##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q

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

For the Quarterly Period Ended September 30, 2001 Commission File Number 1-5823



---



CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 36-6169860
(I.R.S. Employer
Identification No.)
|                                                                       
|CNA Plaza
Chicago, Illinois
(Address of principal executive offices)    |  | 60685
(Zip Code)                               

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

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

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

|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding at November 1, 2001
|                              |  |                                
|Common Stock, Par value $2.50 |  | 223,596,905                    



---

---





---

TABLE OF CONTENTS



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



---



##### Table of Contents



CNA FINANCIAL CORPORATION
INDEX

|                                         |                                                                                       |                                                                                                                             |  |    |   | 
|---------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- |  | -- | - | 
|PART I. FINANCIAL INFORMATION            |                                                                                       | PAGE NO.                                                                                                                    | 
|                                         |                                                                                       |                                                                                                                             | 
|                                        
|                                         | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                          |                                                                                                                             |  |    |  
|                                        
|                                         |                                                                                       | CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 (Unaudited) AND DECEMBER 31, 2000                                  |  |    | 1 | 
|                                        
|                                         |                                                                                       | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000 |  |    | 2 | 
|                                        
|                                         |                                                                                       | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000           |  |    | 3 | 
|                                        
|                                         |                                                                                       | NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) SEPTEMBER 30, 2001                                         |  |    | 4 | 
|                                        
|                                         | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |                                                                                                                             |  | 32 |  
|                                        
|PART II. OTHER INFORMATION               |                                                                                       |                                                                                                                             |  |   
|                                        
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K |                                                                                       | 74                                                                                                                          | 
|                                        
|SIGNATURES                               |                                                                                       | 74                                                                                                                          | 





---



##### Table of Contents












CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |               |        |       |              |        |        | 
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------- | ------------------------------------------ | ------ | ------------- | ------ | ----- | ------------ | ------ | ------ | 
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        | (Unaudited)   |        |       |              |        |       
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        | September 30, |        |       | December 31, |       
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        | 2001          |        |       | 2000         |       
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |               |        |       |              |       
|(In millions, except share data)       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |               |        |      
|Assets:                                |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |               |        |      
|                                       | Investments:                                                                                                                                                                                                                                         |                                                                                      |                            |                                            |        |               |        |       |             
|                                       |                                                                                                                                                                                                                                                      | Fixed maturity securities available-for-sale (amortized cost of $27,949 and $26,579) |                            | $                                          | 28,578 |               |        | $     | 26,652       |       
|                                       |                                                                                                                                                                                                                                                      | Equity securities available-for-sale (cost of $1,358 and $1,175)                     |                            |                                            | 1,420  |               |        |       | 2,412        |       
|                                       |                                                                                                                                                                                                                                                      | Mortgage loans and real estate (less accumulated depreciation of $1 and $1)          |                            |                                            | 22     |               |        |       | 26           |       
|                                       |                                                                                                                                                                                                                                                      | Policy loans                                                                         |                            |                                            | 194    |               |        |       | 193          |       
|                                       |                                                                                                                                                                                                                                                      | Other invested assets                                                                |                            |                                            | 1,378  |               |        |       | 1,116        |       
|                                       |                                                                                                                                                                                                                                                      | Short-term investments                                                               |                            |                                            | 4,788  |               |        |       | 4,723        |       
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              
|                                       |                                                                                                                                                                                                                                                      |                                                                                      | Total investments          |                                            |        | 36,380        |        |       |              | 35,122 |       
|                                       | Cash and cash equivalents                                                                                                                                                                                                                            |                                                                                      |                            | 121                                        |        |               |        | 163   |             
|                                       | Receivables:                                                                                                                                                                                                                                         |                                                                                      |                            |                                            |        |               |        |       |             
|                                       |                                                                                                                                                                                                                                                      | Reinsurance                                                                          |                            |                                            | 13,312 |               |        |       | 9,397        |       
|                                       |                                                                                                                                                                                                                                                      | Insurance                                                                            |                            |                                            | 4,162  |               |        |       | 5,026        |       
|                                       |                                                                                                                                                                                                                                                      | Less allowance for doubtful accounts                                                 |                            |                                            | (355   | )             |        |       | (321         | )     
|                                       | Accrued investment income                                                                                                                                                                                                                            |                                                                                      |                            | 394                                        |        |               |        | 404   |             
|                                       | Receivable for securities sold                                                                                                                                                                                                                       |                                                                                      |                            | 722                                        |        |               |        | 424   |             
|                                       | Deferred acquisition costs                                                                                                                                                                                                                           |                                                                                      |                            | 2,455                                      |        |               |        | 2,418 |             
|                                       | Prepaid reinsurance premiums                                                                                                                                                                                                                         |                                                                                      |                            | 1,350                                      |        |               |        | 1,445 |             
|                                       | Federal income taxes recoverable (includes $777 and $25 due from Loews)                                                                                                                                                                              |                                                                                      |                            | 770                                        |        |               |        | 15    |             
|                                       | Deferred income taxes                                                                                                                                                                                                                                |                                                                                      |                            | 889                                        |        |               |        | 503   |             
|                                       | Property and equipment at cost (less accumulated depreciation of $786 and $802)                                                                                                                                                                      |                                                                                      |                            | 463                                        |        |               |        | 716   |             
|                                       | Intangibles                                                                                                                                                                                                                                          |                                                                                      |                            | 298                                        |        |               |        | 317   |             
|                                       | Other assets                                                                                                                                                                                                                                         |                                                                                      |                            | 2,426                                      |        |               |        | 2,152 |             
|                                       | Separate account business                                                                                                                                                                                                                            |                                                                                      |                            | 3,730                                      |        |               |        | 4,287 |             
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            | Total assets                               |        | $             | 67,117 |       |              | $      | 62,068 | 
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              
|Liabilities and Stockholders Equity:  |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |               |        |      
|Liabilities:                           |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |               |        |      
|                                       | Insurance reserves:                                                                                                                                                                                                                                  |                                                                                      |                            |                                            |        |               |        |       |             
|                                       |                                                                                                                                                                                                                                                      | Claim and claim adjustment expense                                                   |                            | $                                          | 30,807 |               |        | $     | 26,962       |       
|                                       |                                                                                                                                                                                                                                                      | Unearned premiums                                                                    |                            |                                            | 4,766  |               |        |       | 4,821        |       
|                                       |                                                                                                                                                                                                                                                      | Future policy benefits                                                               |                            |                                            | 7,200  |               |        |       | 6,669        |       
|                                       |                                                                                                                                                                                                                                                      | Policyholders funds                                                                 |                            |                                            | 582    |               |        |       | 602          |       
|                                       | Collateral on loaned securities and derivatives                                                                                                                                                                                                      |                                                                                      |                            | 1,431                                      |        |               |        | 1,308 |             
|                                       | Payables for securities purchased                                                                                                                                                                                                                    |                                                                                      |                            | 1,422                                      |        |               |        | 593   |             
|                                       | Participating policyholders funds                                                                                                                                                                                                                   |                                                                                      |                            | 121                                        |        |               |        | 131   |             
|                                       | Debt                                                                                                                                                                                                                                                 |                                                                                      |                            | 2,084                                      |        |               |        | 2,729 |             
|                                       | Reinsurance balances payable                                                                                                                                                                                                                         |                                                                                      |                            | 2,684                                      |        |               |        | 1,381 |             
|                                       | Other liabilities                                                                                                                                                                                                                                    |                                                                                      |                            | 3,441                                      |        |               |        | 2,721 |             
|                                       | Separate account business                                                                                                                                                                                                                            |                                                                                      |                            | 3,730                                      |        |               |        | 4,287 |             
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              
|                                       |                                                                                                                                                                                                                                                      |                                                                                      | Total liabilities          |                                            |        | 58,268        |        |       |              | 52,204 |       
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              
|Commitments and contingencies (Note E) |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |               |        |      
|Minority interest                      |                                                                                                                                                                                                                                                      |                                                                                      | 223                        |                                            |        |               | 217    |      
|Stockholders equity:                  |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |               |        |      
|                                       | Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,314 and
185,525,907 shares issued at September 30, 2001 and December 31, 2000; and 223,596,905
and 183,263,873 shares outstanding at September 30, 2001 and December 31, 2000) |                                                                                      |                            | 565                                        |        |               |        | 464   |             
|                                       | Additional paid-in capital                                                                                                                                                                                                                           |                                                                                      |                            | 1,031                                      |        |               |        | 126   |             
|                                       | Retained earnings                                                                                                                                                                                                                                    |                                                                                      |                            | 6,705                                      |        |               |        | 8,327 |             
|                                       | Accumulated other comprehensive income                                                                                                                                                                                                               |                                                                                      |                            | 462                                        |        |               |        | 873   |             
|                                       | Treasury stock, at cost                                                                                                                                                                                                                              |                                                                                      |                            | (70                                        | )      |               |        | (71   | )           
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              
|                                       |                                                                                                                                                                                                                                                      |                                                                                      | 8,693                      |                                            |        |               | 9,719  |      
|                                       | Notes receivable for the issuance of common stock                                                                                                                                                                                                    |                                                                                      |                            | (67                                        | )      |               |        | (72   | )           
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              
|                                       |                                                                                                                                                                                                                                                      |                                                                                      | Total stockholders equity |                                            |        | 8,626         |        |       |              | 9,647  |       
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            | Total liabilities and stockholders equity |        | $             | 67,117 |       |              | $      | 62,068 | 
|                                       |                                                                                                                                                                                                                                                      |                                                                                      |                            |                                            |        |              

