgments that are required of
management. Accordingly, a high degree of uncertainty remains for the
Companys ultimate liability for APMT claim and claim adjustment expenses.

In addition to the difficulties described above, estimating the ultimate cost
of both reported and unreported APMT claims is subject to a higher degree of
variability due to a number of additional factors, including among others: the
number and outcome of direct actions against the Company; coverage issues,
including whether certain costs are covered under the policies and whether
policy limits apply; allocation of liability among numerous parties, some of
whom may be in bankruptcy proceedings, and in particular the application of
joint and several liability to specific insurers on a risk; inconsistent
court decisions and developing legal theories; increasingly aggressive tactics
of plaintiffs lawyers; the risks and lack of predictability inherent in major
litigation; increased filings of claims in certain states to avoid the
application of tort reform statute effective dates; a further increase in
asbestos and environmental claims which cannot now be anticipated; continued
increase in mass tort claims relating to silica and silica-containing products,
and the outcome of ongoing disputes as to coverage in relation to these claims;
a further increase of claims and claims payment that may exhaust underlying
umbrella and excess coverage at accelerated rates; and future developments
pertaining to the Companys ability to recover reinsurance for asbestos and
environmental claims.

Since 1999, CNA has performed semi-annual ground up reviews of all open APMT
claims to evaluate the adequacy of the Companys APMT reserves. The completion
of a comprehensive ground up analysis of its APMT exposures that was previously
scheduled for the second quarter was completed in the third quarter
of 2003. During the second quarter of 2003, significant resources were

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

dedicated to the proposed national asbestos reform litigation and to support
regulatory reviews. The Company completed its formal and comprehensive
analysis of all open APMT claims in the third quarter of 2003. In performing
its comprehensive ground up analysis, the Company considers input from its
professionals with direct responsibility for the claims, inside and outside
counsel with responsibility for representation of the Company, and its
actuarial staff. These professionals review, among many factors, the
policyholders present and future exposures, including such factors as claims
volume, trial conditions, settlement demands and defense costs; the policies
issued by CNA, including such factors as aggregate or per occurrence limits,
whether the policy is primary, umbrella or excess, and the existence of
policyholder retentions and/or deductibles; the existence of other insurance;
and reinsurance arrangements.

Due to the inherent uncertainties in estimating reserves for APMT claim and
claim adjustment expenses and due to the significant uncertainties previously
described related to APMT claims, the ultimate liability for these cases, both
individually and in aggregate, may exceed the recorded reserves. Any such
potential additional liability, or any range of potential additional amounts,
cannot be reasonably estimated currently, but could be material to the
Companys business, results of operations, equity, insurer financial strength
and debt ratings. Due to, among other things, the factors described above, it
may be necessary for the Company to record material changes in its APMT claim
and claim adjustment expense reserves in the future, should new information
become available or other developments emerge.

The following table provides data related to CNAs APMT claim and claim
adjustment expense reserves.

Environmental Pollution and Mass Tort and Asbestos

September 30, 2003
    
    December 31, 2002Environmental
    
    
    
    
    
    EnvironmentalPollution and Mass
    
    
    
    
    
    Pollution and MassTort
    
    Asbestos
    
    Tort
    
    Asbestos(In millions)Gross reserves
    
    $
    872
    
    
    $
    3,434
    
    
    $
    830
    
    
    $
    1,758Ceded reserves
    
    
    (270
    )
    
    
    (1,647
    )
    
    
    (313
    )
    
    
    (512
    )Net reserves
    
    $
    602
    
    
    $
    1,787
    
    
    $
    517
    
    
    $
    1,246


Environmental Pollution and Mass Tort

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 1,244 cleanup sites have been identified by
the Environmental Protection Agency (EPA) and included on its National
Priorities List (NPL). State authorities have designated many cleanup sites as
well.

Many policyholders have made claims against various CNA insurance subsidiaries
for defense costs and indemnification in connection with environmental
pollution matters. The vast majority of these claims

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

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 2002 or during the first
nine months of 2003, and it is unclear what positions Congress or the
Administration will take and what legislation, if any, will result in the
future. If there is legislation, and in some circumstances even if there is no
legislation, the federal role in environmental cleanup may be significantly
reduced in favor of state action. Substantial changes in the federal statute
or the activity of the EPA may cause states to reconsider their environmental
cleanup statutes and regulations. There can be no meaningful prediction of the
pattern of regulation that would result or the possible effect upon CNAs
results of operations or equity.

As of September 30, 2003 and December 31, 2002, CNA carried approximately $602
million and $517 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and mass tort claims. There was $153 million of environmental pollution and
mass tort net unfavorable prior year claim and claim adjustment expense reserve
development for the three and nine months ended September 30, 2003 and no
environmental pollution and mass tort net claim and claim adjustment expense
reserve development for the three and nine months ended September 30, 2002.
The Company paid environmental pollution-related claims and mass tort-related
claims, net of reinsurance recoveries, of $68 million and $91 million for the
nine months ended September 30, 2003 and 2002.

CNA has increased its net environmental pollution reserves to $405 million
reflecting $72 million in unfavorable net prior year environmental pollution
reserve development in the third quarter of 2003. This increase was in part
due to the emergence of certain negative legal developments, including several
court decisions which have reduced the effectiveness of the absolute pollution
exclusion by limiting its application to traditional industrial pollution, and
which have increased the scope of damages compensable under policies of
insurance. In addition, management has noted the potential emergence of
Natural Resource Damages claims under the Comprehensive Environmental Response
Compensation and Liability Act of 1980 and other federal statutes.

CNA has made settlement of large environmental pollution exposures a management
priority. The Company has resolved a number of its large environmental accounts
by negotiating favorable settlement agreements. In its settlements, CNA sought
to resolve those exposures and obtain the broadest release language to avoid
future claims from the same policyholders seeking coverage for sites or claims
that had not emerged at the time CNA settled with its policyholder. While the
terms of each settlement agreement vary, CNA sought to obtain broad
environmental releases that include known and unknown sites, claims and
policies. The broad release provisions contained in those settlement agreements
should, in many cases, prevent future exposure from settled policyholders. It
remains uncertain, however, whether a court interpreting the language of the
settlement agreements will uphold the broad language of the agreements.

In the third quarter of 2003, the Company began to classify its environmental
pollution accounts into several categories, which include structured
settlements, coverage in place agreements and active accounts. CNA has a
structured settlement agreement with one of its policyholders for which it has
future payment obligations. Structured settlement agreements provide for
payments over multiple years as set

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

forth in each individual agreement. As to the one structured settlement
agreement existing at September 30, 2003, CNA has a reserve of $12 million, net
of reinsurance.

CNA has also used coverage in place agreements to resolve large pollution
exposures. Coverage in place agreements are typically agreements between CNA
and its policyholders identifying the policies and the terms for payment of
pollution related liabilities. Claims payments are contingent on presentation
of adequate documentation of damages during the policy periods and other
documentation supporting the demand for claims payment. Coverage in place
agreements may have annual payment caps. At September 30, 2003, CNA had
negotiated five such agreements in which CNA committed coverage for payment of
claims and claim related adjustment expenses subject to documentation
requirements as set forth in the terms of each specific agreement. The Company
has evaluated these commitments and has a $12 million reserve, net of
reinsurance, as of September 30, 2003 related to coverage in place agreements.

The Company categorizes active accounts as large or small accounts in the
pollution area. CNA defines a large account as an active account with more
than $100,000 cumulative paid losses. CNA has 148 large accounts with a
collective reserve of $101 million, net of reinsurance at September 30, 2003.
The Company has made closing large accounts a significant management priority.
Small accounts are defined as active accounts with $100,000 or less cumulative
paid losses. CNA has 427 small accounts with a collective reserve of $60
million, net of reinsurance at September 30, 2003.

The Company also evaluates its environmental pollution exposures arising from
its assumed reinsurance and its participation in various pools, including
Excess & Casualty Reinsurance Association (ECRA). At September 30, 2003, CNA
has a reserve of $38 million related to these liabilities.

At September 30, 2003, CNAs unassigned IBNR reserve for environmental
pollution was $182 million, net of reinsurance. This IBNR reserve relates to
potential development on accounts that have not settled and potential future
claims from unidentified policyholders.

The chart below depicts CNAs overall pending pollution accounts and associated
reserves at September 30, 2003.

Total Paid
    
    Pollution
    
    Percent ofNumber of
    
    in 2003
    
    Reserves
    
    PollutionPolicyholders
    
    (Net)
    
    9/30/03 (Net)
    
    ReservePolicyholders with Settlement AgreementsStructured Settlements
    
    
    1
    
    
    $
    16
    
    
    $
    12
    
    
    
    3
    %Coverage In Place
    
    
    5
    
    
    
    
    
    
    
    12
    
    
    
    3
    %Total with Settlement Agreements
    
    
    6
    
    
    
    16
    
    
    
    24
    
    
    
    6
    %Other Policyholders with Active AccountsLarge Pollution Accounts
    
    
    148
    
    
    
    19
    
    
    
    101
    
    
    
    25
    %Small Pollution Accounts
    
    
    427
    
    
    
    9
    
    
    
    60
    
    
    
    15
    %Total Other Policyholders
    
    
    575
    
    
    
    28
    
    
    
    161
    
    
    
    40
    %Assumed Reinsurance & Pools
    
    
    
    
    
    
    2
    
    
    
    38
    
    
    
    9
    %Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    45
    %Total
    
    
    581
    
    
    $
    46
    
    
    $
    405
    
    
    
    100
    %


CNA has also increased its mass tort
net reserves to $197 million reflecting
$81 million in unfavorable mass tort net prior year reserve development, due in
part to the elevated volume of silica claims. In 2003,

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

CNA observed a marked increase in silica claims frequency in Mississippi,
where plaintiff attorneys appear to have filed claims to avoid the effect of a
tort reform. The most significant silica exposures identified to date include
a relatively small number of accounts with significant numbers of new claims
and substantial insurance limits issued by the Company. Establishing claim and
claim adjustment expense reserves for silica claims is subject to uncertainties
because of disputes concerning medical causation with respect to certain
diseases, including lung cancer, geographical concentration of the lawsuits
asserting the claims, and the large rise in the total number of claims without
underlying epidemiological developments suggesting an increase in disease rates
or plaintiffs.

The Companys ultimate liability for its environmental pollution and mass tort
claims is impacted by several factors including ongoing disputes with
policyholders over scope and meaning of coverage terms and, in the area of
environmental pollution, court decisions that continue to restrict the scope
and applicability of the absolute pollution exclusion contained in policies
issued by the Company after 1989. Due to the inherent uncertainties described
above, including the inconsistency of court decisions, the number of waste
sites subject to cleanup, and in the area of environmental pollution, the
standards for cleanup and liability, the ultimate liability of CNA for
environmental pollution and mass tort claims may vary substantially from the
amount currently recorded.

Asbestos

CNAs property and casualty insurance subsidiaries also have exposure to
asbestos-related claims. Estimation of asbestos-related claim and claim
adjustment expense reserves involves many of the same limitations discussed
above for environmental pollution claims, such as inconsistency of court
decisions, specific policy provisions, allocation of liability among insurers
and insureds, and additional factors such as missing policies and proof of
coverage. Furthermore, estimation of asbestos-related claims is difficult due
to, among other reasons, the proliferation of bankruptcy proceedings and
attendant uncertainties, the targeting of a broader range of businesses and
entities as defendants, the uncertainty as to which other insureds may be
targeted in the future and the uncertainties inherent in predicting the number
of future claims.

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

Several factors are, in managements view, negatively impacting asbestos claim
trends. Plaintiff attorneys who previously sued entities who are now bankrupt
are seeking other viable targets. As a result, companies with few or no
previous asbestos claims are becoming targets in asbestos litigation and,
although they may have little or no liability, nevertheless must be defended by
their insurers. Additionally, plaintiff attorneys and trustees for future
claimants are demanding that policy limits be paid lump-sum into the bankruptcy
asbestos trusts prior to presentation of valid claims and medical proof of
these claims. The ultimate impact or success of this tactic remains uncertain.
Plaintiff attorneys and trustees for future claimants are also attempting to
devise claims payment procedures for bankruptcy

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

trusts that would allow asbestos claims to be paid under lax standards. This
also presents the potential for exhausting policy limits in an accelerated
fashion.

In addition, management has observed an increase in the total number of
policyholders with current asbestos claims as additional defendants are added
to existing lawsuits and are named in new asbestos bodily injury lawsuits. New
asbestos bodily injury claims have also increased substantially in 2003.