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

1



---



##### Table of Contents






CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                                             |                                                                                       |      |              |       |      |             |       |       |  |   |        |       |   |   |        |       | 
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------- | ---- | ------------ | ----- | ---- | ----------- | ----- | ----- |  | - | ------ | ----- | - | - | ------ | ----- | 
|                                                                                                             |                                                                                       |      | Three Months |       |      | Nine Months |      
|                                                                                                             |                                                                                       |      |              |       |      |             |      
|                                                                                                             |                                                                                       | 2001 |              |       | 2000 |             |       | 2001  |  |   | 2000   |      
|Period ended September 30                                                                                    |                                                                                       |      |              |       |      |             |       |       |  |   |        |      
|(In millions, except per share data)                                                                         |                                                                                       |      |              |       |      |             |       |       |  |   |        |       |   |   |        |      
|Revenues:                                                                                                    |                                                                                       |      |              |       |      |             |       |       |  |   |        |       |   |   |        |      
|                                                                                                             | Net earned premiums                                                                   |      | $            | 2,529 |      |             | $     | 2,919 |  |   | $      | 6,663 |   |   | $      | 8,467 | 
|                                                                                                             | Net investment income                                                                 |      |              | 457   |      |             |       | 601   |  |   |        | 1,385 |   |   |        | 1,731 | 
|                                                                                                             | Realized investment gains, net of participating policyholders
and minority interests |      |              | 1     |      |             |       | 606   |  |   |        | 940   |   |   |        | 910   | 
|                                                                                                             | Other revenues                                                                        |      |              | 162   |      |             |       | 183   |  |   |        | 507   |   |   |        | 529   | 
|                                                                                                             |                                                                                       |      |              |       |      |             |      
|Total revenues                                                                                               |                                                                                       |      | 3,149        |       |      |             | 4,309 |       |  |   | 9,495  |       |   |   | 11,637 |      
|                                                                                                             |                                                                                       |      |              |       |      |             |       |       |  |   |        |      
|Claims, Benefits and Expenses:                                                                               |                                                                                       |      |              |       |      |             |       |       |  |   |        |       |   |   |        |      
|                                                                                                             | Insurance claims and policyholders benefits                                          |      |              | 2,440 |      |             |       | 2,465 |  |   |        | 8,846 |   |   |        | 7,156 | 
|                                                                                                             | Amortization of deferred acquisition costs                                            |      |              | 423   |      |             |       | 456   |  |   |        | 1,297 |   |   |        | 1,381 | 
|                                                                                                             | Other operating expenses                                                              |      |              | 483   |      |             |       | 523   |  |   |        | 1,467 |   |   |        | 1,434 | 
|                                                                                                             | Restructuring and other related charges                                               |      |              |      |      |             |       |      |  |   |        | 62    |   |   |        |      | 
|                                                                                                             | Interest                                                                              |      |              | 37    |      |             |       | 54    |  |   |        | 121   |   |   |        | 154   | 
|                                                                                                             |                                                                                       |      |              |       |      |             |       |       |  |   |        |      
|Total claims, benefits and expenses                                                                          |                                                                                       |      | 3,383        |       |      |             | 3,498 |       |  |   | 11,793 |       |   |   | 10,125 |      
|                                                                                                             |                                                                                       |      |              |       |      |             |       |       |  |   |        |      
|(Loss) income before income tax, minority interest and cumulative
effect of a change in accounting principle |                                                                                       |      | (234         | )     |      |             | 811   |       |  |   | (2,298 | )     |   |   | 1,512  |      
|Income tax benefit (expense)                                                                                 |                                                                                       |      | 85           |       |      |             | (251  | )     |  |   | 755    |       |   |   | (468   | )    
|Minority interest                                                                                            |                                                                                       |      | (6           | )     |      |             | (10   | )     |  |   | (18    | )     |   |   | (23    | )    
|                                                                                                             |                                                                                       |      |              |       |      |             |       |       |  |   |        |      
|(Loss) income before cumulative effect of a change in accounting
principle                                   |                                                                                       |      | (155         | )     |      |             | 550   |       |  |   | (1,561 | )     |   |   | 1,021  |      
|Cumulative effect of a change in accounting principle, net of tax
of $33                                     |                                                                                       |      |             |       |      |             |      |       |  |   | (61    | )     |   |   |       |      
|                                                                                                             |                                                                                       |      |              |       |      |             |       |       |  |   |        |      
|Net (loss) income                                                                                            |                                                                                       | $    | (155         | )     |      | $           | 550   |       |  | $ | (1,622 | )     |   | $ | 1,021  |      
|                                                                                                             |                                                                                       |      |              |       |      |             |       |       |  |   |        |      
|Basic and Diluted (Loss) Earnings Per Share:                                                                 |                                                                                       |      |              |       |      |             |       |       |  |   |        |       |   |   |        |      
|                                                                                                             | (Loss) income before cumulative effect of a change in accounting
principle            |      | $            | (0.84 | )    |             | $     | 3.00  |  |   | $      | (8.48 | ) |   | $      | 5.55  | 
|                                                                                                             | Cumulative effect of a change in accounting principle, net of tax                     |      |              |      |      |             |       |      |  |   |        | (0.33 | ) |   |        |      | 
|                                                                                                             |                                                                                       |      |              |       |      |             |      
|Basic and diluted (loss) earnings per share available to common
stockholders                                 |                                                                                       | $    | (0.84        | )     |      | $           | 3.00  |       |  | $ | (8.81  | )     |   | $ | 5.55   |      
|                                                                                                             |                                                                                       |      |              |       |      |             |       |       |  |   |        |      
|Weighted average outstanding common stock and common stock
equivalents                                       |                                                                                       |      |              |       |      |             |       |       |  |   |        |       |   |   |        |      
|                                                                                                             | Basic                                                                                 |      |              | 185.5 |      |             |       | 183.4 |  |   |        | 184.0 |   |   |        | 183.7 | 
|                                                                                                             | Diluted                                                                               |      |              | 185.5 |      |             |       | 183.5 |  |   |        | 184.0 |   |   |        | 183.7 | 

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

2



---



##### Table of Contents






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

|                                                       |                                                                                            |                                                                 |                                          |                   |        |        |       |         |        |        |        |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ---------------------------------------- | ----------------- | ------ | ------ | ----- | ------- | ------ | ------ | ------ | -
|Nine months ended September 30                         |                                                                                            | 2001                                                            |                                          |                   | 2000   |       
|(In millions)                                          |                                                                                            |                                                                 |                                          |                   |        |       
|                                                       |                                                                                            |                                                                 |                                          |                   |        |        |       |        
|Net Cash Flows used by Operating Activities:           |                                                                                            |                                                                 |                                          |                   |        |        |       |        
|                                                       | Net (loss) income                                                                          |                                                                 | $                                        | (1,622            | )      |        | $     | 1,021   |       
|                                                       | Adjustments to reconcile net (loss) income to net cash flows used by operating activities: |                                                                 |                                          |                   |        |        |       |         |       
|                                                       |                                                                                            | Cumulative effect of change in accounting principle, net of tax |                                          |                   | 61     |        |       |         |       |       
|                                                       |                                                                                            | Minority interest                                               |                                          |                   | 18     |        |       |         | 23     |       
|                                                       |                                                                                            | Deferred income tax provision                                   |                                          |                   | (217   | )      |       |         | 292    |       
|                                                       |                                                                                            | Net realized investment gains                                   |                                          |                   | (940   | )      |       |         | (910   | )     
|                                                       |                                                                                            | Equity method income                                            |                                          |                   | (52    | )      |       |         | (258   | )     
|                                                       |                                                                                            | Amortization of intangibles                                     |                                          |                   | 15     |        |       |         | 16     |       
|                                                       |                                                                                            | Amortization of bond discount                                   |                                          |                   | (208   | )      |       |         | (232   | )     
|                                                       |                                                                                            | Depreciation                                                    |                                          |                   | 99     |        |       |         | 111    |       
|                                                       |                                                                                            | Changes in:                                                     |                                          |                   |        |        |       |         |        |       
|                                                       |                                                                                            |                                                                 | Receivables, net                         |                   |        | (3,017 | )     |         |        | (1,548 | )     
|                                                       |                                                                                            |                                                                 | Deferred acquisition costs               |                   |        | (54    | )     |         |        | (155   | )     
|                                                       |                                                                                            |                                                                 | Accrued investment income                |                   |        | 10     |       |         |        | (20    | )     
|                                                       |                                                                                            |                                                                 | Federal income taxes recoverable/payable |                   |        | (721   | )     |         |        | 422    |       
|                                                       |                                                                                            |                                                                 | Prepaid reinsurance premiums             |                   |        | 95     |       |         |        | (40    | )     
|                                                       |                                                                                            |                                                                 | Reinsurance balances payable             |                   |        | 1,303  |       |         |        | 333    |       
|                                                       |                                                                                            |                                                                 | Insurance reserves                       |                   |        | 4,339  |       |         |        | 191    |       
|                                                       |                                                                                            |                                                                 | Other, net                               |                   |        | 124    |       |         |        | (142   | )     
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|                                                       |                                                                                            |                                                                 |                                          | Total adjustments |        |        | 855   |         |        |        | (1,917 | )
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|Net cash flows used by operating activities            |                                                                                            |                                                                 | (767                                     | )                 |        |        | (896  | )      
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|Net Cash Flows from Investing Activities:              |                                                                                            |                                                                 |                                          |                   |        |        |       |        
|                                                       | Purchases of fixed maturity securities                                                     |                                                                 |                                          | (43,308           | )      |        |       | (29,061 | )     
|                                                       | Proceeds from fixed maturity securities:                                                   |                                                                 |                                          |                   |        |        |       |         |       
|                                                       |                                                                                            | Sales                                                           |                                          |                   | 39,847 |        |       |         | 27,003 |       
|                                                       |                                                                                            | Maturities, calls and redemptions                               |                                          |                   | 2,835  |        |       |         | 3,259  |       
|                                                       | Purchases of equity securities                                                             |                                                                 |                                          | (1,066            | )      |        |       | (1,388  | )     
|                                                       | Proceeds from sales of equity securities                                                   |                                                                 |                                          | 1,915             |        |        |       | 2,298   |       
|                                                       | Change in short-term investments                                                           |                                                                 |                                          | 48                |        |        |       | (1,241  | )     
|                                                       | Change in collateral on loaned securities and derivatives                                  |                                                                 |                                          | 123               |        |        |       | 539     |       
|                                                       | Change in other investments                                                                |                                                                 |                                          | (246              | )      |        |       | 28      |       
|                                                       | Purchases of property and equipment                                                        |                                                                 |                                          | (95               | )      |        |       | (108    | )     
|                                                       | Sales of property and equipment                                                            |                                                                 |                                          | 273               |        |        |       |        |       
|                                                       | Other, net                                                                                 |                                                                 |                                          | 82                |        |        |       | (17     | )     
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|Net cash flows provided by investing activities        |                                                                                            |                                                                 | 408                                      |                   |        |        | 1,312 |        
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|Net Cash Flows from Financing Activities:              |                                                                                            |                                                                 |                                          |                   |        |        |       |        
|                                                       | Issuance of common stock                                                                   |                                                                 |                                          | 1,006             |        |        |       |        |       
|                                                       | Principal payments on debt                                                                 |                                                                 |                                          | (646              | )      |        |       | (112    | )     
|                                                       | Return of policyholder account balances on investment contracts                            |                                                                 |                                          | (50               | )      |        |       | (113    | )     
|                                                       | Redemption of preferred stock                                                              |                                                                 |                                          |                  |        |        |       | (150    | )     
|                                                       | Dividends paid to preferred stockholders                                                   |                                                                 |                                          |                  |        |        |       | (1      | )     
|                                                       | Purchase of treasury stock                                                                 |                                                                 |                                          |                  |        |        |       | (28     | )     
|                                                       | Receipts from investment contracts credited to policyholder account balances               |                                                                 |                                          | 1                 |        |        |       | 4       |       
|                                                       | Proceeds from issuance of debt                                                             |                                                                 |                                          |                  |        |        |       | 5       |       
|                                                       | Other                                                                                      |                                                                 |                                          | 6                 |        |        |       |        |       
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|Net cash flows provided (used) by financing activities |                                                                                            |                                                                 | 317                                      |                   |        |        | (395  | )      
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|Net change in cash and cash equivalents                |                                                                                            |                                                                 | (42                                      | )                 |        |        | 21    |        
|Cash and cash equivalents, beginning of year           |                                                                                            |                                                                 | 163                                      |                   |        |        | 153   |        
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|Cash and cash equivalents, end of period               |                                                                                            | $                                                               | 121                                      |                   |        | $      | 174   |        
|                                                       |                                                                                            |                                                                 |                                          |                   |        |       
|Supplemental Disclosures of Cash Flow Information:     |                                                                                            |                                                                 |                                          |                   |        |        |       |        
|                                                       | Cash paid (received):                                                                      |                                                                 |                                          |                   |        |        |       |         |       
|                                                       |                                                                                            | Interest                                                        |                                          | $                 | 99     |        |       | $       | 106    |       
|                                                       |                                                                                            | Federal income taxes                                            |                                          |                   | 127    |        |       |         | (240   | )     
|                                                       | Non-cash transactions:                                                                     |                                                                 |                                          |                   |        |        |       |         |       
|                                                       |                                                                                            | Notes receivable for the issuance of common stock               |                                          |                   |       |        |       |         | (4     | )     

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

3



---



##### Table of Contents






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

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include CNA
Financial Corporation (CNAF) and its controlled subsidiaries, which include
property-casualty insurance companies (principally Continental Casualty Company
(CCC) and The Continental Insurance Company (CIC)) and life and group insurance
companies (principally Continental Assurance Company (CAC), Valley Forge Life
Insurance Company (VFL) and CNA Group Life Assurance Company (CNAGLAC)),
collectively CNA or the Company. As of September 30, 2001, Loews Corporation
(Loews) owned approximately 89% of the outstanding common stock of CNAF.

The accompanying Condensed Consolidated Financial Statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America (GAAP). Certain financial information that is normally
included in annual financial statements, including certain financial statement
footnotes, prepared in accordance with GAAP, is not required for interim
reporting purposes and has been condensed or omitted. These statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in CNAFs Annual Report to Shareholders for the year ended
December 31, 2000 (incorporated by reference in Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2000).

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

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

During the first quarter of 2001, the Company reclassified equity method income
from limited partnership investments. This income was previously classified in
realized investment gains, net of participating policyholders and minority
interests and is now classified in net investment income. The after-tax impact
of this reclassification on net operating results was income of $13 million and
$66 million for the three months ended September 30, 2001 and 2000 and income
of $34 million and $168 million for the nine months ended September 30, 2001
and 2000.

4



---



##### Table of Contents



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

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

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

|                                                                                      |  |              |     |   |             |   |     |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------- |  | ------------ | --- | - | ----------- | - | --- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                      |  | Three Months |     |   | Nine Months |  
|                                                                                      |  |              |     |   |             |  
|Period ended September 30                                                             |  | 2001         |     |   | 2000        |   |     | 2001 |  |   | 2000  |  
|(In millions)                                                                         |  |              |     |   |             |   |     |      |  |   |       |  
|                                                                                      |  |              |     |   |             |   |     |      |  |   |       |   |  |   |       |  
|Fixed maturity securities                                                             |  | $            | 469 |   |             | $ | 443 |      |  | $ | 1,356 |   |  | $ | 1,309 |  
|Short-term investments                                                                |  |              | 34  |   |             |   | 61  |      |  |   | 113   |   |  |   | 152   |  
|Limited partnerships                                                                  |  |              | 20  |   |             |   | 100 |      |  |   | 52    |   |  |   | 258   |  
|Other, including interest on funds withheld and other deposits                        |  |              | (48 | ) |             |   | 8   |      |  |   | (89   | ) |  |   | 49    |  
|                                                                                      |  |              |     |   |             |   |     |      |  |   |       |  
|Gross investment income                                                               |  |              | 475 |   |             |   | 612 |      |  |   | 1,432 |   |  |   | 1,768 |  
|Investment expense                                                                    |  |              | (18 | ) |             |   | (11 | )    |  |   | (47   | ) |  |   | (37   | )
|                                                                                      |  |              |     |   |             |   |     |      |  |   |       |  
|Net investment income                                                                 |  | $            | 457 |   |             | $ | 601 |      |  | $ | 1,385 |   |  | $ | 1,731 |  
|                                                                                      |  |              |     |   |             |   |     |      |  |   |       |  
|Realized investment gains, net of participating policyholders
and minority interests |  | $            | 1   |   |             | $ | 606 |      |  | $ | 940   |   |  | $ | 910   |  
|                                                                                      |  |              |     |   |             |   |     |      |  |   |       |  

Note B. Accounting Pronouncements

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

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

Additionally, CNAs property-casualty companies implemented a change, effective
January 1, 2001, in the timing of recording written premiums for policies with
future effective dates. This change was made in conjunction with changes
required by Codification related to
5Table of Contents

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

the recording of written premiums. The effect of this change was to reduce net
written premiums by $87 million for the nine months ended September 30, 2001.
This change has no impact on net earned premiums or net income.

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

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

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets(SFAS 142). SFAS 142 changes the
accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach. Amortization of goodwill
and indefinite-lived intangible assets, including goodwill recorded in past
business combinations, will cease upon adoption of SFAS 142, which for CNA will
be January 1, 2002. The Company is in the process of quantifying the impact
this new standard will have on its operations and intangible assets.
Amortization of goodwill and intangible assets amounted to $4 million and $15
million for the three months and nine months ended September 30, 2001 and $6
million and $16 million for the three months and nine months ended September
30, 2000.

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes FASB Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The provisions
of this statement are effective for CNA beginning January 1, 2002. The Company
is in the process of quantifying the impact this new standard will have on its
operations and financial position.

6



---



##### Table of Contents



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

Note C. (Loss) Earnings Per Share

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

(Loss) Earnings Per Share

|                                                                                                     |  |              |       |   |             |   |       |      |  |   |        |   |  |   |       |  
|---------------------------------------------------------------------------------------------------- |  | ------------ | ----- | - | ----------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                                                     |  | Three Months |       |   | Nine Months |  
|                                                                                                     |  |              |       |   |             |  
|                                                                                                     |  | 2001         |       |   | 2000        |   |       | 2001 |  |   | 2000   |  
|Period Ended September 30                                                                            |  |              |       |   |             |   |       |      |  |   |        |  
|(In millions, except per share amounts)                                                              |  |              |       |   |             |   |       |      |  |   |        |   |  |   |       |  
|Net (loss) income                                                                                    |  | $            | (155  | ) |             | $ | 550   |      |  | $ | (1,622 | ) |  | $ | 1,021 |  
|Less preferred dividends                                                                             |  |              |      |   |             |   |      |      |  |   |       |   |  |   | (1    | )
|                                                                                                     |  |              |       |   |             |   |       |      |  |   |        |  
|Net (loss) income applicable to common stock                                                         |  | $            | (155  | ) |             | $ | 550   |      |  | $ | (1,622 | ) |  | $ | 1,020 |  
|                                                                                                     |  |              |       |   |             |   |       |      |  |   |        |  
|Weighted average outstanding common stock and common
stock equivalents                               |  |              | 185.5 |   |             |   | 183.4 |      |  |   | 184.0  |   |  |   | 183.7 |  
|Effect of dilutive securities, employee stock options                                                |  |              |      |   |             |   | 0.1   |      |  |   |       |   |  |   |      |  
|                                                                                                     |  |              |       |   |             |   |       |      |  |   |        |  
|Adjusted weighted average outstanding common stock
and common stock equivalents assuming conversions |  |              | 185.5 |   |             |   | 183.5 |      |  |   | 184.0  |   |  |   | 183.7 |  
|                                                                                                     |  |              |       |   |             |   |       |      |  |   |        |  
|Basic and diluted (loss) earnings per share
available to common stockholders                         |  | $            | (0.84 | ) |             | $ | 3.00  |      |  | $ | (8.81  | ) |  | $ | 5.55  |  
|                                                                                                     |  |              |       |   |             |   |       |      |  |   |        |  

Note D. Derivative Financial Instruments

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

7



---



##### Table of Contents



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

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

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

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

Use of Derivatives

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

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

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

8



---



##### Table of Contents



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

Risk Management Strategies Regarding Market Risk

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

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

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

Derivative Holdings

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

9



---



##### Table of Contents



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

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

Derivative Financial Instruments

|                   |                                                             |        |             |     |       |            |     |             |  |   |     |     |  
|------------------ | ----------------------------------------------------------- | ------ | ----------- | --- | ----- | ---------- | --- | ----------- |  | - | --- | --- | -
|                   |                                                             |        | Contractual |     |       | Fair Value |    
|                   |                                                             |        | Notional    |     |       |            |    
|September 30, 2001 |                                                             | Amount |             |     | Asset |            |     | (Liability) | 
|(In millions)      |                                                             |        |             |     |       |            |     |             | 
|General Account:   |                                                             |        |             |     |       |            |     |             |  |   |     |    
|                   | Swaps                                                       |        | $           | 54  |       |            | $   |            |  |   | $   | (1  | )
|                   | Interest rate caps                                          |        |             | 500 |       |            |     | 1           |  |   |     |    |  
|                   | Futures sold, not yet purchased                             |        |             | 14  |       |            |     |            |  |   |     |    |  
|                   | Forwards                                                    |        |             | 187 |       |            |     |            |  |   |     | (3  | )
|                   | Equity warrants                                             |        |             | 15  |       |            |     |            |  |   |     |    |  
|                   | Collateralized debt obligation liabilities                  |        |             | 170 |       |            |     |            |  |   |     | (16 | )
|                   | Options purchased                                           |        |             | 24  |       |            |     | 1           |  |   |     |    |  
|                   | Options written                                             |        |             | 1   |       |            |     |            |  |   |     | (1  | )
|                   | Options embedded in convertible debt securities             |        |             | 867 |       |            |     | 114         |  |   |     |    |  
|                   |                                                             |        |             |     |       |            |     |             | 
|Total              |                                                             | $      | 1,832       |     |       | $          | 116 |             |  | $ | (21 | )  
|                   |                                                             |        |             |     |       |            |     |             | 
|Separate Accounts: |                                                             |        |             |     |       |            |     |             |  |   |     |    
|                   | Futures purchased                                           |        | $           | 756 |       |            | $   | 15          |  |   | $   |    |  
|                   | Futures sold, not yet purchased                             |        |             | 10  |       |            |     |            |  |   |     |    |  
|                   | Commitments to purchase government and municipal securities |        |             | 15  |       |            |     |            |  |   |     |    |  
|                   | Options purchased                                           |        |             | 67  |       |            |     |            |  |   |     |    |  
|                   | Options written                                             |        |             | 68  |       |            |     |            |  |   |     | (1  | )
|                   |                                                             |        |             |     |       |            |     |             | 
|Total              |                                                             | $      | 916         |     |       | $          | 15  |             |  | $ | (1  | )  
|                   |                                                             |        |             |     |       |            |     |             | 