Following the third quarter ground up review, CNA has increased its gross
asbestos reserves to $3,434 million and its net asbestos reserves to $1,787
million at September 30, 2003 reflecting $1,808 million and $642 million in
unfavorable gross and net asbestos prior year reserve development principally
due to potential losses from policies issued by CNA with high attachment
points, which previous exposure analysis indicated would not be reached. As
part of its semi-annual review, the Company examined the claims filing trends
and the projected erosion rates of underlying primary and lower excess
insurance on open asbestos accounts to determine timeframes within which high
excess policies issued by CNA could be reached. Elevated claims volumes,
together with certain adverse court decisions affecting the
rapidity by which asbestos claims are paid, supported the conclusion that
excess policies with high attachment points previously thought not to be
exposed may now potentially be exposed.

The Company has resolved a number of its large asbestos accounts by negotiating
favorable settlement agreements. CNA has structured settlement agreements with
seven of its policyholders for which it has future payment obligations.
Structured settlement agreements provide for payments over multiple years as set
forth in each individual agreement. At December 31, 2002, CNA had four
structured settlement agreements reserved at $118 million, net of reinsurance.
Since December 31, 2002, CNA has resolved three additional asbestos accounts
through structured settlement agreements. As to the seven structured
settlement agreements existing at September 30, 2003, payment obligations under
those settlement agreements are projected to terminate in 2016. CNA has
evaluated its exposure and the expected reinsurance recoveries under these
agreements and has a reserve of $160 million, net of reinsurance at September
30, 2003, related to remaining payment obligations under these agreements.

CNA, through its acquisition of CIC in 1995, assumed obligations under the
Wellington Agreement. In 1985, 47 asbestos producers and their insurers,
including CIC, executed the Wellington Agreement. The agreement intended to
resolve all issues and litigation related to coverage for asbestos exposures.
Under this agreement, signatory insurers committed scheduled policy limits and
made the limits available to pay asbestos claims based upon coverage blocks
designated by the policyholders in 1985, subject to extension by policyholders.
CIC was a signatory insurer to the Wellington Agreement. At December 31,
2002, CNA had fulfilled its Wellington Agreement obligations as to all but five
accounts and had a reserve of $28 million, net of reinsurance, related to its
remaining Wellington obligations. At September 30, 2003, with respect to these
five remaining unpaid Wellington obligations, CNA has evaluated its exposure
and the expected reinsurance recoveries under these agreements and has a $23
million reserve, net of reinsurance.

CNA has also used coverage in place agreements to resolve large asbestos
exposures. Coverage in place agreements are typically agreements between CNA
and its policyholders identifying the policies and the terms for payment of
asbestos related liabilities. Claims payments are contingent on presentation
of adequate documentation showing exposure during the policy periods and other
documentation supporting the demand for claims payment. Coverage in place
agreements may have annual payment caps. At September 30, 2003, CNA had
negotiated 27 such agreements in which CNA committed coverage for payment of
claims and claim related adjustment expenses subject to documentation
requirements as set

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

forth in the terms of each specific agreement. Coverage in place agreements
are evaluated based on claims filings trends and severities. Due to adverse
claims trends described in this section, management has increased its estimate
of exposure under current coverage in place agreements. At December 31, 2002,
the Company had estimated its exposure for its twenty-three coverage in place
agreements at $66 million, net of reinsurance. Since year end 2002, CNA
resolved four additional asbestos exposures through coverage in place
agreements and has also evaluated the possibility that high excess coverages it
issued could become impaired under these agreements. The Company has evaluated
these commitments and the expected reinsurance recoveries under these
agreements and has a $106 million reserve, net of reinsurance, related to
coverage in place agreements.

The Company categorizes active asbestos accounts as large or small accounts.
CNA defines a large account as an active account with more than $100,000
cumulative paid losses. The Company made closing large accounts a significant
management priority. At December 31, 2002, the Company had 150 large accounts
and has a reserve of $220 million, net of reinsurance. At September 30, 2003,
CNA has 156 large accounts with a collective reserve of $388 million, net of
reinsurance. Large accounts are typically accounts that have been long
identified as significant asbestos exposures. In its most recent ground up
reserve study, the Company observed that underlying layers of primary, umbrella
and lower layer excess policies were exhausting at accelerated rates due to
increased claims volumes, claims severities and increased defense expense
incurred in litigating claims for certain policyholders. Those accounts where
the Company had issued high excess policies were evaluated in the study to
determine potential impairment of the high excess layers of coverage.
Management concluded that high excess coverage previously thought not to be
exposed could potentially be exposed should current adverse claim trends
continue.

Small accounts are defined as active accounts with $100,000 or less cumulative
paid losses. At December 31, 2002, the Company had 939 small accounts with a
reserve of $90 million, net of reinsurance. At September 30, 2003, CNA has
1,028 small accounts, approximately 84% of its total active asbestos accounts.
Small accounts are typically representative of policyholders with limited
connection to asbestos. As entities who were historic targets in asbestos
litigation continue to file for bankruptcy protection, plaintiffs attorneys
are seeking other viable targets. As a result, companies with few or no
previous asbestos claims are becoming targets in asbestos litigation and,
although they may have little or no liability, nevertheless must be defended by
their insurers. As claims filings continue to increase, costs incurred in
defending small accounts are expected to increase. The Company has evaluated
small accounts and has increased its collective reserve to $155 million, net of
reinsurance, as of September 30, 2003.

The Company also evaluates its asbestos liabilities arising from its assumed
reinsurance business and its participation in various pools. At December 31,
2002, CNA had a $91 million reserve related to these asbestos liabilities
arising from the Companys assumed reinsurance obligations and CNAs
participation in pools, including ECRA. At September 30, 2003, CNA has a $158
million net reserve related to these liabilities.

At September 30, 2003, CNAs unassigned IBNR reserve for asbestos was $742
million, net of reinsurance. This IBNR reserve relates to potential
development on accounts that have not settled and potential future claims from
unidentified policyholders. At December 31, 2002, the unassigned IBNR reserve
was $584 million, net of reinsurance.

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

The chart below depicts CNAs overall pending asbestos accounts and associated
reserves at September 30, 2003.

Asbestos Reserves
    
    Percent ofNumber of
    
    2003
    
    9/30/03
    
    AsbestosPolicyholders
    
    Paid (Net)
    
    (Net)
    
    ReservePolicyholders with Settlement AgreementsStructured Settlements
    
    
    7
    
    
    $
    5
    
    
    $
    160
    
    
    
    9
    %Wellington
    
    
    5
    
    
    
    2
    
    
    
    23
    
    
    
    1
    %Coverage In Place
    
    
    27
    
    
    
    30
    
    
    
    106
    
    
    
    6
    %Fibreboard
    
    
    1
    
    
    
    
    
    
    
    55
    
    
    
    3
    %Total with Settlement Agreements
    
    
    40
    
    
    
    37
    
    
    
    344
    
    
    
    19
    %Other Policyholders with Active AccountsLarge Asbestos Accounts
    
    
    156
    
    
    
    48
    
    
    
    388
    
    
    
    22
    %Small Asbestos Accounts
    
    
    1,028
    
    
    
    11
    
    
    
    155
    
    
    
    8
    %Total Other Policyholders
    
    
    1,184
    
    
    
    59
    
    
    
    543
    
    
    
    30
    %Assumed Reinsurance & Pools
    
    
    
    
    
    
    5
    
    
    
    158
    
    
    
    9
    %Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    742
    
    
    
    42
    %Total
    
    
    1,224
    
    
    $
    101
    
    
    $
    1,787
    
    
    
    100
    %


Some asbestos-related defendants have asserted that their claims for insurance
are not subject to aggregate limits on coverage. CNA has such claims from a
number of insureds. Some of these claims involve insureds facing exhaustion of
products liability aggregate limits in their policies, who have asserted that
their asbestos-related claims fall within so-called non-products liability
coverage contained within their policies rather than products liability
coverage, and that the claimed non-products coverage is not subject to any
aggregate limit. It is difficult to predict the ultimate size of any of the
claims for coverage purportedly not subject to aggregate limits or predict to
what extent, if any, the attempts to assert non-products claims outside the
products liability aggregate will succeed. The Company has attempted to manage
its asbestos exposure by aggressively seeking to settle claims on acceptable
terms. There can be no assurance that any of these settlement efforts will be
successful, or that any such claims can be settled on terms acceptable to CNA.
Where CNA cannot settle a claim on acceptable terms, the Company aggressively
litigates the claim. Adverse developments with respect to such matters could
have a material adverse effect on CNAs results of operations or equity.

Certain asbestos litigations in which CNA is currently engaged are described
below:

On February 13, 2003, CNA announced it had resolved asbestos related coverage
litigation and claims involving A.P. Green Industries, A.P. Green Services and
Bigelow  Liptak Corporation. Under the agreement, CNA will be required to
pay $74 million, net of reinsurance recoveries, over a ten year period. The
settlement resolves CNAs liabilities for all pending and future asbestos
claims involving A.P. Green Industries, Bigelow  Liptak Corporation and
related subsidiaries, including alleged non-products exposures. The
settlement has received initial bankruptcy court approval and CNA expects to
procure confirmation of a bankruptcy plan containing a channeling injunction to
protect CNA from any future claims.

CNA is engaged in insurance coverage litigation with underlying plaintiffs who
have asbestos bodily injury claims against the former Robert A. Keasbey Company
(Keasbey) in New York State court (Continental Casualty Co. v. Nationwide
Indemnity Co. et al., No. 601037/03 (N.Y. County)). Keasbey,

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

a currently dissolved corporation, was a seller and installer of
asbestos-containing insulation products in New York and New Jersey. Thousands
of plaintiffs have filed bodily injury claims against Keasbey; however,
Keasbeys involvement at a number of work sites is a highly contested issue.
Therefore, the defense disputes the percentage of valid claims against Keasbey.
CNA issued Keasbey primary policies for 1970-1987 and excess policies for
1972-1978. CNA has paid an amount substantially equal to the policies
aggregate limits for products and completed operations claims. Claimants
against Keasbey allege, among other things, that CNA owes coverage under
sections of the policies not subject to the aggregate limits, an allegation CNA
vigorously contests in the lawsuit.

CNA has insurance coverage disputes related to asbestos bodily injury claims
against Burns & Roe Enterprises, Inc. (Burns & Roe). Originally raised in
litigation, now stayed, these disputes are currently part of In re: Burns & Roe
Enterprises, Inc., pending in the U.S. Bankruptcy Court for the District of New
Jersey, No. 00-41610. Burns & Roe provided engineering and related services in
connection with construction projects. At the time of its bankruptcy filing,
Burns & Roe faced approximately 11,000 claims alleging bodily injury resulting
from exposure to asbestos as a result of construction projects in which Burns &
Roe was involved. CNA allegedly provided primary liability coverage to Burns &
Roe from 1956-1969 and 1971-1974, along with certain project-specific policies
from 1964-1970.

CIC issued certain primary and excess policies to Bendix Corporation (Bendix),
now part of Honeywell International Inc. (Honeywell). Honeywell faces
approximately 71,000 pending asbestos bodily injury claims resulting from
alleged exposure to Bendix friction products. CICs primary policies allegedly
covered the period from at least 1939 (when Bendix began to use asbestos in its
friction products) to 1983, although the parties disagree about whether CICs
policies provided product liability coverage before 1940 and from 1945 to 1956.
CIC asserts that it owes no further material obligations to Bendix under any
primary policy. Honeywell alleges that two primary policies issued by CIC
covering 1969-1975 contain occurrence limits but not product liability
aggregate limits for asbestos bodily injury claims. CIC has asserted, among
other things, which even if Honeywells allegation is correct, which CNA
denies, its liability is limited to a single occurrence limit per policy or per
year, and in the alternative, a proper allocation of losses would substantially
limit its exposure under the 1969-1975 policies to asbestos claims. These and
other issues are being litigated in Continental Insurance Co., et al. v.
Honeywell International Inc., No. MRS-L-1523-00 (Morris County, New Jersey).

Policyholders have also initiated litigation directly against CNA and other
insurers in four jurisdictions: Ohio, Texas, West Virginia and Montana. In the
Ohio action, plaintiffs allege the defendants negligently performed duties
undertaken to protect the public from the effects of asbestos (Varner v. Ford
Motor Co., et al., (Cuyahoga County, Ohio)). Similar lawsuits have also been
filed in Texas against CNA, and other insurers and non-insurer corporate
defendants asserting liability for failing to warn of the dangers of asbestos
(Boson v. Union Carbide Corp., et al., (District Court of Nueces County,
Texas)). Many of the Texas claims have been dismissed as time-barred by the
applicable statute of limitations. In other claims, the Texas court recently
ruled that the carriers did not owe any duty to the plaintiffs or the general
public to advise on the effects of asbestos thereby dismissing these claims.
The time period for filing an appeal of this ruling has not expired and it
remains uncertain whether the plaintiffs will continue to pursue their causes
of action.