10



---



##### Table of Contents



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

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

Derivative Financial Instruments

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

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

Fair Value Hedges

As of the adoption date of SFAS 133, the Companys collar position related to
its investment in Global Crossing Ltd. (Global Crossing) common stock was the
only derivative position that has been designated as a hedge for accounting
purposes. The nature of the transition adjustment related to this hedge was
such that the $962 million unrealized gain that existed on the Global Crossing
common stock when the hedge was established was preserved in accumulated other
comprehensive income. During the second quarter, the Companys collar position
related to Global Crossing common stock was terminated and the related stock
was sold. See Note I for further discussion of this transaction.

The effectiveness of this hedge was measured based on changes in the intrinsic
value of the collar in relation to changes in the fair value of the Global
Crossing common stock. Changes in the time value component of the collars
fair value were excluded from the hedge designation and measurement of
effectiveness. Up to the date of the sale, the Global Crossing hedge was 100%
effective. The change in the time value component of the collar was a pretax
gain of

11



---



##### Table of Contents



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

$33 million for the nine months ended September 30, 2001, and has been recorded
as a realized investment gain in the Condensed Consolidated Statements of
Operations.

During the third quarter 2001, the Company closed one fair value hedge and
maintained another that under SFAS 133 meet the criteria for hedge accounting
treatment. First, the Company closed the hedge related to a portion of its
10-year Treasury Note position. Second, as a hedge against currency risk
related to its Canary Wharf plc common stock position, the Company renewed £125
million currency forward contracts. The ineffective portion of the currency
hedging activity was $.03 million for the three months and nine months ended
September 30, 2001.

Note E. Legal Proceedings and Contingent Liabilities

Tobacco Litigation

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

IGI Contingency

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

CNA has undertaken a review of the IGI Program and, among other things, has
determined that a small portion of the premiums assumed under the IGI Program
related to United States workers compensation carve-out business. CNA is
aware that a number of reinsurers with workers compensation carve-out
insurance exposure have disavowed their obligations under
12Table of Contents

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

various legal theories. If one or more such companies are successful in
avoiding or reducing their liabilities, then it is likely that CNAs liability
will also be reduced. Moreover, based on information known at this time, CNA
reasonably believes it has strong grounds for avoiding a substantial portion of
its United States workers compensation carve-out exposure through legal
action.

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

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

The Company is pursuing a number of loss mitigation strategies. Although the
results of these various actions to date support the recorded reserves, the
estimate of ultimate losses is subject to considerable uncertainty. As a
result of these uncertainties, the results of operations in future years may be
adversely affected by potentially significant reserve additions.

Other Litigation

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

Note F. Claim and Claim Adjustment Expense Reserves

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

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

13



---



##### Table of Contents



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

year reserve estimates, if necessary, are reflected in the operating income in
the period that the need for such adjustments is determined.

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

During the third quarter of 2001, the Company experienced a severe catastrophe
loss estimated at $468 million pretax net of reinsurance related to the
September 11, 2001 World Trade Center disaster and related events (WTC). The
loss estimate is based on a total industry loss of $50 billion and includes all
lines of insurance. The current estimate takes into account CNAs substantial
reinsurance agreements, including its catastrophe reinsurance program and
corporate reinsurance program. These loss estimates are also subject to considerable
uncertainty. Subsequent developments on claims arising out of the WTC
catastrophe could result in an increase in the total estimated loss, which
could be material to the results of operations.

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

|                                                                                                      |                         |       |       |       |       |     |      |     | 
|----------------------------------------------------------------------------------------------------- | ----------------------- | ----- | ----- | ----- | ----- | --- | ---- | --- | 
|                                                                                                      |                         |       | Gross |       |       | Net |     
|Three and nine months ended September 30, 2001                                                        |                         | Basis |       |       | Basis |    
|                                                                                                      |                         |       |       |       |       |    
|(In millions)                                                                                         |                         |       |       |       |       |     |      |    
|                                                                                                     
|Property-casualty reinsurance                                                                         |                         | $     | 662   |       |       | $   | 465  |    
|Property                                                                                              |                         |       | 282   |       |       |     | 159  |    
|Workers compensation                                                                                  |                         |       | 112   |       |       |     | 25   |    
|Airline hull                                                                                          |                         |       | 194   |       |       |     | 6    |    
|Commercial auto                                                                                       |                         |       | 1     |       |       |     | 1    |    
|                                                                                                      |                         |       |       |       |       |    
|                                                                                                      | Total property-casualty |       |       | 1,251 |       |     |      | 656 | 
|                                                                                                      |                         |       |       |       |       |    
|Group                                                                                                 |                         |       | 322   |       |       |     | 60   |    
|Life                                                                                                  |                         |       | 75    |       |       |     | 22   |    
|                                                                                                      |                         |       |       |       |       |    
|                                                                                                      | Total group and life    |       |       | 397   |       |     |      | 82  | 
|                                                                                                      |                         |       |       |       |       |    
|Total loss before corporate aggregate
reinsurance and reinstatement and additional
premiums and other |                         | $     | 1,648 |       |       |     | 738  |    
|                                                                                                      |                         |       |       |       |       |    
|Reinstatement and additional premiums and other                                                       |                         |       |       |       |       |     | (11  | )  
|Corporate aggregate reinsurance                                                                       |                         |       |       |       |       |     | (259 | )  
|                                                                                                      |                         |       |       |       |       |     |     
|Total                                                                                                 |                         |       |       |       |       | $   | 468  |    
|                                                                                                      |                         |       |       |       |       |     |     

Environmental Pollution and Other Mass Tort and Asbestos Reserves

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

14



---



##### Table of Contents



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

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

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

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

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

As of September 30, 2001 and December 31, 2000, CNA carried approximately $649
million and $347 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims. There was no environmental pollution and other mass
tort net claim and claim adjustment expense reserve development for the three
months ended September 30, 2001. Unfavorable environmental pollution and other
mass tort net claim and claim adjustment expense reserve development for the
three months ended September 30, 2000 amounted to $15 million. Unfavorable

15



---



##### Table of Contents



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

environmental pollution and other mass tort net
claim and claim adjustment expense reserve development for the nine months ended September 30, 2001 and
2000 amounted to $453 million and $36 million. The Company made environmental
pollution-related claim payments and other mass tort-related claim payments of
$135 million and $153 million in calendar year 2000 and the nine months ended
September 30, 2001 respectively, net of reinsurance.

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

As of September 30, 2001 and December 31, 2000, CNA carried approximately
$1,233 million and $603 million of net claim and claim adjustment expense
reserves, net of reinsurance recoverables, for reported and unreported
asbestos-related claims. There was no asbestos net claim and claim adjustment
expense reserve development for the three months ended September 30, 2001.
Unfavorable asbestos net claim and claim adjustment expense reserve development
for the three months ended September 30, 2000 amounted to $12 million.
Unfavorable asbestos net claim and claim adjustment expense reserve development
for the nine months ended September 30, 2001 and 2000 amounted to $769 million
and $43 million. The Company made asbestos-related claim payments of $126
million and $78 million in calendar year 2000 and the nine months ended
September 30, 2001 respectively, net of reinsurance, excluding payments made in
connection with the 1993 settlement of litigation related to Fibreboard
Corporation. CNA has attempted to manage its asbestos exposures by aggressively
resolving old accounts.

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

In addition, some asbestos defendants have asserted that their claims for
insurance are not subject to aggregate limits on coverage. CNA currently has
such claims from a number of insureds. Some of these claims involve insureds
facing exhaustion of products liability aggregate limits in their policies, who
have asserted that their asbestos claims fall within

16



---



##### Table of Contents



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

so-called non-products
liability coverage contained within their policies rather than products
liability coverage, and that the claimed non-products coverage is not subject
to any aggregate limit. It is difficult to predict the ultimate size of any of
the claims for coverage not subject to aggregate limits or predict to what extent, if any, the attempts to assert
non-products claims outside the products liability aggregate will succeed.