CNA has been named in Adams v.
Aetna, Inc., et al., (Circuit Court of Kanhwha
County, West Virginia), a purported class action against CNA and other
insurers, alleging that the defendants violated West Virginias Unfair Trade
Practices Act in handling and resolving asbestos claims against their
policyholders. A direct action has also been filed in Montana (Pennock, et al.
v. Maryland Casualty, et al., First Judicial District Court of Lewis & Clark
County, Montana) by
eight individual plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace))
and their spouses against CNA, Maryland Casualty and

88



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

the State of Montana. This action alleges that CNA failed to fulfill its
obligations as W.R. Graces Workers Compensation carrier because of the alleged
negligent failure of CNA to warn of or otherwise protect W.R. Grace employees
from the dangers of asbestos at a W.R. Grace vermiculite mining facility in
Libby, Montana. This action is currently stayed as to CNA because of W.R.
Graces pending bankruptcy. On July 23, 2003, the stay of similar direct
action litigation against Maryland Casualty was lifted by the District Court as
to Maryland Casualty. Maryland Casualty and W.R. Grace have appealed the
District Courts decision to the Third Circuit Court of Appeals. The stay of
the litigation may also be lifted as to CNA.

CNA is vigorously defending these and other cases and believes that it has
meritorious defenses to the claims asserted. However, there are numerous
factual and legal issues to be resolved in connection with these claims, and it
is extremely difficult to predict the outcome or ultimate financial exposure
represented by these matters. Adverse developments with respect to any of
these matters could have a material adverse effect on CNAs business, insurer
financial strength and debt ratings and equity.

As a result of the uncertainties and complexities involved, reserves for
asbestos claims cannot be estimated with traditional actuarial techniques that
rely on historical accident year loss development factors. In establishing
asbestos reserves, CNA evaluates the exposure presented by each insured. As
part of this evaluation, CNA considers the available insurance coverage; limits
and deductibles; the potential role of other insurance, particularly underlying
coverage below any CNA excess liability policies; and applicable coverage
defenses, including asbestos exclusions. Estimation of asbestos-related claim
and claim adjustment expense reserves involves a high degree of judgment on the
part of management and consideration of many complex factors, including:



| |  |  | inconsistency of court decisions, jury attitudes and future court decisions
| | - |  | ---------------------------------------------------------------------------



| |  |  | specific policy provisions
| | - |  | --------------------------



| |  |  | allocation of liability among insurers and insureds
| | - |  | ---------------------------------------------------



| |  |  | missing policies and proof of coverage
| | - |  | --------------------------------------



| |  |  | the proliferation of bankruptcy proceedings and attendant uncertainties
| | - |  | -----------------------------------------------------------------------



| |  |  | novel theories asserted by policyholders and their counsel
| | - |  | ----------------------------------------------------------



| |  |  | 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
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | volatility in claim numbers and settlement demands
| | - |  | --------------------------------------------------



| |  |  | increases in the number of non-impaired claimants and the extent to
which they can be precluded from making claims
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the efforts by insureds to obtain coverage not subject to aggregate
limits
| | - |  | --------------------------------------------------------------------------

89



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



| |  |  | long latency period between asbestos exposure and disease
manifestation and the resulting potential for involvement of multiple
policy periods for individual claims
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | medical inflation trends
| | - |  | ------------------------



| |  |  | the mix of asbestos-related diseases presented and
| | - |  | --------------------------------------------------



| |  |  | the ability to recover reinsurance including the impact, if any, of
restructured operations of Lloyds of London into Equitas Limited.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

The Company is also monitoring possible legislative reforms, including the
possible creation of a national privately financed trust, which if established
and approved through federal legislation, could replace litigation of asbestos
claims with payments to claimants from the trust. It is uncertain at the
present time whether such a trust will be created or, if it is, what will be
the terms and conditions of its establishment or its impact on the Company.

As of September 30, 2003 and December 31, 2002, CNA carried approximately
$1,787 million and $1,246 million of claim and claim adjustment expense
reserves, net of reinsurance recoverables, for reported and unreported
asbestos-related claims. There was $642 million in asbestos-related net claim
and claim adjustment expense prior year unfavorable reserve development for the
three and nine months ended September 30, 2003. The Company paid
asbestos-related claims, net of reinsurance, of $101 million for the nine
months ended September 30, 2003 and had net reinsurance recoveries of $12
million for the nine months ended September 30, 2002.

90



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

INVESTMENTS

The significant components of net investment income are presented in the
following table.

Net Investment Income

|                                              |  |              |      |             |  |      |     |      |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | ------------ | ---- | ----------- |  | ---- | --- | ---- |  | - | ----- | - |  | - | ----- | -
|                                              |  | Three Months |      | Nine Months
|                                              |  |              |      |            
|Period ended September 30                     |  | 2003         |      | 2002        |  | 2003 |     | 2002
|                                              |  |              |      |             |  |      |     |     
|(In millions)                                 |  |              |      |             |  |      |     |      |  |   |       |   |  |   |       |  
|Fixed maturity securities                     |  | $            | 412  |             |  | $    | 461 |      |  | $ | 1,254 |   |  | $ | 1,404 |  
|Short term investments                        |  |              | 14   |             |  |      | 17  |      |  |   | 46    |   |  |   | 44    |  
|Limited partnerships                          |  |              | 61   |             |  |      | (72 | )    |  |   | 159   |   |  |   | (28   | )
|Equity securities                             |  |              | 4    |             |  |      | 10  |      |  |   | 13    |   |  |   | 25    |  
|Interest on funds withheld and other deposits |  |              | (148 | )           |  |      | (53 | )    |  |   | (288  | ) |  |   | (168  | )
|Other                                         |  |              | 20   |             |  |      | 22  |      |  |   | 63    |   |  |   | 62    |  
|                                              |  |              |      |             |  |      |     |      |  |   |       |   |  |   |       |  
|Gross investment income                       |  |              | 363  |             |  |      | 385 |      |  |   | 1,247 |   |  |   | 1,339 |  
|Investment expense                            |  |              | (11  | )           |  |      | (21 | )    |  |   | (36   | ) |  |   | (47   | )
|                                              |  |              |      |             |  |      |     |      |  |   |       |   |  |   |       |  
|Net investment income                         |  | $            | 352  |             |  | $    | 364 |      |  | $ | 1,211 |   |  | $ | 1,292 |  
|                                              |  |              |      |             |  |      |     |      |  |   |       |   |  |   |       |  

The Company experienced lower net investment income for the three and nine
months ended September 30, 2003 as compared with the same periods in 2002.
These decreases were due primarily to lower investment yields on fixed maturity
securities and increased interest costs on funds withheld and other deposits.
The interest costs on funds withheld and other deposits increased principally
as a result of additional cessions to the corporate aggregate reinsurance and
other treaties due to adverse net prior year development recorded in both the
three and nine months ended September 30, 2003. These decreases were partially
offset by increased limited partnership income. Limited partnership income
increased as a result of improving equity markets and favorable conditions in
the fixed income markets. See the Reinsurance section of this MD&A for further
discussion of the Companys aggregate reinsurance treaties.

The bond segment of the investment portfolio yielded 5.3% and 6.0% for the nine
months ended September 30, 2003 and 2002.

The components of net realized investment results are presented in the
following table.

Net Realized Investment Gains (Losses)

|                                                                |                                   |      |              |      |             |      |     |      |   |   |      |     |   |   |      |      |  
|--------------------------------------------------------------- | --------------------------------- | ---- | ------------ | ---- | ----------- | ---- | --- | ---- | - | - | ---- | --- | - | - | ---- | ---- | -
|                                                                |                                   |      | Three Months |      | Nine Months
|                                                                |                                   |      |              |      |            
|Period ended September 30                                       |                                   | 2003 |              | 2002 |             | 2003 |     | 2002
|                                                                |                                   |      |              |      |             |      |     |     
|(In millions)                                                   |                                   |      |              |      |             |      |     |      |   |   |      |     |   |   |      |     
|Realized investment gains (losses):                             |                                   |      |              |      |             |      |     |      |   |   |      |     |   |   |      |     
|Fixed maturity securities:                                      |                                   |      |              |      |             |      |     |      |   |   |      |     |   |   |      |     
|                                                                | U.S. Government bonds             |      | $            | (145 | )           |      | $   | 214  |   |   | $    | (70 | ) |   | $    | 263  |  
|                                                                | Corporate and other taxable bonds |      |              | 177  |             |      |     | (165 | ) |   |      | 303 |   |   |      | (414 | )
|                                                                | Tax-exempt bonds                  |      |              | (16  | )           |      |     | 41   |   |   |      | 79  |   |   |      | 57   |  
|                                                                | Asset-backed bonds                |      |              | 17   |             |      |     | 14   |   |   |      | 58  |   |   |      | 42   |  
|                                                                | Redeemable preferred stock        |      |              | (4   | )           |      |     | (13  | ) |   |      | (14 | ) |   |      | (28  | )
|                                                                |                                   |      |              |      |             |      |     |      |   |   |      |     |   |   |      |     
|Total fixed maturity securities                                 |                                   |      | 29           |      |             |      | 91  |      |   |   | 356  |     |   |   | (80  | )   
|Equity securities                                               |                                   |      | 31           |      |             |      | (17 | )    |   |   | 89   |     |   |   | 32   |     
|Derivative securities                                           |                                   |      | 85           |      |             |      | (44 | )    |   |   | 8    |     |   |   | (78  | )   
|Short term investments                                          |                                   |      | 3            |      |             |      |    |      |   |   | 13   |     |   |   | 10   |     
|Other invested assets                                           |                                   |      | 18           |      |             |      | 1   |      |   |   | 1    |     |   |   | (13  | )   
|                                                                |                                   |      |              |      |             |      |     |      |   |   |      |     |   |   |      |     
|Total realized investment gains (losses)                        |                                   |      | 166          |      |             |      | 31  |      |   |   | 467  |     |   |   | (129 | )   
|Allocated to participating policyholders and minority interest |                                   |      | (2           | )    |             |      | (7  | )    |   |   | (1   | )   |   |   | (8   | )   
|Income tax (expense) benefit                                    |                                   |      | (59          | )    |             |      | (8  | )    |   |   | (161 | )   |   |   | 50   |     
|                                                                |                                   |      |              |      |             |      |     |      |   |   |      |     |   |   |      |     
|Net realized investment gains (losses)                          |                                   | $    | 105          |      |             | $    | 16  |      |   | $ | 305  |     |   | $ | (87  | )   
|                                                                |                                   |      |              |      |             |      |     |      |   |   |      |     |   |   |      |     

91



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##### Table of Contents



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

Net realized investment results increased $89 million after-tax for the three
months ended September 30, 2003 as compared with the same period in 2002. This
change was due primarily to a reduction in impairment losses for
other-than-temporary declines in market values for fixed maturity and equity
securities and increased realized gains related to derivative securities.
Partially offsetting these increases were decreased realized results from the
sale of fixed maturity securities. Impairment losses of $10 million after-tax
were recorded primarily in the forestry sector for the three months ended
September 30, 2003. Impairment losses of $144 million after-tax were recorded
primarily in the communications sector for the same period in 2002.

Net realized investment results increased $392 million after-tax for the nine
months ended September 30, 2003 as compared with the same period in 2002. This
change was due primarily to a reduction in impairment losses for
other-than-temporary declines in market values for fixed maturity and equity
securities and increased realized results related to fixed maturity and
derivative securities. Impairment losses of $196 million after-tax were
recorded across several sectors, including the airline, healthcare and energy
industries, for the nine months ended September 30, 2003. Impairment losses of
$346 million after-tax were recorded primarily in the communications sector for
the same period in 2002.

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

CNA classifies its fixed maturity securities (bonds and redeemable preferred
stocks) and its equity securities as available-for-sale, and as such, they are
carried at fair value. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity,
which is included in net investment income. Changes in fair value are reported
as a component of other comprehensive income.

The following table provides further detail of gross realized gains and gross
realized losses on fixed maturity securities and equity securities.

Realized Gains and Losses

|                                                                                |                                                          |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |     |     | 
|------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------- | -- | ------------ | --- | ----------- | -- | ---- | --- | - | --- | --- | ----- | - | --- | --- | --- | 
|                                                                                |                                                          |                       |    | Three Months |     | Nine Months
|                                                                                |                                                          |                       |    |              |     |            
|Period ended September 30                                                       |                                                          | 2003                  |    | 2002         |     | 2003        |    | 2002
|                                                                                |                                                          |                       |    |              |     |             |    |     
|(In millions)                                                                   |                                                          |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |    
|Net realized gains (losses) on fixed maturity securities
and equity securities: |                                                          |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |    
|                                                                                | Fixed maturity securities:                               |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |     |    
|                                                                                |                                                          | Gross realized gains  |    | $            | 361 |             |    | $    | 368 |   |     | $   | 1,056 |   |     | $   | 725 | 
|                                                                                |                                                          | Gross realized losses |    |              | 332 |             |    |      | 277 |   |     |     | 700   |   |     |     | 805 | 
|                                                                                |                                                          |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |    
|                                                                                | Net realized gains (losses) on fixed maturity securities |                       |    | 29           |     |             |    | 91   |     |   |     | 356 |       |   |     | (80 | )  
|                                                                                | Equity securities:                                       |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |     |    
|                                                                                |                                                          | Gross realized gains  |    |              | 43  |             |    |      | 109 |   |     |     | 113   |   |     |     | 242 | 
|                                                                                |                                                          | Gross realized losses |    |              | 12  |             |    |      | 126 |   |     |     | 24    |   |     |     | 210 | 
|                                                                                |                                                          |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |    
|                                                                                | Net realized gains (losses) on equity securities         |                       |    | 31           |     |             |    | (17  | )   |   |     | 89  |       |   |     | 32  |    
|                                                                                |                                                          |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |    
|Net realized gains (losses) on fixed maturity and equity
securities             |                                                          | $                     | 60 |              |     | $           | 74 |      |     | $ | 445 |     |       | $ | (48 | )  
|                                                                                |                                                          |                       |    |              |     |             |    |      |     |   |     |     |       |   |     |    

92



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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 provides details of the largest realized losses from sales
of securities aggregated by issuer for the nine months ended September 30,
2003, including: the fair value of the securities at sales date, the amount of
the loss recorded and the period of time that the security had been in an
unrealized loss position prior to sale. The period of time that the security
had been in an unrealized loss position prior to sale can vary due to the
timing of individual security purchases. Also footnoted is a narrative
providing the industry sector along with the facts and circumstances giving
rise to the loss.

Largest Realized Losses from Securities Sold at a Loss

|                                                                                                                                                                   |  |          |       |         |  |            |     |            |  |               |     | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ----- | ------- |  | ---------- | --- | ---------- |  | ------------- | --- | 
|                                                                                                                                                                   |  | Fair     |       |         |  |            |     | Months in 
|                                                                                                                                                                   |  | Value at |       |         |  |            |     | Unrealized
|                                                                                                                                                                   |  | Date of  |       | Loss    |  | Loss Prior
|Issuer Description and Discussion                                                                                                                                  |  | Sale     |       | On Sale |  | To Sale   
|                                                                                                                                                                   |  |          |       |         |  |           
|(In millions)                                                                                                                                                      |  |          |       |         |  |            |     |            |  |               |     | 
|Various securities issued by the United States Treasury (a)                                                                                                        |  | $        | 5,364 |         |  | $          | 157 |            |  |               | 0-6 | 
|A food retailer of supermarkets and discount stores in the
U.S. and Europe. Also supplies food to institutional
foodservice companies (b)                          |  |          | 34    |         |  |            | 12  |            |  |               | 0-6 | 
|A company which manufactures rubber and rubber-related
chemicals. They also manufacture and distribute tires (c)                                                   |  |          | 23    |         |  |            | 9   |            |  | Various, 0-24
|A company which provides wholesale financing and capital
loans to auto retail dealerships and vehicle leasing
companies (d)                                        |  |          | 120   |         |  |            | 8   |            |  | Various, 0-12
|Issues and sells mortgage backed securities. Issuer was
chartered by United States Congress to facilitate housing
ownership for low to middle income Americans (e) |  |          | 841   |         |  |            | 7   |            |  |               | 0-6 | 
|A company which provides and operates a network of
in-patient and outpatient surgery and rehabilitation
facilities (f)                                             |  |          | 18    |         |  |            | 7   |            |  | Various, 0-12
|                                                                                                                                                                   |  |          |       |         |  |            |     |            |  |               |     | 
|Total                                                                                                                                                              |  | $        | 6,400 |         |  | $          | 200 |            |  |               |     | 
|                                                                                                                                                                   |  |          |       |         |  |            |     |            |  |               |     | 



---

|(a) |  | Volatility of interest rates prompted movement to other asset classes.                                                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The issuer is under investigation for accounting fraud. Losses relate to
trades that took place to reduce issuer exposure.                                                          
|   
|(c) |  | These losses relate to trades that took place to reduce issuer exposure.                                                                                                            
|   
|(d) |  | The issuers financial condition is in good standing and is investment
grade quality. A decision was made to reduce the portfolios overall
exposure to this issuer.                
|   
|(e) |  | Volatility of interest rates prompted movement to other asset classes.                                                                                                              
|   
|(f) |  | The company is under investigation for accounting fraud and various
security issues relating to management. These losses relate to trades
that took place to reduce issuer exposure.

Invested assets are exposed to various risks, such as interest rate, market and
credit risk. Due to the level of risk associated with certain invested assets
and the level of uncertainty related to changes in the value of these assets,
it is possible that changes in risks in the near term could have an adverse
material impact on the Companys results of operations or equity.

A significant judgment in the valuation of investments is the determination of
when an other-than-temporary decline in value has occurred. The Company
follows a consistent and systematic process for impairing securities that
sustain other-than-temporary declines in value. The Company has established a
committee responsible for the impairment process. This committee, referred to
as the Impairment

93



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##### Table of Contents



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

Committee, is made up of three officers appointed by the Companys Chief
Financial Officer. The Impairment Committee is responsible for analyzing watch
list securities on at least a quarterly basis. The watch list includes
individual securities that fall below certain thresholds or that exhibit
evidence of impairment indicators including, but not limited to, a significant
adverse change in the financial condition and near term prospects of the
investment or a significant adverse change in legal factors, the business
climate or credit ratings.

When a security is placed on the watch list, it is monitored for further market
value changes and additional news related to the issuers financial condition.
The focus is on objective evidence that may influence the evaluation of
impairment factors.

The decision to impair a security incorporates both quantitative criteria and
qualitative information. The Impairment Committee considers a number of
factors including, but not limited to: (1) the length of time and the extent
to which the market value has been less than book value, (2) the financial
condition and near term prospects of the issuer, (3) the intent and ability of
the Company to retain its investment for a period of time sufficient to allow
for any anticipated recovery in value, (4) whether the debtor is current on
interest and principal payments and (5) general market conditions and industry
or sector specific factors. The Impairment Committees decision to impair a
security is primarily based on whether the securitys fair value is likely to
remain significantly below its book value in light of all of the factors
considered above. For securities that are impaired, the security is written
down to fair value and the resulting losses are recognized in realized
gains/losses in the Condensed Consolidated Statements of Operations.

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

The following table details the carrying value of CNAs general account
investment portfolios.

Carrying Value of Investments

|                                  |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |   |    |  
|--------------------------------- | -------------------------- | --------------------------------------------------------------- | ------ | ------------- | ------ | - | --- | ---- | -- | ------------ | ------ | --- | ------ |  | --- | - | -- | -
|                                  |                            |                                                                 |        | September 30, |        |   |     |      |    | December 31, |        |     |        | 
|                                  |                            |                                                                 |        | 2003          |        | % |     | 2002 |    | %           
|                                  |                            |                                                                 |        |               |        |   |     |      |    |             
|(In millions)                     |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |  
|General account investments:      |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |  
|                                  | Fixed maturity securities: |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |   |   
|                                  |                            | U.S. Treasury securities and obligations of government agencies |        | $             | 1,628  |   |     |      | 4  | %            |        | $   | 1,376  |  |     |   | 4  | %
|                                  |                            | Asset-backed securities                                         |        |               | 7,469  |   |     |      | 20 |              |        |     | 8,208  |  |     |   | 23 |  
|                                  |                            | States, municipalities and political subdivisions  tax-exempt  |        |               | 7,848  |   |     |      | 21 |              |        |     | 5,074  |  |     |   | 14 |  
|                                  |                            | Corporate securities                                            |        |               | 7,589  |   |     |      | 20 |              |        |     | 7,591  |  |     |   | 22 |  
|                                  |                            | Other debt securities                                           |        |               | 3,902  |   |     |      | 10 |              |        |     | 3,827  |  |     |   | 11 |  
|                                  |                            | Redeemable preferred stock                                      |        |               | 118    |   |     |      |   |              |        |     | 69     |  |     |   |   |  
|                                  |                            | Options embedded in convertible debt securities                 |        |               | 193    |   |     |      | 1  |              |        |     | 130    |  |     |   |   |  
|                                  |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |  
|                                  |                            | Total fixed maturity securities                                 |        |               | 28,747 |   |     |      | 76 |              |        |     | 26,275 |  |     |   | 74 |  
|                                  |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |  
|                                  | Equity securities:         |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |   |   
|                                  |                            | Common stock                                                    |        |               | 440    |   |     |      | 1  |              |        |     | 461    |  |     |   | 1  |  
|                                  |                            | Non-redeemable preferred stock                                  |        |               | 135    |   |     |      |   |              |        |     | 205    |  |     |   | 1  |  
|                                  |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |  
|                                  | Total equity securities    |                                                                 |        | 575           |        |   |     | 1    |    |              |        | 666 |        |  |     | 2 |   
|                                  |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |  
|                                  |                            | Short-term investments                                          |        |               | 7,044  |   |     |      | 19 |              |        |     | 7,008  |  |     |   | 20 |  
|                                  |                            | Limited partnerships                                            |        |               | 1,213  |   |     |      | 3  |              |        |     | 1,060  |  |     |   | 3  |  
|                                  |                            | Other investments                                               |        |               | 223    |   |     |      | 1  |              |        |     | 284    |  |     |   | 1  |  
|                                  |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |  
|Total general account investments |                            | $                                                               | 37,802 |               |        |   | 100 | %    |    | $            | 35,293 |     |        |  | 100 | %
|                                  |                            |                                                                 |        |               |        |   |     |      |    |              |        |     |        |  |     |  

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

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

Investments in the general account had a total net unrealized gain of $1,528
million at September 30, 2003 compared with $887 million at December 31, 2002.
The net unrealized position at September 30, 2003 was composed of a net
unrealized gain of $1,313 million for fixed maturities and a net unrealized
gain of $215 million for equity securities. The net unrealized position at
December 31, 2002 was composed of a net unrealized gain of $742 million for
fixed maturities, a net unrealized gain of $147 million for equity securities
and a net unrealized loss of $2 million for short-term securities.

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

|                                           |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |     | 
|------------------------------------------ | --------------------------------------------------------------- | ---- | --------- | ----- | ---------- | ------ | ---------- | ---- | ---------- | - | --- | -- |  | - | ----- | --- | 
|                                           |                                                                 |      | Cost or   |       | Gross      |        | Gross      |      | Net       
|                                           |                                                                 |      | Amortized |       | Unrealized |        | Unrealized |      | Unrealized
|September 30, 2003                         |                                                                 | Cost |           | Gains |            | Losses |            | Gain
|                                           |                                                                 |      |           |       |            |        |            |     
|(In millions)                              |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |    
|Fixed maturity securities:                 |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |    
|                                           | U.S. Treasury securities and obligations of government agencies |      | $         | 1,531 |            |        | $          | 104  |            |   | $   | 7  |  |   | $     | 97  | 
|                                           | Asset-backed securities                                         |      |           | 7,281 |            |        |            | 216  |            |   |     | 28 |  |   |       | 188 | 
|                                           | States, municipalities and political subdivisions  tax-exempt  |      |           | 7,732 |            |        |            | 170  |            |   |     | 54 |  |   |       | 116 | 
|                                           | Corporate securities                                            |      |           | 7,065 |            |        |            | 588  |            |   |     | 64 |  |   |       | 524 | 
|                                           | Other debt securities                                           |      |           | 3,520 |            |        |            | 405  |            |   |     | 23 |  |   |       | 382 | 
|                                           | Redeemable preferred stock                                      |      |           | 112   |            |        |            | 7    |            |   |     | 1  |  |   |       | 6   | 
|                                           | Options embedded in convertible debt securities                 |      |           | 193   |            |        |            |     |            |   |     |   |  |   |       |    | 
|                                           |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |    
|Total fixed maturity securities            |                                                                 |      | 27,434    |       |            |        | 1,490      |      |            |   | 177 |    |  |   | 1,313 |    
|                                           |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |    
|Equity securities:                         |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |    
|                                           | Common stock                                                    |      |           | 238   |            |        |            | 207  |            |   |     | 5  |  |   |       | 202 | 
|                                           | Non-redeemable preferred stock                                  |      |           | 122   |            |        |            | 15   |            |   |     | 2  |  |   |       | 13  | 
|                                           |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |    
|Total equity securities                    |                                                                 |      | 360       |       |            |        | 222        |      |            |   | 7   |    |  |   | 215   |    
|                                           |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |    
|Total fixed maturity and equity securities |                                                                 | $    | 27,794    |       |            | $      | 1,712      |      |            | $ | 184 |    |  | $ | 1,528 |    
|                                           |                                                                 |      |           |       |            |        |            |      |            |   |     |    |  |   |       |    