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

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

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

|                                                         |  |                    |      |   |                   |   |       |           |                     |   |          |   |  |   |      |  
|-------------------------------------------------------- |  | ------------------ | ---- | - | ----------------- | - | ----- | --------- | ------------------- | - | -------- | - |  | - | ---- | -
|Environmental Pollution and Other Mass Tort and Asbestos |  |                    |      |   |                   |   |       |          
|                                                         |  |                    |      |   |                   |   |       |          
|                                                         |  | September 30, 2001 |      |   | December 31, 2000 |  
|                                                         |  |                    |      |   |                   |  
|                                                         |  | Environmental      |      |   |                   |   |       |           | Environmental       |   |          |   |  |  
|                                                         |  | Pollution and      |      |   |                   |   |       |           | Pollution and Other |   |          |   |  |  
|                                                         |  | Other Mass Tort    |      |   | Asbestos          |   |       | Mass Tort |                     |   | Asbestos |  
|                                                         |  |                    |      |   |                   |   |       |           |                     |   |          |  
|(In millions)                                            |  |                    |      |   |                   |   |       |           |                     |   |          |   |  |   |      |  
|                                                        
|Gross reserves                                           |  | $                  | 879  |   |                   | $ | 1,586 |           |                     | $ | 493      |   |  | $ | 848  |  
|Ceded reserves                                           |  |                    | (230 | ) |                   |   | (353  | )         |                     |   | (146     | ) |  |   | (245 | )
|                                                         |  |                    |      |   |                   |   |       |           |                     |   |          |  
|Net reserves                                             |  | $                  | 649  |   |                   | $ | 1,233 |           |                     | $ | 347      |   |  | $ | 603  |  
|                                                         |  |                    |      |   |                   |   |       |           |                     |   |          |  

Second Quarter 2001 Prior Year Reserve Strengthening

During the second quarter of 2001, the Company noted the continued emergence of
adverse loss experience across several lines of business related to prior
years, which are discussed in further detail below. The Company completed a
number of reserve studies during the second quarter of 2001 for many of its
lines of business, including those in which these adverse trends were noted.
In the area of asbestos and environmental pollution, the Company reviewed
internal claims data as well as studies generated by external parties,
including a significant industry analysis on asbestos, environmental pollution
and other mass tort claims (APMT) published by an international rating agency.
As a result of these various reviews, management concluded that ultimate
losses, including losses for APMT, will be higher in the range of possible
outcomes than previously estimated. The Company recorded $2.6 billion of pretax
reserve strengthening associated with a change in estimate of prior year net
loss and allocated loss adjustment expense reserves (loss reserves),
including $1.2 billion pretax related to APMT. Concurrent with the Companys
review of loss reserves, the Company completed comprehensive studies of
estimated premium receivable accruals on retrospectively rated

17



---



##### Table of Contents



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

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

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

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

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

The adverse loss development excluding asbestos, environmental pollution and
other mass tort (non-APMT) was the result of recent analyses of several
businesses. The non-APMT reserve strengthening principally related to
commercial insurance coverages including automobile liability and commercial
multiple-peril, assumed reinsurance and healthcare related coverages. A brief
summary of these lines of business and the associated reserve development is
discussed below.

Approximately $600 million, excluding the impact of the corporate aggregate
reinsurance treaty, of the adverse loss development is a result of analyses of
several coverages provided to commercial entities written by various segments
of CNA. These analyses showed unexpected increases in the size of claims for
several lines, including commercial automobile liability, general liability and
the liability portion of commercial multiple-peril coverages. In addition, the
number of commercial automobile liability claims was higher than expected.
Finally, several state-specific factors resulted in higher than anticipated
losses, including developments associated with commercial automobile liability
coverage in Ohio and general liability coverage provided to contractors in New
York.

18



---



##### Table of Contents



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

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

Approximately $320 million, excluding the impact of the corporate aggregate
reinsurance treaty, of adverse loss development occurred in Specialty
Operations and was caused by coverages provided to healthcare related entities.
The level of paid and reported losses associated with coverages provided to
national long-term care facilities were higher than expected. In addition, the
average size of claims resulting from coverages provided to physicians and
institutions providing healthcare related services increased more than
expected.

Note G. Reinsurance

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

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

Reinsurance receivables have increased $3.9 billion from December 31, 2000
through September 30, 2001 primarily due to $1.4 billion related to corporate
aggregate reinsurance treaties, $0.7 billion related to the second quarter of
2001 reserve adjustment (excluding corporate aggregate reinsurance) and $0.9
billion related to the estimated loss reserves related to the WTC catastrophe
(excluding corporate aggregate reinsurance).

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)                  |                     |   |       |         |  |   |       |       |  |     |       |       |  |   |       |      
|                              
|2001                           |                     |   |       |         |  |   |       |       |  |     |       |       |  |   |       |      
|                               | Property-casualty   |   | $     | 6,188   |  |   | $     | 937   |  |     | $     | 3,781 |  |   | $     | 3,344 | 
|                               | Accident and health |   |       | 2,729   |  |   |       | 443   |  |     |       | 426   |  |   |       | 2,746 | 
|                               | Life                |   |       | 928     |  |   |       | 155   |  |     |       | 510   |  |   |       | 573   | 
|                               |                     |   |       |         |  |   |       |       |  |     |       |      
|Total earned premiums          |                     | $ | 9,845 |         |  | $ | 1,535 |       |  | $   | 4,717 |       |  | $ | 6,663 |      
|                               |                     |   |       |         |  |   |       |       |  |     |       |      
|2000                           |                     |   |       |         |  |   |       |       |  |     |       |       |  |   |       |      
|                               | Property-casualty   |   | $     | 6,261   |  |   | $     | 1,426 |  |     | $     | 2,601 |  |   | $     | 5,086 | 
|                               | Accident and health |   |       | 2,708   |  |   |       | 406   |  |     |       | 431   |  |   |       | 2,683 | 
|                               | Life                |   |       | 896     |  |   |       | 173   |  |     |       | 371   |  |   |       | 698   | 
|                               |                     |   |       |         |  |   |       |       |  |     |       |      
|Total earned premiums          |                     | $ | 9,865 |         |  | $ | 2,005 |       |  | $   | 3,403 |       |  | $ | 8,467 |      
|                               |                     |   |       |         |  |   |       |       |  |     |       |      

19



---



##### Table of Contents



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

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

In the first quarter of 2001, the Company triggered the coverage under the
second section of the Aggregate Cover for the 2001 accident year. The Company
has ceded losses and the related ceded premium to this section in all quarters
of 2001. In the third quarter, as a result of losses related to the WTC
catastrophe, the limit under this section has been exhausted. In the second
quarter of 2001, the significant reserve additions fully utilized the limit on
the 1999 accident year under the first section. No losses have been ceded to
the remaining $500 million of limit on accident years 2000 and 2001 under the
first section.

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

|                                                      |  |        |     |  |        |   |       | 
|----------------------------------------------------- |  | ------ | --- |  | ------ | - | ----- | 
|Impact of Aggregate Cover on Pretax Operating Results |  |        |     | 
|                                                      |  |        |     | 
|                                                      |  | Three  |     |  | Nine   |  
|Period ended September 30, 2001                       |  | Months |     |  | Months |  
|                                                      |  |        |     |  |        |  
|(In millions)                                         |  |        |     |  |        |   |       | 
|                                                     
|Ceded earned premium                                  |  | $      | 83  |  |        | $ | 543   | 
|Ceded claim and claim adjustment expense              |  |        | 288 |  |        |   | 1,010 | 
|Interest charges                                      |  |        | 11  |  |        |   | 70    | 
|                                                      |  |        |     |  |        |  
|Pretax benefit on operating results                   |  | $      | 194 |  |        | $ | 397   | 
|                                                      |  |        |     |  |        |  

In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property-casualty
lines of business in the Continental Casualty Company pool (the CCC Cover).
The loss protection provided by the CCC Cover has an aggregate limit of $750
million to $825 million of losses depending on CCCs 2001 actual premium
volume. The CCC Cover provides continuous coverage in excess of the second
section of the Aggregate Cover discussed above. Under the CCC Cover, interest
expense on the funds withheld generally accrues at 8% per annum. The interest
rate increases to 10% per annum if the aggregate loss ratio exceeds certain
thresholds. In the third quarter, as a result of significant losses related to
the WTC catastrophe, significant recoveries were recorded under this treaty.

20



---



##### Table of Contents



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

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

|                                                |  |        |     |  |        |   |     | 
|----------------------------------------------- |  | ------ | --- |  | ------ | - | --- | 
|Impact of CCC Cover on Pretax Operating Results |  |        |     | 
|                                                |  |        |     | 
|                                                |  | Three  |     |  | Nine   |  
|For the period ended September 30, 2001         |  | Months |     |  | Months |  
|                                                |  |        |     |  |        |  
|(In millions)                                   |  |        |     |  |        |   |     | 
|                                               
|Ceded earned premiums                           |  | $      | 232 |  |        | $ | 234 | 
|Ceded claim and claim adjustment expense        |  |        | 427 |  |        |   | 427 | 
|Interest charges                                |  |        | 15  |  |        |   | 15  | 
|                                                |  |        |     |  |        |  
|Pretax benefit on operating results             |  | $      | 180 |  |        | $ | 178 | 
|                                                |  |        |     |  |        |  

The pretax benefit from the Aggregate Cover and the CCC Cover by operating
segment on estimated losses related to the WTC catastrophe and all other losses
(Core) for the three months ended September 30, 2001, was as follows.

|                                                                    |     |   |     |      |  |   |       |  |  |   |     | 
|------------------------------------------------------------------- | --- | - | --- | ---- |  | - | ----- |  |  | - | --- | 
|Impact of Aggregate Cover and CCC Cover on Pretax Operating Results |     |   |     |      |  |   |       | 
|                                                                   
|For the three months ended September 30, 2001                       | WTC |   |     | Core |  |   | Total | 
|                                                                    |     |   |     |      |  |   |       | 
|(In millions)                                                       |     |   |     |      |  |   |       |  |  |   |     | 
|                                                                   
|Agency Market Operations                                            |     | $ | 40  |      |  | $ | 39    |  |  | $ | 79  | 
|Specialty Operations                                                |     |   | 7   |      |  |   | 15    |  |  |   | 22  | 
|CNA Re                                                              |     |   | 139 |      |  |   | 2     |  |  |   | 141 | 
|Global Operations                                                   |     |   | 5   |      |  |   | 5     |  |  |   | 10  | 
|Risk Management                                                     |     |   | 68  |      |  |   | 54    |  |  |   | 122 | 
|                                                                    |     |   |     |      |  |   |       |  | 
|Pretax benefit on operating results                                 |     | $ | 259 |      |  | $ | 115   |  |  | $ | 374 | 
|                                                                    |     |   |     |      |  |   |       |  | 

The pretax benefit from the Aggregate Cover and the CCC Cover by operating
segment on estimated losses related to the second quarter of 2001 reserve
adjustment, the WTC catastrophe and Core for the nine months ended September
30, 2001 was as follows.