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

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

|                                           |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |     |  
|------------------------------------------ | --------------------------------------------------------------- | ---- | --------- | ----- | ---------- | ------ | ---------- | ----------- | ---------- | - | --- | --- |  | - | --- | --- | -
|                                           |                                                                 |      | Cost or   |       | Gross      |        | Gross      |             | Net       
|                                           |                                                                 |      | Amortized |       | Unrealized |        | Unrealized |             | Unrealized
|December 31, 2002                          |                                                                 | Cost |           | Gains |            | Losses |            | Gain/(Loss)
|                                           |                                                                 |      |           |       |            |        |            |            
|(In millions)                              |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |    
|Fixed maturity securities:                 |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |    
|                                           | U.S. Treasury securities and obligations of government agencies |      | $         | 1,266 |            |        | $          | 114         |            |   | $   | 4   |  |   | $   | 110 |  
|                                           | Asset-backed securities                                         |      |           | 7,888 |            |        |            | 336         |            |   |     | 16  |  |   |     | 320 |  
|                                           | States, municipalities and political subdivisions  tax-exempt  |      |           | 4,966 |            |        |            | 151         |            |   |     | 43  |  |   |     | 108 |  
|                                           | Corporate securities                                            |      |           | 7,439 |            |        |            | 487         |            |   |     | 335 |  |   |     | 152 |  
|                                           | Other debt securities                                           |      |           | 3,780 |            |        |            | 284         |            |   |     | 237 |  |   |     | 47  |  
|                                           | Redeemable preferred stock                                      |      |           | 64    |            |        |            | 5           |            |   |     |    |  |   |     | 5   |  
|                                           | Options embedded in convertible debt securities                 |      |           | 130   |            |        |            |            |            |   |     |    |  |   |     |    |  
|                                           |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |    
|Total fixed maturity securities            |                                                                 |      | 25,533    |       |            |        | 1,377      |             |            |   | 635 |     |  |   | 742 |    
|                                           |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |    
|Equity securities:                         |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |    
|                                           | Common stock                                                    |      |           | 310   |            |        |            | 166         |            |   |     | 15  |  |   |     | 151 |  
|                                           | Non-redeemable preferred stock                                  |      |           | 209   |            |        |            | 3           |            |   |     | 7   |  |   |     | (4  | )
|                                           |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |    
|Total equity securities                    |                                                                 |      | 519       |       |            |        | 169        |             |            |   | 22  |     |  |   | 147 |    
|                                           |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |    
|Total fixed maturity and equity securities |                                                                 | $    | 26,052    |       |            | $      | 1,546      |             |            | $ | 657 |     |  | $ | 889 |    
|                                           |                                                                 |      |           |       |            |        |            |             |            |   |     |     |  |   |     |    

The Companys investment policies for the general account 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.

At September 30, 2003, the carrying value of the general account fixed
maturities was $28,747 million, representing 76% of the total investment
portfolio. The net unrealized gain related to this fixed maturity portfolio
was $1,313 million, comprised of $1,490 million in gross unrealized gains and
$177 million in gross unrealized losses. Corporate bonds represented 36%,
municipal securities represented 31%, other debt securities, which include
public utility and foreign government bonds, represented 13%, and all other
fixed maturity securities represented 20% of the gross unrealized losses.
Within corporate bonds, the largest industry sectors were consumer
cyclical/non-cyclical and financial, which represented 51% and 21% of the gross
unrealized losses. Gross unrealized losses in any single issuer were less than
0.1% of the carrying value of the total general account fixed maturity
portfolio.

If the deterioration for these holdings continues in future periods and the
Company continues to hold these securities, the Company is likely to have
additional impairments in the future.

The following table provides the composition of fixed maturity securities with
an unrealized loss at September 30, 2003 in relation to the total of all fixed
maturity securities with an unrealized loss by contractual maturities.

Contractual Maturity

|                                       |  |            |     |            |  |  |     |  
|-------------------------------------- |  | ---------- | --- | ---------- |  |  | --- | -
|                                       |  | Percent of |     | Percent of
|                                       |  | Market     |     | Unrealized
|                                       |  | Value      |     | Loss      
|                                       |  |            |     |           
|Due in one year or less                |  |            | 1   | %          |  |  | 1   | %
|Due after one year through five years  |  |            | 9   |            |  |  | 15  |  
|Due after five years through ten years |  |            | 17  |            |  |  | 17  |  
|Due after ten years                    |  |            | 49  |            |  |  | 51  |  
|Asset-backed securities                |  |            | 24  |            |  |  | 16  |  
|                                       |  |            |     |            |  |  |     |  
|Total                                  |  |            | 100 | %          |  |  | 100 | %
|                                       |  |            |     |            |  |  |     |  

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

The following tables summarize, for fixed maturity and equity securities in an
unrealized loss position at September 30, 2003 and December 31, 2002, the
aggregate fair value and gross unrealized loss by length of time, those
securities have been continuously in an unrealized loss position.

Gross Unrealized Loss Aging

|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |     |     | 
|------------------------------------------ | -------------------------- | ---------------------- | ----- | ------------------ | ----- | ----------------- | --- | ---------- | --- | ---------- | ----- | ----- | ----- | ----- | --- | --- | --- | 
|                                           |                            |                        |       | September 30, 2003 |       | December 31, 2002
|                                           |                            |                        |       |                    |       |                  
|                                           |                            |                        |       |                    |       |                   |     | Gross      |     |            |       |       |       | Gross
|                                           |                            |                        |       | Estimated          |       | Unrealized        |     | Estimated  |     | Unrealized
|                                           |                            |                        |       | Fair Value         |       | Loss              |     | Fair Value |     | Loss      
|                                           |                            |                        |       |                    |       |                   |     |            |     |           
|(In millions)                              |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|Fixed maturity securities:                 |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|                                           | Investment grade:          |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |     |    
|                                           |                            | 0-6 months             |       | $                  | 4,863 |                   |     | $          | 103 |            |       | $     | 2,632 |       |     | $   | 100 | 
|                                           |                            | 7-12 months            |       |                    | 51    |                   |     |            | 4   |            |       |       | 361   |       |     |     | 30  | 
|                                           |                            | 13-24 months           |       |                    | 153   |                   |     |            | 10  |            |       |       | 163   |       |     |     | 21  | 
|                                           |                            | Greater than 24 months |       |                    | 45    |                   |     |            | 5   |            |       |       | 172   |       |     |     | 20  | 
|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|                                           | Total investment grade     |                        |       | 5,112              |       |                   |     | 122        |     |            |       | 3,328 |       |       |     | 171 |    
|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|                                           | Non-investment grade:      |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |     |    
|                                           |                            | 0-6 months             |       |                    | 596   |                   |     |            | 19  |            |       |       | 892   |       |     |     | 119 | 
|                                           |                            | 7-12 months            |       |                    | 56    |                   |     |            | 4   |            |       |       | 473   |       |     |     | 115 | 
|                                           |                            | 13-24 months           |       |                    | 211   |                   |     |            | 18  |            |       |       | 458   |       |     |     | 157 | 
|                                           |                            | Greater than 24 months |       |                    | 115   |                   |     |            | 14  |            |       |       | 169   |       |     |     | 73  | 
|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|                                           | Total non-investment grade |                        |       | 978                |       |                   |     | 55         |     |            |       | 1,992 |       |       |     | 464 |    
|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|Total fixed maturity securities            |                            |                        | 6,090 |                    |       |                   | 177 |            |     |            | 5,320 |       |       |       | 635 |    
|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|Equity securities:                         |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|                                           | 0-6 months                 |                        |       | 40                 |       |                   |     | 3          |     |            |       | 119   |       |       |     | 13  |    
|                                           | 7-12 months                |                        |       | 7                  |       |                   |     | 2          |     |            |       | 79    |       |       |     | 9   |    
|                                           | 13-24 months               |                        |       | 11                 |       |                   |     | 2          |     |            |       | 4     |       |       |     |    |    
|                                           | Greater than 24 months     |                        |       | 7                  |       |                   |     |           |     |            |       | 4     |       |       |     |    |    
|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|Total equity securities                    |                            |                        | 65    |                    |       |                   | 7   |            |     |            | 206   |       |       |       | 22  |    
|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    
|Total fixed maturity and equity securities |                            | $                      | 6,155 |                    |       | $                 | 184 |            |     | $          | 5,526 |       |       | $     | 657 |    
|                                           |                            |                        |       |                    |       |                   |     |            |     |            |       |       |       |       |     |    

The Companys non-investment grade fixed maturity securities held as of
September 30, 2003 that were in a gross unrealized loss position had a fair
value of $978 million. As discussed previously, a significant judgment in the
valuation of investments is the determination of when an other-than-temporary
impairment has occurred. The Companys Impairment Committee analyzes
securities placed on the watch list on at least a quarterly basis. Part of
this analysis is to monitor the length of time and severity of the decline
below book value of the watch list securities. The following tables summarize
the fair value and gross unrealized loss of non-investment grade securities
categorized by the length of time those securities have been in a continuous
unrealized loss position and further categorized by the severity of the
unrealized loss position in 10% increments as of September 30, 2003 and
December 31, 2002.

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

Gross Unrealized Loss Aging for Non-investment Grade Securities

|                           |  |            |     |        |  |                                          |    |        |  |      |    |      |  |   |   |  |  |   |   |  |  |   |    | 
|-------------------------- |  | ---------- | --- | ------ |  | ---------------------------------------- | -- | ------ |  | ---- | -- | ---- |  | - | - |  |  | - | - |  |  | - | -- | 
|                           |  |            |     |        |  | Fair Value as a Percentage of Book Value |    | Gross 
|                           |  | Estimated  |     |        |  | Unrealized                              
|September 30, 2003         |  | Fair Value |     | 90-99% |  | 80-89%                                   |    | 70-79% |  | <70% |    | Loss
|                           |  |            |     |        |  |                                          |    |        |  |      |    |     
|(In millions)              |  |            |     |        |  |                                          |    |        |  |      |    |      |  |   |   |  |  |   |   |  |  |   |    | 
|Fixed maturity securities: |  |            |     |        |  |                                          |    |        |  |      |    |      |  |   |   |  |  |   |   |  |  |   |    | 
|Non-investment grade:      |  |            |     |        |  |                                          |    |        |  |      |    |      |  |   |   |  |  |   |   |  |  |   |    | 
|0-6 months                 |  | $          | 596 |        |  | $                                        | 15 |        |  | $    | 3  |      |  | $ | 1 |  |  | $ | 0 |  |  | $ | 19 | 
|7-12 months                |  |            | 56  |        |  |                                          | 1  |        |  |      | 3  |      |  |   | 0 |  |  |   | 0 |  |  |   | 4  | 
|13-24 months               |  |            | 211 |        |  |                                          | 6  |        |  |      | 12 |      |  |   | 0 |  |  |   | 0 |  |  |   | 18 | 
|Greater than 24 months     |  |            | 115 |        |  |                                          | 1  |        |  |      | 1  |      |  |   | 7 |  |  |   | 5 |  |  |   | 14 | 
|                           |  |            |     |        |  |                                          |    |        |  |      |    |      |  |   |   |  |  |   |   |  |  |   |    | 
|Total non-investment grade |  | $          | 978 |        |  | $                                        | 23 |        |  | $    | 19 |      |  | $ | 8 |  |  | $ | 5 |  |  | $ | 55 | 
|                           |  |            |     |        |  |                                          |    |        |  |      |    |      |  |   |   |  |  |   |   |  |  |   |    | 

Gross Unrealized Loss Aging for Non-investment Grade Securities

|                           |  |            |       |        |  |                                          |    |        |  |      |    |      |  |   |     |  |  |   |     |  |  |   |     | 
|-------------------------- |  | ---------- | ----- | ------ |  | ---------------------------------------- | -- | ------ |  | ---- | -- | ---- |  | - | --- |  |  | - | --- |  |  | - | --- | 
|                           |  |            |       |        |  | Fair Value as a Percentage of Book Value |    | Gross 
|                           |  | Estimated  |       |        |  | Unrealized                              
|December 31, 2002          |  | Fair Value |       | 90-99% |  | 80-89%                                   |    | 70-79% |  | <70% |    | Loss
|                           |  |            |       |        |  |                                          |    |        |  |      |    |     
|(In millions)              |  |            |       |        |  |                                          |    |        |  |      |    |      |  |   |     |  |  |   |     |  |  |   |     | 
|Fixed maturity securities: |  |            |       |        |  |                                          |    |        |  |      |    |      |  |   |     |  |  |   |     |  |  |   |     | 
|Non-investment grade:      |  |            |       |        |  |                                          |    |        |  |      |    |      |  |   |     |  |  |   |     |  |  |   |     | 
|0-6 months                 |  | $          | 892   |        |  | $                                        | 30 |        |  | $    | 28 |      |  | $ | 28  |  |  | $ | 33  |  |  | $ | 119 | 
|7-12 months                |  |            | 473   |        |  |                                          | 9  |        |  |      | 12 |      |  |   | 24  |  |  |   | 70  |  |  |   | 115 | 
|13-24 months               |  |            | 458   |        |  |                                          | 5  |        |  |      | 12 |      |  |   | 50  |  |  |   | 90  |  |  |   | 157 | 
|Greater than 24 months     |  |            | 169   |        |  |                                          | 2  |        |  |      | 6  |      |  |   | 15  |  |  |   | 50  |  |  |   | 73  | 
|                           |  |            |       |        |  |                                          |    |        |  |      |    |      |  |   |     |  |  |   |     |  |  |   |     | 
|Total non-investment grade |  | $          | 1,992 |        |  | $                                        | 46 |        |  | $    | 58 |      |  | $ | 117 |  |  | $ | 243 |  |  | $ | 464 | 
|                           |  |            |       |        |  |                                          |    |        |  |      |    |      |  |   |     |  |  |   |     |  |  |   |     | 

The non-investment grade securities that were in an unrealized loss severity of
less than 70% for greater than 24 months as of September 30, 2003 consisted of
a consumer products retail sector security which represented approximately 3%
of the gross unrealized loss for the total fixed maturity portfolio.