|                                                                    |  |              |     |  |     |   |     |      |  |   |       |  |  |   |     | 
|------------------------------------------------------------------- |  | ------------ | --- |  | --- | - | --- | ---- |  | - | ----- |  |  | - | --- | 
|Impact of Aggregate Cover and CCC Cover on Pretax Operating Results |  |              |     |  |     |   |     |      |  |   |       | 
|                                                                    |  | Second       |     |  |     |   |     |      |  |   |       |  |  |   |    
|                                                                    |  | Quarter      |     |  |     |   |     |      |  |   |       |  |  |   |    
|                                                                    |  | 2001 Reserve |     |  |     |   |     |      |  |   |       |  |  |   |    
|For the nine months ended September 30, 2001                        |  | Adjustment   |     |  | WTC |   |     | Core |  |   | Total | 
|                                                                    |  |              |     |  |     |   |     |      |  |   |       | 
|(In millions)                                                       |  |              |     |  |     |   |     |      |  |   |       |  |  |   |     | 
|                                                                   
|Agency Market Operations                                            |  | $            | 150 |  |     | $ | 40  |      |  | $ | 26    |  |  | $ | 216 | 
|Specialty Operations                                                |  |              |    |  |     |   | 7   |      |  |   | 12    |  |  |   | 19  | 
|CNA Re                                                              |  |              | 26  |  |     |   | 139 |      |  |   | 1     |  |  |   | 166 | 
|Global Operations                                                   |  |              |    |  |     |   | 5   |      |  |   | 2     |  |  |   | 7   | 
|Risk Management                                                     |  |              | 47  |  |     |   | 68  |      |  |   | 52    |  |  |   | 167 | 
|                                                                    |  |              |     |  |     |   |     |      |  |   |       | 
|Pretax benefit on operating results                                 |  | $            | 223 |  |     | $ | 259 |      |  | $ | 93    |  |  | $ | 575 | 
|                                                                    |  |              |     |  |     |   |     |      |  |   |       | 

21



---



##### Table of Contents



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

Note H. Debt

Debt is composed of the following obligations.

|                                                              |                               |               |       |     |              |      |       |     | 
|------------------------------------------------------------- | ----------------------------- | ------------- | ----- | --- | ------------ | ---- | ----- | --- | 
|Debt                                                          |                               |               |       |     |              |      |       |    
|                                                              |                               | September 30, |       |     | December 31, |     
|                                                              |                               |               | 2001  |     |              | 2000 |      
|                                                              |                               |               |       |     |              |      |      
|(In millions)                                                 |                               |               |       |     |              |      |       |    
|                                                             
|Variable rate debt:                                           |                               |               |       |     |              |      |       |    
|                                                              | Commercial Paper              |               | $     | 17  |              |      | $     | 627 | 
|                                                              | Credit facility  CNA Surety  |               |       | 75  |              |      |       | 100 | 
|Senior notes:                                                 |                               |               |       |     |              |      |       |    
|                                                              | 7.250%, due March 1, 2003     |               |       | 133 |              |      |       | 133 | 
|                                                              | 6.250%, due November 15, 2003 |               |       | 250 |              |      |       | 249 | 
|                                                              | 6.500%, due April 15, 2005    |               |       | 491 |              |      |       | 491 | 
|                                                              | 6.750%, due November 15, 2006 |               |       | 249 |              |      |       | 249 | 
|                                                              | 6.450%, due January 15, 2008  |               |       | 149 |              |      |       | 149 | 
|                                                              | 6.600%, due December 15, 2008 |               |       | 199 |              |      |       | 199 | 
|                                                              | 8.375%, due August 15, 2012   |               |       | 68  |              |      |       | 68  | 
|                                                              | 6.950%, due January 15, 2018  |               |       | 148 |              |      |       | 148 | 
|Debenture, 7.250%, due November 15, 2023                      |                               |               | 240   |     |              |      | 240   |    
|Capital leases, 8.000%-19.980%, due through December 31, 2011 |                               |               | 38    |     |              |      | 40    |    
|Other debt, 1.000%-8.500%, due through 2019                   |                               |               | 27    |     |              |      | 36    |    
|                                                              |                               |               |       |     |              |     
|Total debt                                                    |                               | $             | 2,084 |     |              | $    | 2,729 |    
|                                                              |                               |               |       |     |              |     

As of April 30, 2001, CNAF replaced its $750 million revolving credit facility
(the Prior Facility) with a new $500 million revolving credit facility (the New
Facility). No loans were outstanding under either the Prior Facility or the
New Facility at anytime during 2001. The Prior Facility was scheduled to
expire on May 10, 2001. The New Facility is split into two parts, a $250
million component with a 364-day expiration date (with an option by CNAF to
turn this part of the New Facility into a one-year term loan) and a $250
million component with a 3-year expiration date.

The Company pays a facility fee, which varies based on the long-term debt
ratings of the Company, to the lenders of the New Facility for having funds
available for loans under both components of the New Facility. On October 10,
2001, S&P lowered the Companys long-term debt rating from BBB to BBB-. As a
result of this action, the facility fee on the 364-day component increased from
12.5 basis points to 15 basis points, and the facility fee on the 3-year
component increased from 15 basis points to 17.5 basis points.

In addition to the facility fees, the Company pays interest on any outstanding
loans under the New Facility based on a rate determined using the long-term
debt ratings of the Company. Subsequent to the S&P action on October 10, 2001,
that interest rate is equal to the London Interbank Offering Rate (LIBOR) plus
60 basis points for the 364-day component and LIBOR plus 57.5 basis points for
the 3-year component. Further, if the Company has outstanding loans equaling
more than 50% of the amounts available under the New Facility, the Company also
will pay a utilization fee of 12.5 basis points on such loans.

22



---



##### Table of Contents



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

Note I. Comprehensive Income

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

|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |   |       |   |       |   |      |  
|------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---- | - | ----------- | - | --- | ---- | --- | - | ------ | - | ----- | - | ----- | - | ---- | -
|Comprehensive Income (Loss)                                                                             |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |   |       |   |       |  
|                                                                                                        |                                                                   | Three Months                                                                               |      |   | Nine Months |  
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |     
|Period ended September 30                                                                               |                                                                   | 2001                                                                                       |      |   | 2000        |   |     | 2001 |     |   | 2000   |  
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |  
|(In millions)                                                                                           |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |   |       |   |       |  
|                                                                                                       
|Net (loss) income                                                                                       |                                                                   | $                                                                                          | (155 | ) |             | $ | 550 |      |     | $ | (1,622 | ) |       | $ | 1,021 |  
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |  
|Other comprehensive income (loss):                                                                      |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |   |       |   |       |  
|                                                                                                        | Change in unrealized gains/losses on general account investments: |                                                                                            |      |   |             |   |     |      |     |   |        |   |       |   |       |   |     
|                                                                                                        |                                                                   | Holding gains arising during the period                                                    |      |   | 285         |   |     |      | 441 |   |        |   | 421   |   |       |   | 250  |  
|                                                                                                        |                                                                   | Less: unrealized gains at beginning of period included in
realized gains during the period |      |   | 16          |   |     |      | 503 |   |        |   | 1,139 |   |       |   | 958  |  
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |  
|                                                                                                        |                                                                   | Net change in unrealized gains/losses on general account
investments                       |      |   | 269         |   |     |      | (62 | ) |        |   | (718  | ) |       |   | (708 | )
|                                                                                                        |                                                                   | Net change in unrealized gains/losses on separate accounts and
other                       |      |   | 31          |   |     |      | 31  |   |        |   | 28    |   |       |   | 28   |  
|                                                                                                        |                                                                   | Foreign currency translation adjustment                                                    |      |   | (11         | ) |     |      | (25 | ) |        |   | (16   | ) |       |   | (28  | )
|                                                                                                        |                                                                   | Allocation to participating policyholders and minority interest                            |      |   | (9          | ) |     |      | (10 | ) |        |   | (12   | ) |       |   | (15  | )
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |  
|Other comprehensive income (loss), before tax and cumulative effect
of a change in accounting principle |                                                                   |                                                                                            | 280  |   |             |   | (66 | )    |     |   | (718   | ) |       |   | (723  | )
|Deferred income tax (expense) benefit related to other
comprehensive income (loss)                      |                                                                   |                                                                                            | (104 | ) |             |   | 14  |      |     |   | 249    |   |       |   | 255   |  
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |  
|Other comprehensive income (loss), before cumulative effect of a
change in accounting principle         |                                                                   |                                                                                            | 176  |   |             |   | (52 | )    |     |   | (469   | ) |       |   | (468  | )
|Cumulative effect of a change in accounting principle, net of tax                                       |                                                                   |                                                                                            |     |   |             |   |    |      |     |   | 58     |   |       |   |      |  
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |  
|Other comprehensive income (loss), net of tax and cumulative effect
of a change in accounting principle |                                                                   |                                                                                            | 176  |   |             |   | (52 | )    |     |   | (411   | ) |       |   | (468  | )
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |  
|Total comprehensive income (loss)                                                                       |                                                                   | $                                                                                          | 21   |   |             | $ | 498 |      |     | $ | (2,033 | ) |       | $ | 553   |  
|                                                                                                        |                                                                   |                                                                                            |      |   |             |   |     |      |     |   |        |  

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

23



---



##### Table of Contents



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

Note J. Business Segments

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

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

Risk Managements other revenues and expenses for 2001 and 2000 include
revenues for services provided by RSKCoSM to other units within the Risk
Management segment that are eliminated at the consolidated level. Such
intrasegment revenue and expenses eliminated at the consolidated level were $39
million and $39 million for the three months ended September 30, 2001 and 2000
and $116 million and $119 million for the nine months ended September 30, 2001
and 2000.