As part of the ongoing impairment monitoring process, the Impairment Committee
has evaluated the facts and circumstances based on available information for
each of the non-investment grade securities and determined that no further
impairments were appropriate at September 30, 2003. This determination was
based on a number of factors that the Impairment Committee regularly considers
including, but not limited to: the issuers ability to meet current and future
interest and principal payments, an evaluation of the issuers financial
condition and near term prospects, the Companys sector outlook and estimates
of the fair value of any underlying collateral. In all cases where a decline
in value is judged to be temporary, the Company had the intent and ability to
hold these securities for a period of time sufficient to recover the book value
of its investment through a recovery in the market value of such securities or
by holding the securities to maturity. In many cases, the securities held are
matched to liabilities as part of ongoing asset/liability duration management.
As such, the Impairment Committee continually assesses its ability to hold
securities for a time sufficient to recover any temporary loss in value or
until maturity. The Company maintains sufficient levels of liquidity so as to
not impact the asset/liability management process.

The Companys equity securities held as of September 30, 2003 that were in a
gross unrealized loss position had a fair value of $65 million. The Companys
Impairment Committee, under the same process

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

as fixed maturity securities, monitors the equity securities for
other-than-temporary declines in value. In all cases where a decline in value
is judged to be temporary, the Company expects to recover the book value of its
investment through a recovery in the market value of the security.

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

The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 89% of which were rated as investment grade at September 30,
2003 and December 31, 2002. The following table summarizes the ratings of
CNAs general account bond portfolio at carrying value.

General Account Bond Ratings

|                                                 |  |               |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|------------------------------------------------ |  | ------------- | ------ | - |  | ---- | --- | ------------ |  | - | ------ |  |  |  | --- | -
|                                                 |  | September 30, |        |   |  |      |     | December 31, |  |   |        | 
|                                                 |  | 2003          |        | % |  | 2002 |     | %           
|                                                 |  |               |        |   |  |      |     |             
|(In millions)                                    |  |               |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|U.S. Government and affiliated agency securities |  | $             | 2,674  |   |  |      | 9   | %            |  | $ | 1,908  |  |  |  | 7   | %
|Other AAA rated                                  |  |               | 12,047 |   |  |      | 42  |              |  |   | 10,856 |  |  |  | 41  |  
|AA and A rated                                   |  |               | 5,880  |   |  |      | 21  |              |  |   | 5,730  |  |  |  | 22  |  
|BBB rated                                        |  |               | 4,921  |   |  |      | 17  |              |  |   | 4,930  |  |  |  | 19  |  
|Below investment-grade                           |  |               | 3,107  |   |  |      | 11  |              |  |   | 2,782  |  |  |  | 11  |  
|                                                 |  |               |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|Total                                            |  | $             | 28,629 |   |  |      | 100 | %            |  | $ | 26,206 |  |  |  | 100 | %
|                                                 |  |               |        |   |  |      |     |              |  |   |        |  |  |  |     |  

At September 30, 2003 and December 31, 2002, approximately 96% and 97% of the
general account portfolio was U.S. Government and affiliated agency securities
or was rated by Standard & Poors (S&P) or Moodys Investors Service (Moodys).
The remaining bonds were rated by other rating agencies or Company management.

Non-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.

The carrying value of non-traded securities at September 30, 2003 was $262
million which represents 0.7% of the Companys total investment portfolio.
These securities were in a net unrealized gain position of $51 million at
September 30, 2003. Of the non-traded securities, 44% are priced by unrelated
third party sources.

The carrying value of non-traded securities at December 31, 2002 was $237
million which represents 0.7% of the Companys total investment portfolio.
These securities were in a net unrealized loss position of $0.4 million at
December 31, 2002. Of the non-traded securities, 78% are priced by unrelated
third party sources.

Included in CNAs general account fixed maturity securities at September 30,
2003 are $7,469 million of asset-backed securities, at fair value, consisting
of approximately 52% in collateralized mortgage obligations (CMOs), 11% in
corporate asset-backed obligations, 14% in U.S. Government agency issued
pass-through certificates and 23% in corporate mortgage-backed pass-through
certificates. The majority of CMOs held are actively traded in liquid markets
and are priced by broker-dealers.

Included in CNAs general account fixed maturity securities at December 31,
2002 are $8,208 million of asset-backed securities, at fair value, consisting
of approximately 67% in collateralized mortgage obligations (CMOs), 11% in
corporate asset-backed obligations, 7% in U.S. Government agency issued
pass-through certificates and 15% in corporate mortgage-backed pass-through
certificates. The majority of CMOs held are actively traded in liquid markets
and are priced by broker-dealers.

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

The carrying value of the components of the general account short-term
investment portfolio is presented in the following table.

Short-term Investments

|                             |  |               |       |              |  |   |       | 
|---------------------------- |  | ------------- | ----- | ------------ |  | - | ----- | 
|                             |  | September 30, |       | December 31,
|                             |  | 2003          |       | 2002        
|                             |  |               |       |             
|(In millions)                |  |               |       |              |  |   |       | 
|Commercial paper             |  | $             | 3,299 |              |  | $ | 1,141 | 
|U.S. Treasury securities     |  |               | 969   |              |  |   | 2,756 | 
|Money market funds           |  |               | 1,400 |              |  |   | 2,161 | 
|Other                        |  |               | 1,376 |              |  |   | 950   | 
|                             |  |               |       |              |  |   |       | 
|Total short-term investments |  | $             | 7,044 |              |  | $ | 7,008 | 
|                             |  |               |       |              |  |   |       | 

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

Most derivatives in separate accounts are held for hedging 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
Group Operations Index 500 guaranteed investment contract product.

LIQUIDITY AND CAPITAL RESOURCES

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

For the nine months ended September 30, 2003, net cash provided by operating
activities was $1,482 million as compared with $806 million for the same period
in 2002. The increase in cash provided by operating activities related
primarily to a decrease in paid claims and
increased net premium collections in 2003 as compared with 2002.

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

For the nine months ended September 30, 2003, net cash used by investing
activities was $1,270 million as compared with net cash used by investing
activities of $635 million for the same period in 2002. Cash flows used for
investing related principally to purchases of fixed maturity securities.

Cash flows from financing activities include proceeds from the issuance of debt
or equity securities, outflows for dividends or repayment of debt and outlays
to reacquire equity instruments.

For the nine months ended September 30, 2003, net cash used by financing
activities was $160 million as compared with $54 million for the same period in
2002. Cash flows used by financing activities were related principally to
repayment of debt.

The Company is closely monitoring the cash flows related to claims and
reinsurance recoverables from the WTC event. It is anticipated that
significant claim payments will be made prior to receipt of the

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

corresponding reinsurance recoverables. As of October 3, 2003, the
Company has paid $546 million in claims and recovered $364 million from
reinsurers.

CNAs initial estimated gross pretax losses for the WTC event were $1,648
million pretax ($1,071 million after-tax) and net pretax losses before the
effect of corporate aggregate reinsurance treaties were $727 million.
Approximately 1%, 60% and 33% of the remaining reinsurance recoverables on the
estimated losses related to the WTC event are from companies with S&P ratings
of AAA, AA or A.

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

The Companys 2002 Form 10-K provides a detailed discussion of the Companys
debt.

During the first quarter of 2003, The Continental Corporation (Continental), a
wholly owned subsidiary, repaid its $128 million, 7.250% Senior Note, due March
1, 2003.

The Company pays a facility fee to the lenders for having funds available for
loans under the credit facility maturing April 30, 2004. The fee varies based
on the long term debt ratings of the Company. At September 30, 2003 and
December 31, 2002, the facility fee was 17.5 basis points.

The Company pays interest on any outstanding debt/borrowings under the facility
based on a rate determined using the long term debt ratings of the Company.
The interest rate is equal to the London Interbank Offering Rate (LIBOR) plus
57.5 basis points. Further, if the Company has outstanding loans greater than
50% of the amounts available under the facility, the Company will also pay a
utilization fee of 12.5 basis points on such loans. At September 30, 2003 and
December 31, 2002, the weighted-average interest rate on the borrowings under
the facility, including facility fees and utilization fees, was 2.1% and 2.3%.

On November 12, 2003 Moodys
downgraded the CNAF senior debt rating to Baa3,
increasing the facility fee from 17.5 basis points to 25.0 basis points. The
applicable interest rate increased from LIBOR plus 57.5 basis points to
LIBOR plus 75.0 basis points. The utilization fee remained unchanged on
the facility at 12.5 basis points.

CNA Surety Corporation (CNA Surety), a 64% owned and consolidated subsidiary of
CNA, pays interest on any outstanding borrowings under its credit agreement
based on an applicable margin determined by the amount of leverage of the
company. The current interest rate on any borrowings under the facility is
LIBOR plus applicable margin. The margin on the term loan was 62.5 basis
points. The margin on the revolving loan was 90.0 basis points. In addition,
CNA Surety pays a facility fee that is currently 35.0 basis points. If the
utilization of the credit facility is greater than 50% of the amount available
under the facility, an additional fee of 5.0 basis points will be incurred. At
September 30, 2003, the aggregate commitment of the term loan component of the
credit agreement was reduced by $5 million to an aggregate commitment of $20
million. Effective January 30, 2003, CNA Surety entered into an interest rate
swap on the term loan portion of its credit agreement, which uses the 3-month
LIBOR to determine the swap increment. As a result, the term loan effective
interest rate on September 30, 2003 was 2.83%. At September 30, 2003, the
weighted-average interest rate on the $50 million of outstanding borrowings
under the credit agreement, including facility fees and utilization fees was
2.7%. At December 31, 2002, the weighted-average interest rate on the $60
million of outstanding borrowings under the credit agreement, including
facility fees and utilization fees was 2.0%. At September 30, 2003 and
December

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

31, 2002, CNA Surety was in compliance with all restrictive debt covenants,
except for the fixed charge coverage ratio for the period ended September 30,
2003. The lenders have waived compliance with this covenant with respect to
the period ending September 30, 2003 and have amended the 2002 Credit Facility
to replace the fixed charge coverage ratio for the next three quarters with a
minimum earnings before interest, income taxes, depreciation and amortization
requirement.

See Note M of the Notes to the Condensed Consolidated Financial Statements for
information related to CNA Suretys related party transactions with CNAF. The
impact of these transactions should be considered when evaluating the Companys
liquidity and capital resources.

See Note I of the Notes to the Condensed Consolidated Financial Statements for
information related to the Companys commitments and contingencies. The impact
of these commitments and contingencies should be considered when evaluating the
Companys liquidity and capital resources.

A summary of the Companys commitments as of September 30, 2003 is presented in
the following table.

Commitments

2007 andSeptember 30, 2003
    
    2003
    
    2004
    
    2005
    
    2006
    
    Beyond
    
    Total(In millions)Debt (a)
    
    $
    249
    
    
    $
    260
    
    
    $
    533
    
    
    $
    250
    
    
    $
    835
    
    
    $
    2,127Capital leases
    
    
    1
    
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    24
    
    
    
    34Lease obligations
    
    
    23
    
    
    
    69
    
    
    
    59
    
    
    
    49
    
    
    
    144
    
    
    
    344Guaranteed payment contracts
    
    
    4
    
    
    
    13
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    22Total
    
    $
    277
    
    
    $
    345
    
    
    $
    600
    
    
    $
    302
    
    
    $
    1,003
    
    
    $
    2,527




---

|(a) |  | Does not include original issue discount of $8 million.
|--- |  | -------------------------------------------------------

Regulatory Matters

The Company has established a plan to reorganize and streamline its U.S.
property and casualty insurance legal entity structure. Once
completed, the plan
will consolidate the Companys U.S. property and casualty insurance risks into
CCC, as well as realign the capital supporting these risks. Under the plan,
the Company will implement in the fourth quarter a 100% quota share reinsurance
agreement, effective January 1, 2003, ceding all of the net
insurance risks of CIC and its 14 affiliated insurance companies (CIC
Group) to CCC. The ownership of the CIC Group will be moved under CCC
in the fourth quarter in order to properly align the insurance risks with the
supporting capital. Additionally, the Company will continue its efforts to
reduce both the number of U.S. property and casualty insurance entities it
maintains and the number of states in which such entities are domiciled. In
order to facilitate the execution of this plan, the Company, CCC and CIC have
agreed to participate in a working group consisting of domestic and other key
states of the National Association of Insurance Commissioners.

In connection with the approval process for aspects of the reorganization plan,
the Company has agreed to undergo a state regulatory financial examination of
CIC as of December 31, 2003, including a review of insurance reserves by an
independent actuarial firm. CCC is also scheduled to undergo its routine state
regulatory financial examination as of December 31, 2003.

The Company has also agreed that any proceeds from the sale of any member of
the CIC pool, net of transaction expenses, will be retained in CIC or one of
its subsidiaries until the dividend stipulation discussed below expires.

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

Dividends from Subsidiaries

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

Dividends from CCC are subject to the insurance holding company laws of the
State of Illinois, the domiciliary state of CCC. Under these laws, ordinary
dividends, or dividends that do not require prior approval of the Illinois
Department of Insurance (the Department), may be paid only from earned surplus,
which is calculated by removing unrealized gains from unassigned surplus. As
of September 30, 2003, CCCs earned surplus is in a positive earned surplus
position, thereby enabling CCC to pay approximately $72 million of dividend
payments during the remainder of 2003 that would not be subject to the
Departments prior approval. The Companys scheduled debt service payments for the fourth
quarter of 2003 are expected to be paid with the Companys available cash.
However, as a result of the fourth quarter 2003 implementation of the 100%
quota share reinsurance agreement, which is effective January 1,2003, whereby
CCC will assume 100% of the CIC Groups net insurance risks, including its 2003
underwriting activity,the Company expects that CCC will be in a negative
earned surplus position as of December 31, 2003. The Company
expects CCC to
receive prior approval for dividends to fund the Companys debt service and principal
repayment in 2004.

As a result of the ownership change of the CIC Group under CCC in the fourth
quarter, no dividends will be paid to CNAF from the CIC Group companies. In
addition, by agreement with the New Hampshire Insurance Department, the CIC
Group will not pay dividends to CCC until after January 1, 2006.

Loews

Loews owned approximately 90% of the outstanding common stock of CNAF
as of September 30, 2003. Loews has been a major source of capital
for the Company to meet its liquidity and capital resource needs.

The Companys capital plan includes substantial support from
Loews. See the Third Quarter 2003 Net Prior Year Development, Results
of Operations and Capital Plan section of this MD&A for
additional detail. The preferred stock will automatically convert into a number of
shares of CNAF common stock determined by dividing $750 million by
the weighted average of the daily trading prices of CNAFs
common stock as reported by Bloomberg Financial, L.P., for the five
trading days from and including November 17, 2003 through November
21, 2003. Conversion will take place upon CNAFs compliance
with, or receipt of a waiver of, the shareholder approval
requirements of the New York Stock Exchange, Inc. which would be
triggered by the issuance of this additional common stock.

Surplus notes issued under the capital plan, if any, will have a
20-year term, bear interest at LIBOR plus 350 basis points, reset
annually, and be mandatorily prepayable in the event of certain
additions to CCCs statutory surplus from business or asset
sales after the issuance of the notes.

Surplus notes are financial instruments with a stated maturity date
and scheduled interest payments, issued by insurance enterprises
with the approval of the insurers domiciliary state. All payments of
interest and principal on these notes are subject to the prior
approval of the Illinois Insurance Department. Surplus notes are
included as surplus for statutory accounting purposes, but are
classified as debt instruments under GAAP, as reflected in the
Condensed Consolidated Balance Sheet.

On December 19, 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Preferred Issue), to Loews.
The terms of the Preferred Issue were approved by a special committee of
independent members of CNAFs Board of Directors. The Preferred Issue is
senior to CNAFs common stock as to the payment of dividends and amounts
payable upon any liquidation, dissolution or winding up. No dividends may be
declared on CNAFs common stock until all cumulative dividends on the Preferred
Issue have been paid.

The Preferred Issue accrues cumulative dividends at an initial rate of 8% per
year, compounded annually. It will be adjusted quarterly to a rate equal to
400 basis points above the ten-year U.S. Treasury rate

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

beginning with the quarterly dividend after the first triggering event to occur
of either (1) an increase by two intermediate ratings levels of the financial
strength rating of CCC from its December 19, 2002 rating by any of A.M. Best,
S&P or Moodys or (2) one year following an increase by one intermediate
ratings level of the financial strength rating of CCC by any one of those
rating agencies. Accrued but unpaid cumulative dividends cannot be paid on the
Preferred Issue unless and until one of the two triggering events described
above has occurred. Beginning with the quarter following an increase of one
intermediate ratings level in CCCs financial strength rating, however, current
(but not accrued cumulative) quarterly dividends can be paid. For the three
months ended September 30, 2003, the Company has $15 million of undeclared but
accumulated dividends. As of September 30, 2003, the cumulative undeclared
dividend was $47 million.

CNA completed a common stock rights offering on September 26, 2001,
successfully raising $1,006 million (40.3 million shares sold at $25 per
share). Loews purchased 38.3 million shares issued in connection with the
rights offering for $957 million.

Ratings

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

The actions that can be taken by rating agencies are changes in ratings or
modifiers. On Review, Credit Watch and Rating Watch are modifiers used
by the ratings agencies to alert those parties relying on the Companys ratings
of the possibility of a rating change in the near term. Modifiers are utilized
when the agencies are uncertain as to the impact of a Company action or
initiative, which could prove to be material to the current rating level.
Modifiers are generally used to indicate a possible change in rating within 90
days.

On November 12, 2003,
in response to CNAs earnings and capital restoration plan
announcement
the rating agencies took various rating actions on CNA. A.M. Best
affirmed the existing CNA insurance financial
strength and debt ratings with a negative outlook. S&P retained
the current rating levels and the existing
Credit Watch with negative implications status across all insurance
financial strength and debt ratings. Moodys affirmed CNAs Property
and Casualty insurance financial strength ratings and lowered CAC /VFL insurance
financial strength ratings to Baa1. Moodys has also affirmed Continentals
debt ratings but has lowered CNAFs debt rating to Baa3. All of
the Moodys ratings have a negative outlook. Fitch has affirmed
CNAs existing insurance financial strength and senior debt
ratings and placed the Property and Casualty companies and debt
ratings on negative outlook. Fitch has also retained
the Rating Watch Negative status on the Life and Group companies.

The Institutional Markets business
unit of group operations which provides investment products to pension plan sponsors and
other institutional customers, is most significantly impacted by the
Moodys downgrade of CAC/VFL, however, the Company does not
expect the downgrade to have a significant impact on its results of
operations or liquidity.

The table below reflects the various group ratings issued by A.M. Best, S&P,
Moodys and Fitch as of November 12, 2003 for the Property and Casualty and
Life and Group companies. The table also includes the ratings for CNAFs
senior debt and Continental senior debt.

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

Insurance Financial Strength Ratings
    
    Debt RatingsProperty & Casualty
    
    Life & Group
    
    CNAF
    
    ContinentalCCC
    
    CIC
    
    
    
    
    
    
    
    
    
    Senior
    
    SeniorGroup
    
    Group
    
    CAC/VFL
    
    CNAGLA
    
    Debt
    
    DebtA.M. Best
    
    
    A
    
    
    
    A
    
    
    
    A
    
    
    
    A
    
    
    bbb
    
    bbb-Fitch
    
    
    A-
    
    
    
    A-
    
    
    
    A+
    
    
    
    A
    
    
    BBB-
    
    BBB-Moodys
    
    
    A3
    
    
    
    A3
    
    
    Baa1*
    
    NR
    
    Baa3
    
    Baa3S&P
    
    
    A-
    
    
    
    A-
    
    
    
    A
    
    
    NR
    
    BBB-
    
    BBB-




---

|  |  | NR = Not Rated                                                                                                                                    
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | All modifiers for the insurance financial strength and debt ratings as
evaluated by S&P are Credit Watch with negative implications.              
| 
|* |  | Continental Assurance Corporation (CAC) and Valley Forge Life Insurance
Company (VFL) are rated separately by Moodys and both have
a Baa1 rating.

If CNAs insurance financial
strength ratings were downgraded, CNAs business and  results of operations
could be materially adversely affected. The severity of the impact on
CNAs business is dependant on the level of downgrade and, for
certain products, which rating agency takes the rating action.
Among the adverse effects in the
event of such downgrading would be the inability to obtain business
from certain major insurance brokers, the inability to sell the
Companys insurance products to certain markets,
and the required collateralization of certain future
payment obligations or reserves.

The Company has entered into several settlement agreements and assumed
reinsurance contracts that require collateralization of future payment
obligations and assumed reserves if the Companys ratings or other specific
criteria fall below certain thresholds. The ratings triggers are generally
more than one level below the Companys November 12, 2003 ratings.

FORWARD-LOOKING STATEMENTS

This quarterly report includes a number of statements which relate to
anticipated future events (forward-looking statements) rather than actual
present conditions or historical events. You can identify forward-looking
statements because generally they include words such as believes, expects,
intends, anticipates, estimates, and similar expressions.
Forward-looking statements in this quarterly report include expected
developments in the Companys insurance business, including losses and loss
reserves for asbestos, environmental pollution and mass tort claims; which are
more uncertain, and therefore more difficult to estimate than loss reserves
respecting traditional property and casualty exposures; the impact of the
insurance reserve reviews being conducted by the Company and an independent
actuarial firm; the ongoing state regulatory examinations of the Companys
primary insurance company subsidiaries, and the Companys responses to the
results of those reviews and examinations; the Companys expectations
concerning its revenues, earnings, expenses and investment activities; expected
cost savings and other results from the Companys expense reduction and
restructuring activities; and the Companys proposed actions in response to
trends in its business.

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



| |  | general economic and business conditions, including inflationary pressures on medical care costs, construction costs and
other economic sectors that increase the severity of claims;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in financial markets such as fluctuations in interest rates, long-term periods of low interest rates, credit
conditions and currency, commodity and stock prices;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the effects of corporate bankruptcies, such as Enron and WorldCom, on surety bond claims, as well as on capital markets,
and on the markets for directors and officers and errors and omissions coverages;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  | changes in foreign or domestic political, social and economic conditions;
|- |  | -------------------------------------------------------------------------



| |  | regulatory initiatives and compliance with governmental regulations, judicial decisions, including interpretation of policy
provisions, decisions regarding coverage and theories of liability, trends in litigation and the outcome of any litigation
involving the Company, and rulings and changes in tax laws and regulations;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | regulatory limitations, impositions and restrictions upon the Company, including the effects of assessments and other
surcharges for guaranty funds and second-injury funds and other mandatory pooling arrangements;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the impact of competitive products, policies and pricing and the competitive environment in which the Company operates,
including changes in the Companys books of business;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | product and policy availability and demand and market responses, including the level of ability to obtain rate increases
and decline or non-renew underpriced accounts, to achieve premium targets and profitability and to realize growth and
retention estimates;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | development of claims and the impact on loss reserves, including changes in claim settlement practices;
|- |  | -------------------------------------------------------------------------------------------------------



| |  | the effectiveness of current initiatives by claims management to reduce loss and expense ratio through more efficacious
claims handling techniques;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the performance of reinsurance companies under reinsurance contracts with the Company;
|- |  | --------------------------------------------------------------------------------------



| |  | results of financing efforts, including the availability of bank credit facilities;
|- |  | -----------------------------------------------------------------------------------



| |  | changes in the Companys composition of operating segments;
|- |  | -----------------------------------------------------------



| |  | weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter
conditions, as well as of natural disasters such as hurricanes and earthquakes;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence of applicable
terrorism legislation on coverages;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the occurrence of epidemics;
|- |  | ----------------------------



| |  | exposure to liabilities due to claims made by insureds and others relating to asbestos remediation and health-based
asbestos impairments, and exposure to liabilities for environmental pollution and mass tort claims;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | whether a national privately financed trust to replace litigation of asbestos claims with payments to claimants from the
trust will be established or approved through federal legislation, or, if established and approved, whether it will contain
funding requirements in excess of the Companys established loss reserves or carried loss reserves;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the sufficiency of the Companys loss reserves and the possibility of future increases in reserves;
|- |  | ---------------------------------------------------------------------------------------------------



| |  | the risks and uncertainties associated with
the Companys loss reserves as outlined in the Reserves 
Estimates and Uncertainties section of this MD&A.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the level of success in integrating acquired
businesses and operations, and in consolidating, or selling  existing ones;
|- |  | ------------------------------------------------------------------------------------------------------------------------



| |  | the possibility of further changes in the Companys ratings by ratings agencies, including the inability to access certain
markets or distribution channels and the required collateralization of future payment obligations as a result of such
changes, and changes in rating agency policies and practices; and
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the actual closing of contemplated transactions and agreements.
|- |  | ---------------------------------------------------------------

107



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

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

108



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##### Table of Contents






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

Market Risk

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

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

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

Sensitivity Analysis

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

The sensitivity analysis estimates the decline in the market value of the
Companys interest sensitive assets and liabilities that were held on September
30, 2003 and December 31, 2002 due to instantaneous parallel increases in the
period end yield curve of 100 and 150 basis points.