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

24



---



##### Table of Contents



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



|                                                                                                    |                                |            |        |     |            |   |     |        |  |   |            |        |   |            |      |     |   |   |    |     |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ------ | --- | ---------- | - | --- | ------ |  | - | ---------- | ------ | - | ---------- | ---- | --- | - | - | -- | --- | -
|                                                                                                    |                                |            | Agency |     |            |   |     |        |  |   |            |        |   |            |      |     |   |   |    |    
|Three months ended                                                                                  |                                | Market     |        |     | Specialty  |   |     |        |  |   |            | Global |   |            | Risk |    
|September 30, 2001                                                                                  |                                | Operations |        |     | Operations |   |     | CNA Re |  |   | Operations |        |   | Management |     
|                                                                                                    |                                |            |        |     |            |   |     |        |  |   |            |        |   |            |     
|(In millions)                                                                                       |                                |            |        |     |            |   |     |        |  |   |            |        |   |            |      |     |   |   |    |    
|                                                                                                   
|Net earned premiums                                                                                 |                                | $          | 695    |     |            | $ | 167 |        |  | $ | 149        |        |   | $          | 308  |     |   | $ | 48 |    
|Claims, benefits and expenses                                                                       |                                |            | 782    |     |            |   | 167 |        |  |   | 419        |        |   |            | 322  |     |   |   | 78 |    
|                                                                                                    |                                |            |        |     |            |   |     |        |  |   |            |        |   |            |     
|                                                                                                    | Underwriting (loss) gain       |            |        | (87 | )          |   |     |       |  |   |            | (270   | ) |            |      | (14 | ) |   |    | (30 | )
|Net investment income                                                                               |                                |            | 106    |     |            |   | 43  |        |  |   | 40         |        |   |            | 35   |     |   |   | 29 |    
|Other revenues                                                                                      |                                |            | 40     |     |            |   | 3   |        |  |   | 3          |        |   |            | 33   |     |   |   | 82 |    
|Other expenses                                                                                      |                                |            | 32     |     |            |   | 2   |        |  |   |           |        |   |            | 29   |     |   |   | 76 |    
|                                                                                                    |                                |            |        |     |            |   |     |        |  |   |            |        |   |            |     
|                                                                                                    | Pretax operating income (loss) |            |        | 27  |            |   |     | 44     |  |   |            | (227   | ) |            |      | 25  |   |   |    | 5   |  
|Income tax (expense) benefit                                                                        |                                |            | (2     | )   |            |   | (14 | )      |  |   | 81         |        |   |            | (8   | )   |   |   |   |    
|Minority interest                                                                                   |                                |            |       |     |            |   |    |        |  |   |           |        |   |            | (6   | )   |   |   |   |    
|                                                                                                    |                                |            |        |     |            |   |     |        |  |   |            |        |   |            |     
|Net operating income (loss),
excluding realized investment
gains                                    |                                |            | 25     |     |            |   | 30  |        |  |   | (146       | )      |   |            | 11   |     |   |   | 5  |    
|Realized investment (losses)
gains, net of tax,
participating policyholders
and minority interests |                                |            | (9     | )   |            |   | (3  | )      |  |   | (4         | )      |   |            | 1    |     |   |   | (3 | )  
|                                                                                                    |                                |            |        |     |            |   |     |        |  |   |            |        |   |            |     
|Net income (loss)                                                                                   |                                | $          | 16     |     |            | $ | 27  |        |  | $ | (150       | )      |   | $          | 12   |     |   | $ | 2  |    
|                                                                                                    |                                |            |        |     |            |   |     |        |  |   |            |        |   |            |     

[Additional columns below]

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

|                                                                                                    |                                |            |       |      |            |   |     |           |   |   |              |     |   |       |     |   |  |   |       |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ----- | ---- | ---------- | - | --- | --------- | - | - | ------------ | --- | - | ----- | --- | - |  | - | ----- | ---- | -
|Three months ended                                                                                  |                                | Group      |       |      | Life       |   |     | Corporate |   |   |              |     |   |       |     |   | 
|September 30, 2001                                                                                  |                                | Operations |       |      | Operations |   |     | and Other |   |   | Eliminations |     |   | Total |    
|                                                                                                    |                                |            |       |      |            |   |     |           |   |   |              |     |   |       |    
|(In millions)                                                                                       |                                |            |       |      |            |   |     |           |   |   |              |     |   |       |     |   |  |   |       |     
|                                                                                                   
|Net earned premiums                                                                                 |                                | $          | 931   |      |            | $ | 248 |           |   | $ | (1           | )   |   | $     | (16 | ) |  | $ | 2,529 |     
|Claims, benefits and expenses                                                                       |                                |            | 1,032 |      |            |   | 403 |           |   |   | (15          | )   |   |       | (16 | ) |  |   | 3,172 |     
|                                                                                                    |                                |            |       |      |            |   |     |           |   |   |              |     |   |       |    
|                                                                                                    | Underwriting (loss) gain       |            |       | (101 | )          |   |     | (155      | ) |   |              | 14  |   |       |     |  |  |   |       | (643 | )
|Net investment income                                                                               |                                |            | 45    |      |            |   | 152 |           |   |   | 7            |     |   |       |    |   |  |   | 457   |     
|Other revenues                                                                                      |                                |            | 4     |      |            |   | 38  |           |   |   | 2            |     |   |       | (43 | ) |  |   | 162   |     
|Other expenses                                                                                      |                                |            | 3     |      |            |   | 28  |           |   |   | 84           |     |   |       | (43 | ) |  |   | 211   |     
|                                                                                                    |                                |            |       |      |            |   |     |           |   |   |              |     |   |       |    
|                                                                                                    | Pretax operating income (loss) |            |       | (55  | )          |   |     | 7         |   |   |              | (61 | ) |       |     |  |  |   |       | (235 | )
|Income tax (expense) benefit                                                                        |                                |            | 20    |      |            |   | (3  | )         |   |   | 12           |     |   |       |    |   |  |   | 86    |     
|Minority interest                                                                                   |                                |            |      |      |            |   |    |           |   |   |             |     |   |       |    |   |  |   | (6    | )   
|                                                                                                    |                                |            |       |      |            |   |     |           |   |   |              |     |   |       |    
|Net operating income (loss),
excluding realized investment
gains                                    |                                |            | (35   | )    |            |   | 4   |           |   |   | (49          | )   |   |       |    |   |  |   | (155  | )   
|Realized investment (losses)
gains, net of tax,
participating policyholders
and minority interests |                                |            | 9     |      |            |   | 8   |           |   |   | 1            |     |   |       |    |   |  |   |      |     
|                                                                                                    |                                |            |       |      |            |   |     |           |   |   |              |     |   |       |    
|Net income (loss)                                                                                   |                                | $          | (26   | )    |            | $ | 12  |           |   | $ | (48          | )   |   | $     |    |   |  | $ | (155  | )   
|                                                                                                    |                                |            |       |      |            |   |     |           |   |   |              |     |   |       |    

25



---



##### Table of Contents



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



|                                                                                                    |                                |            |        |      |            |   |     |        |   |   |            |        |   |            |      |     |   |   |     |     |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ------ | ---- | ---------- | - | --- | ------ | - | - | ---------- | ------ | - | ---------- | ---- | --- | - | - | --- | --- | -
|                                                                                                    |                                |            | Agency |      |            |   |     |        |   |   |            |        |   |            |      |     |   |   |     |    
|Three months ended                                                                                  |                                | Market     |        |      | Specialty  |   |     |        |   |   |            | Global |   |            | Risk |    
|September 30, 2000                                                                                  |                                | Operations |        |      | Operations |   |     | CNA Re |   |   | Operations |        |   | Management |     
|                                                                                                    |                                |            |        |      |            |   |     |        |   |   |            |        |   |            |     
|(In millions)                                                                                       |                                |            |        |      |            |   |     |        |   |   |            |        |   |            |      |     |   |   |     |    
|                                                                                                   
|Net earned premiums                                                                                 |                                | $          | 807    |      |            | $ | 234 |        |   | $ | 289        |        |   | $          | 271  |     |   | $ | 142 |    
|Claims, benefits and expenses                                                                       |                                |            | 939    |      |            |   | 244 |        |   |   | 312        |        |   |            | 283  |     |   |   | 177 |    
|                                                                                                    |                                |            |        |      |            |   |     |        |   |   |            |        |   |            |     
|                                                                                                    | Underwriting loss              |            |        | (132 | )          |   |     | (10    | ) |   |            | (23    | ) |            |      | (12 | ) |   |     | (35 | )
|Net investment income                                                                               |                                |            | 185    |      |            |   | 67  |        |   |   | 49         |        |   |            | 39   |     |   |   | 45  |    
|Other revenues                                                                                      |                                |            | 39     |      |            |   | 6   |        |   |   | 1          |        |   |            | 37   |     |   |   | 80  |    
|Other expenses                                                                                      |                                |            | 37     |      |            |   | 4   |        |   |   |           |        |   |            | 31   |     |   |   | 70  |    
|                                                                                                    |                                |            |        |      |            |   |     |        |   |   |            |        |   |            |     
|                                                                                                    | Pretax operating income (loss) |            |        | 55   |            |   |     | 59     |   |   |            | 27     |   |            |      | 33  |   |   |     | 20  |  
|Income tax (expense) benefit                                                                        |                                |            | (11    | )    |            |   | (17 | )      |   |   | (5         | )      |   |            | (8   | )   |   |   | (5  | )  
|Minority interest                                                                                   |                                |            |       |      |            |   |    |        |   |   |           |        |   |            | (6   | )   |   |   |    |    
|                                                                                                    |                                |            |        |      |            |   |     |        |   |   |            |        |   |            |     
|Net operating income (loss),
excluding realized investment
gains                                    |                                |            | 44     |      |            |   | 42  |        |   |   | 22         |        |   |            | 19   |     |   |   | 15  |    
|Realized investment gains
(losses), net of tax,
participating policyholders
and minority interests |                                |            | 164    |      |            |   | 59  |        |   |   | 36         |        |   |            | 51   |     |   |   | 41  |    
|                                                                                                    |                                |            |        |      |            |   |     |        |   |   |            |        |   |            |     
|Net income (loss)                                                                                   |                                | $          | 208    |      |            | $ | 101 |        |   | $ | 58         |        |   | $          | 70   |     |   | $ | 56  |    
|                                                                                                    |                                |            |        |      |            |   |     |        |   |   |            |        |   |            |     

[Additional columns below]

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

|                                                                                                    |                                |            |     |     |            |   |     |           |   |   |              |     |   |       |     |   |  |   |       |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | --- | --- | ---------- | - | --- | --------- | - | - | ------------ | --- | - | ----- | --- | - |  | - | ----- | ---- | -
|Three months ended                                                                                  |                                | Group      |     |     | Life       |   |     | Corporate |   |   |              |     |   |       |     |   | 
|September 30, 2000                                                                                  |                                | Operations |     |     | Operations |   |     | and Other |   |   | Eliminations |     |   | Total |    
|                                                                                                    |                                |            |     |     |            |   |     |           |   |   |              |     |   |       |    
|(In millions)                                                                                       |                                |            |     |     |            |   |     |           |   |   |              |     |   |       |     |   |  |   |       |     
|                                                                                                   
|Net earned premiums                                                                                 |                                | $          | 947 |     |            | $ | 236 |           |   | $ | 5            |     |   | $     | (12 | ) |  | $ | 2,919 |     
|Claims, benefits and expenses                                                                       |                                |            | 975 |     |            |   | 341 |           |   |   | 35           |     |   |       | (12 | ) |  |   | 3,294 |     
|                                                                                                    |                                |            |     |     |            |   |     |           |   |   |              |     |   |       |    
|                                                                                                    | Underwriting loss              |            |     | (28 | )          |   |     | (105      | ) |   |              | (30 | ) |       |     |  |  |   |       | (375 | )
|Net investment income                                                                               |                                |            | 44  |     |            |   | 157 |           |   |   | 15           |     |   |       |    |   |  |   | 601   |     
|Other revenues                                                                                      |                                |            | 12  |     |            |   | 49  |           |   |   | 1            |     |   |       | (42 | ) |  |   | 183   |     
|Other expenses                                                                                      |                                |            | 9   |     |            |   | 27  |           |   |   | 68           |     |   |       | (42 | ) |  |   | 204   |     
|                                                                                                    |                                |            |     |     |            |   |     |           |   |   |              |     |   |       |    
|                                                                                                    | Pretax operating income (loss) |            |     | 19  |            |   |     | 74        |   |   |              | (82 | ) |       |     |  |  |   |       | 205  |  
|Income tax (expense) benefit                                                                        |                                |            | (5  | )   |            |   | (25 | )         |   |   | 37           |     |   |       |    |   |  |   | (39   | )   
|Minority interest                                                                                   |                                |            |    |     |            |   |    |           |   |   | (4           | )   |   |       |    |   |  |   | (10   | )   
|                                                                                                    |                                |            |     |     |            |   |     |           |   |   |              |     |   |       |    
|Net operating income (loss),
excluding realized investment
gains                                    |                                |            | 14  |     |            |   | 49  |           |   |   | (49          | )   |   |       |    |   |  |   | 156   |     
|Realized investment gains
(losses), net of tax,
participating policyholders
and minority interests |                                |            | 28  |     |            |   | 17  |           |   |   | (2           | )   |   |       |    |   |  |   | 394   |     
|                                                                                                    |                                |            |     |     |            |   |     |           |   |   |              |     |   |       |    
|Net income (loss)                                                                                   |                                | $          | 42  |     |            | $ | 66  |           |   | $ | (51          | )   |   | $     |    |   |  | $ | 550   |     
|                                                                                                    |                                |            |     |     |            |   |     |           |   |   |              |     |   |       |    