The sensitivity analysis also assumes an instantaneous 10% and 20% decline in
the foreign currency exchange rates versus the United States dollar from their
levels at September 30, 2003 and December 31, 2002, 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 September 30, 2003 and December 31,
2002, with all other variables held constant. The Companys equity holdings
were assumed to be highly and positively correlated with the Index. At
September 30, 2003, a 10% and 25% decrease in the Index would result in a $228
million and $570 million decrease compared to $234 million and $585 million
decrease at December 31, 2002, in the market value of the Companys equity
investments.

109



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##### Table of Contents



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

Of these amounts, under the 10% and 25% scenarios, $141 million and $354
million at September 30, 2003 and $113 million and $284 million at December 31,
2002 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.

The following tables present the estimated effects on the market value of the
Companys financial instruments at September 30, 2003 and December 31, 2002,
due to an increase in interest rates of 100 basis points, a 10% decline in
foreign currency exchange rates and a 10% decline in the Index.

Market Risk Scenario 1

Increase (Decrease)Market
    
    Interest
    
    Currency
    
    EquitySeptember 30, 2003
    
    Value
    
    Rate Risk
    
    Risk
    
    Risk(In millions)Held for Other Than Trading Purposes:General account:Fixed maturity securities
    
    $
    28,747
    
    
    $
    (1,920
    )
    
    $
    (65
    )
    
    $
    (15
    )Equity securities
    
    
    575
    
    
    
    
    
    
    
    (27
    )
    
    
    (58
    )Short-term investments
    
    
    7,044
    
    
    
    (6
    )
    
    
    (17
    )
    
    
    Limited partnerships
    
    
    1,213
    
    
    
    5
    
    
    
    
    
    
    
    (14
    )Other invested assets
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    Interest rate caps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (8
    )
    
    
    6
    
    
    
    
    
    
    
    Other derivative securities
    
    
    (4
    )
    
    
    (83
    )
    
    
    3
    
    
    
    Total general account
    
    
    37,802
    
    
    
    (1,998
    )
    
    
    (106
    )
    
    
    (87
    )Separate accounts:Fixed maturity securities
    
    
    1,808
    
    
    
    (114
    )
    
    
    
    
    
    
    Equity securities
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Short-term investments
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    392
    
    
    
    
    
    
    
    
    
    
    
    (39
    )Total separate accounts
    
    
    2,465
    
    
    
    (114
    )
    
    
    
    
    
    
    (49
    )Total securities held for other than trading purposes
    
    
    40,267
    
    
    
    (2,112
    )
    
    
    (106
    )
    
    
    (136
    )Held for Trading Purposes:Separate accounts:Fixed maturity securities
    
    
    311
    
    
    
    (4
    )
    
    
    
    
    
    
    (1
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term investments
    
    
    272
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    385
    
    
    
    1
    
    
    
    
    
    
    
    (2
    )Equity indexed futures
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (89
    )Total securities held for trading purposes
    
    
    968
    
    
    
    (1
    )
    
    
    
    
    
    
    (92
    )Total securities
    
    $
    41,235
    
    
    $
    (2,113
    )
    
    $
    (106
    )
    
    $
    (228
    )Debt (carrying value)
    
    $
    2,153
    
    
    $
    (75
    )
    
    $
    
    
    
    $
    


110



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

Market Risk Scenario 1

Increase (Decrease)Market
    
    Interest
    
    Currency
    
    EquityDecember 31, 2002
    
    Value
    
    Rate Risk
    
    Risk
    
    Risk(In millions)Held for Other Than Trading Purposes:General account:Fixed maturity securities
    
    $
    26,275
    
    
    $
    (1,629
    )
    
    $
    (37
    )
    
    $
    (10
    )Equity securities
    
    
    666
    
    
    
    
    
    
    
    (20
    )
    
    
    (67
    )Short-term investments
    
    
    7,008
    
    
    
    (6
    )
    
    
    (18
    )
    
    
    Limited partnerships
    
    
    1,060
    
    
    
    41
    
    
    
    
    
    
    
    (43
    )Other invested assets
    
    
    263
    
    
    
    
    
    
    
    
    
    
    
    Interest rate caps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    Other derivative securities
    
    
    21
    
    
    
    (52
    )
    
    
    1
    
    
    
    (1
    )Total general account
    
    
    35,293
    
    
    
    (1,641
    )
    
    
    (74
    )
    
    
    (121
    )Separate accounts:Fixed maturity securities
    
    
    1,868
    
    
    
    (96
    )
    
    
    
    
    
    
    Equity securities
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Short-term investments
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    387
    
    
    
    
    
    
    
    
    
    
    
    (39
    )Total separate accounts
    
    
    2,477
    
    
    
    (96
    )
    
    
    
    
    
    
    (50
    )Total securities held for other than trading purposes
    
    
    37,770
    
    
    
    (1,737
    )
    
    
    (74
    )
    
    
    (171
    )Held for Trading Purposes:Separate accounts:Fixed maturity securities
    
    
    145
    
    
    
    (3
    )
    
    
    
    
    
    
    Equity securities
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Short-term investments
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    327
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Equity indexed futures
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (60
    )Total securities held for trading purposes
    
    
    645
    
    
    
    (2
    )
    
    
    
    
    
    
    (63
    )Total securities
    
    $
    38,415
    
    
    $
    (1,739
    )
    
    $
    (74
    )
    
    $
    (234
    )Debt (carrying value)
    
    $
    2,292
    
    
    $
    (86
    )
    
    $
    
    
    
    $
    


111



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##### Table of Contents



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

The following tables present the estimated effects on the market value of the
Companys financial instruments at September 30, 2003 and December 31, 2002,
due to an increase in interest rates of 150 basis points, a 20% decline in
foreign currency exchange rates and a 25% decline in the Index.

Market Risk Scenario 2

Increase (Decrease)Market
    
    Interest
    
    Currency
    
    EquitySeptember 30, 2003
    
    Value
    
    Rate Risk
    
    Risk
    
    Risk(In millions)Held for Other Than Trading Purposes:General account:Fixed maturity securities
    
    $
    28,747
    
    
    $
    (2,747
    )
    
    $
    (129
    )
    
    $
    (36
    )Equity securities
    
    
    575
    
    
    
    
    
    
    
    (54
    )
    
    
    (144
    )Short-term investments
    
    
    7,044
    
    
    
    (10
    )
    
    
    (35
    )
    
    
    Limited partnerships
    
    
    1,213
    
    
    
    7
    
    
    
    
    
    
    
    (36
    )Other invested assets
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    Interest rate caps
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (8
    )
    
    
    8
    
    
    
    
    
    
    
    Other derivative securities
    
    
    (4
    )
    
    
    (123
    )
    
    
    7
    
    
    
    Total general account
    
    
    37,802
    
    
    
    (2,864
    )
    
    
    (211
    )
    
    
    (216
    )Separate accounts:Fixed maturity securities
    
    
    1,808
    
    
    
    (167
    )
    
    
    
    
    
    
    Equity securities
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    (26
    )Short-term investments
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    392
    
    
    
    
    
    
    
    
    
    
    
    (98
    )Other derivative securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total separate accounts
    
    
    2,465
    
    
    
    (167
    )
    
    
    
    
    
    
    (123
    )Total securities held for other than trading purposes
    
    
    40,267
    
    
    
    (3,031
    )
    
    
    (211
    )
    
    
    (339
    )Held for Trading Purposes:Separate accounts:Fixed maturity securities
    
    
    311
    
    
    
    (7
    )
    
    
    
    
    
    
    (2
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term investments
    
    
    272
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    385
    
    
    
    2
    
    
    
    
    
    
    
    (7
    )Equity indexed futures
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    (222
    )Total securities held for trading purposes
    
    
    968
    
    
    
    (2
    )
    
    
    
    
    
    
    (231
    )Total securities
    
    $
    41,235
    
    
    $
    (3,033
    )
    
    $
    (211
    )
    
    $
    (570
    )Debt (carrying value)
    
    $
    2,153
    
    
    $
    (108
    )
    
    $
    
    
    
    $
    


112



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

Market Risk Scenario 2

Increase (Decrease)Market
    
    Interest
    
    Currency
    
    EquityDecember 31, 2002
    
    Value
    
    Rate Risk
    
    Risk
    
    Risk(In millions)Held for Other Than Trading Purposes:General account:Fixed maturity securities
    
    $
    26,275
    
    
    $
    (2,430
    )
    
    $
    (73
    )
    
    $
    (24
    )Equity securities
    
    
    666
    
    
    
    
    
    
    
    (41
    )
    
    
    (166
    )Short-term investments
    
    
    7,008
    
    
    
    (9
    )
    
    
    (36
    )
    
    
    Limited partnerships
    
    
    1,060
    
    
    
    62
    
    
    
    
    
    
    
    (109
    )Other invested assets
    
    
    263
    
    
    
    
    
    
    
    
    
    
    
    Interest rate caps
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    Other derivative securities
    
    
    21
    
    
    
    (86
    )
    
    
    2
    
    
    
    (2
    )Total general account
    
    
    35,293
    
    
    
    (2,455
    )
    
    
    (148
    )
    
    
    (301
    )Separate accounts:Fixed maturity securities
    
    
    1,868
    
    
    
    (137
    )
    
    
    
    
    
    
    Equity securities
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    (28
    )Short-term investments
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    387
    
    
    
    
    
    
    
    
    
    
    
    (97
    )Total separate accounts
    
    
    2,477
    
    
    
    (137
    )
    
    
    
    
    
    
    (125
    )Total securities held for other than trading purposes
    
    
    37,770
    
    
    
    (2,592
    )
    
    
    (148
    )
    
    
    (426
    )Held for Trading Purposes:Separate accounts:Fixed maturity securities
    
    
    145
    
    
    
    (5
    )
    
    
    
    
    
    
    (1
    )Equity securities
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Short-term investments
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    327
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Equity indexed futures
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (151
    )Total securities held for trading purposes
    
    
    645
    
    
    
    (3
    )
    
    
    
    
    
    
    (159
    )Total securities
    
    $
    38,415
    
    
    $
    (2,595
    )
    
    $
    (148
    )
    
    $
    (585
    )Debt (carrying value)
    
    $
    2,292
    
    
    $
    (125
    )
    
    $
    
    
    
    $
    


113



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CNA FINANCIAL CORPORATION
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

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

The Companys principal executive officer and its principal financial officer
undertook an evaluation of the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report and concluded that the Companys controls and
procedures were effective.

Management, in consultation with the Companys independent accountants,
identified deficiencies in certain aspects of initial policy set-up and
processing for large account property and casualty business in the Standard
Lines segment which constitute a Reportable Condition under standards
established by the American Institute of Certified Public Accountants. These
deficiencies impacted the quality of the claim data used by the Companys
actuaries as the basis for their comprehensive actuarial reviews, which
hampered the timeliness of these reviews.

This matter, as well as managements action plan for remediation, have been
discussed with the Companys Audit Committee. The Company has made substantial
progress towards remediation, and expects to complete its action plan by the
end of 2003.

There were no other changes in the Companys internal control over financial
reporting identified in connection with the foregoing evaluation that occurred
during the Companys last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting.

114



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##### Table of Contents






CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION




Item 1. Legal Proceedings

Information on CNAs legal proceedings is set forth in Notes F and G of the
Condensed Consolidated Financial Statements included under Part I, Item 1.




Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------

Description of Exhibit
    
    Exhibit NumberCertification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    31.1Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    31.2Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    32.1
    *Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    32.2
    *




---

|* |  | Exhibits 32.1 and 32.2 are being furnished and shall not be deemed filed
for the purpose of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liabilities of that Section. These
Exhibits shall not be incorporated by reference into any registration statement
or other document pursuant to the Securities Act of 1933, as amended.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

On August 7, 2003, CNA Financial Corporation issued a press release announcing
its second quarter 2003 operating results and financial supplement.





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##### Table of Contents



CNA FINANCIAL CORPORATION
PART II. OTHER INFORMATION




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 CorporationDated:
November 14, 2003
    
    By
    
    /s/ Robert V. DeutschRobert V. Deutsch
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)