26



---



##### Table of Contents



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



|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |       |      |   |   |       |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ------ | ------ | ---------- | - | ----- | ------ | - | - | ---------- | ------ | - | ---------- | ----- | ---- | - | - | ----- | ---- | -
|                                                                                                    |                                |            | Agency |        |            |   |       |        |   |   |            |        |   |            |       |      |   |   |       |     
|Nine months ended                                                                                   |                                | Market     |        |        | Specialty  |   |       |        |   |   |            | Global |   |            | Risk  |     
|September 30, 2001                                                                                  |                                | Operations |        |        | Operations |   |       | CNA Re |   |   | Operations |        |   | Management |      
|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |      
|(In millions)                                                                                       |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |       |      |   |   |       |     
|                                                                                                   
|Net earned premiums                                                                                 |                                | $          | 1,639  |        |            | $ | 523   |        |   | $ | 452        |        |   | $          | 866   |      |   | $ | (94   | )   
|Claims, benefits and expenses                                                                       |                                |            | 3,079  |        |            |   | 925   |        |   |   | 1,356      |        |   |            | 1,087 |      |   |   | 855   |     
|Restructuring and other related charges                                                             |                                |            | 4      |        |            |   | 1     |        |   |   |           |        |   |            | 1     |      |   |   | 1     |     
|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |      
|                                                                                                    | Underwriting loss              |            |        | (1,444 | )          |   |       | (403   | ) |   |            | (904   | ) |            |       | (222 | ) |   |       | (950 | )
|Net investment income                                                                               |                                |            | 317    |        |            |   | 143   |        |   |   | 128        |        |   |            | 105   |      |   |   | 89    |     
|Other revenues                                                                                      |                                |            | 122    |        |            |   | 16    |        |   |   | 4          |        |   |            | 68    |      |   |   | 244   |     
|Other expenses                                                                                      |                                |            | 109    |        |            |   | 5     |        |   |   |           |        |   |            | 86    |      |   |   | 229   |     
|Non-insurance restructuring and other
related charges                                               |                                |            |       |        |            |   |      |        |   |   |           |        |   |            |      |      |   |   | 1     |     
|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |      
|                                                                                                    | Pretax operating (loss) income |            |        | (1,114 | )          |   |       | (249   | ) |   |            | (772   | ) |            |       | (135 | ) |   |       | (847 | )
|Income tax benefit (expense)                                                                        |                                |            | 409    |        |            |   | 95    |        |   |   | 275        |        |   |            | 39    |      |   |   | 302   |     
|Minority interest                                                                                   |                                |            |       |        |            |   |      |        |   |   |           |        |   |            | (18   | )    |   |   |      |     
|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |      
|Net operating (loss) income, excluding
realized investment gains                                    |                                |            | (705   | )      |            |   | (154  | )      |   |   | (497       | )      |   |            | (114  | )    |   |   | (545  | )   
|Realized investment gains (losses),
net of tax, participating
policyholders and minority interests |                                |            | 312    |        |            |   | 127   |        |   |   | (216       | )      |   |            | 27    |      |   |   | 105   |     
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |            | (25    | )      |            |   | (12   | )      |   |   | (5         | )      |   |            | (3    | )    |   |   | (8    | )   
|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |      
|Net (loss) income                                                                                   |                                | $          | (418   | )      |            | $ | (39   | )      |   | $ | (718       | )      |   | $          | (90   | )    |   | $ | (448  | )   
|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |      
|Receivables, net                                                                                    |                                | $          | 5,297  |        |            | $ | 1,296 |        |   | $ | 2,497      |        |   | $          | 1,161 |      |   | $ | 3,664 |     
|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |      
|Insurance reserves                                                                                  |                                | $          | 13,165 |        |            | $ | 3,953 |        |   | $ | 5,196      |        |   | $          | 2,850 |      |   | $ | 5,197 |     
|                                                                                                    |                                |            |        |        |            |   |       |        |   |   |            |        |   |            |      

[Additional columns below]

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

|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |      |   |  |   |        |        |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ----- | ---- | ---------- | - | ----- | --------- | - | - | ------------ | ---- | - | ----- | ---- | - |  | - | ------ | ------ | -
|Nine months ended                                                                                   |                                | Group      |       |      | Life       |   |       | Corporate |   |   |              |      |   |       |      |   | 
|September 30, 2001                                                                                  |                                | Operations |       |      | Operations |   |       | and Other |   |   | Eliminations |      |   | Total |     
|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |     
|(In millions)                                                                                       |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |      |   |  |   |        |       
|                                                                                                   
|Net earned premiums                                                                                 |                                | $          | 2,579 |      |            | $ | 740   |           |   | $ | 1            |      |   | $     | (43  | ) |  | $ | 6,663  |       
|Claims, benefits and expenses                                                                       |                                |            | 2,729 |      |            |   | 1,131 |           |   |   | 22           |      |   |       | (43  | ) |  |   | 11,141 |       
|Restructuring and other related charges                                                             |                                |            |      |      |            |   | 17    |           |   |   | 37           |      |   |       |     |   |  |   | 61     |       
|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |     
|                                                                                                    | Underwriting loss              |            |       | (150 | )          |   |       | (408      | ) |   |              | (58  | ) |       |      |  |  |   |        | (4,539 | )
|Net investment income                                                                               |                                |            | 129   |      |            |   | 446   |           |   |   | 28           |      |   |       |     |   |  |   | 1,385  |       
|Other revenues                                                                                      |                                |            | 14    |      |            |   | 157   |           |   |   | 8            |      |   |       | (126 | ) |  |   | 507    |       
|Other expenses                                                                                      |                                |            | 6     |      |            |   | 83    |           |   |   | 198          |      |   |       | (126 | ) |  |   | 590    |       
|Non-insurance restructuring and other
related charges                                               |                                |            |      |      |            |   |      |           |   |   |             |      |   |       |     |   |  |   | 1      |       
|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |     
|                                                                                                    | Pretax operating (loss) income |            |       | (13  | )          |   |       | 112       |   |   |              | (220 | ) |       |      |  |  |   |        | (3,238 | )
|Income tax benefit (expense)                                                                        |                                |            | 9     |      |            |   | (39   | )         |   |   | 55           |      |   |       |     |   |  |   | 1,145  |       
|Minority interest                                                                                   |                                |            |      |      |            |   |      |           |   |   |             |      |   |       |     |   |  |   | (18    | )     
|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |     
|Net operating (loss) income, excluding
realized investment gains                                    |                                |            | (4    | )    |            |   | 73    |           |   |   | (165         | )    |   |       |     |   |  |   | (2,111 | )     
|Realized investment gains (losses),
net of tax, participating
policyholders and minority interests |                                |            | 24    |      |            |   | 101   |           |   |   | 70           |      |   |       |     |   |  |   | 550    |       
|Cumulative effect of a change in
accounting principle, net of tax                                   |                                |            | (1    | )    |            |   | (3    | )         |   |   | (4           | )    |   |       |     |   |  |   | (61    | )     
|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |     
|Net (loss) income                                                                                   |                                | $          | 19    |      |            | $ | 171   |           |   | $ | (99          | )    |   | $     |     |   |  | $ | (1,622 | )     
|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |     
|Receivables, net                                                                                    |                                | $          | 1,360 |      |            | $ | 834   |           |   | $ | 1,010        |      |   | $     |     |   |  | $ | 17,119 |       
|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |     
|Insurance reserves                                                                                  |                                | $          | 3,032 |      |            | $ | 8,251 |           |   | $ | 1,711        |      |   | $     |     |   |  | $ | 43,355 |       
|                                                                                                    |                                |            |       |      |            |   |       |           |   |   |              |      |   |       |     

27



---



##### Table of Contents



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



|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |       |     |   |   |       |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ------ | ---- | ---------- | - | ----- | ------ | - | - | ---------- | ------ | - | ---------- | ----- | --- | - | - | ----- | ---- | -
|                                                                                                    |                                |            | Agency |      |            |   |       |        |   |   |            |        |   |            |       |     |   |   |       |     
|Nine months ended                                                                                   |                                | Market     |        |      | Specialty  |   |       |        |   |   |            | Global |   |            | Risk  |    
|September 30, 2000                                                                                  |                                | Operations |        |      | Operations |   |       | CNA Re |   |   | Operations |        |   | Management |      
|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |      
|(In millions)                                                                                       |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |       |     |   |   |       |     
|                                                                                                   
|Net earned premiums                                                                                 |                                | $          | 2,477  |      |            | $ | 578   |        |   | $ | 802        |        |   | $          | 811   |     |   | $ | 448   |     
|Claims, benefits and expenses                                                                       |                                |            | 2,818  |      |            |   | 595   |        |   |   | 868        |        |   |            | 854   |     |   |   | 554   |     
|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |      
|                                                                                                    | Underwriting loss              |            |        | (341 | )          |   |       | (17    | ) |   |            | (66    | ) |            |       | (43 | ) |   |       | (106 | )
|Net investment income                                                                               |                                |            | 542    |      |            |   | 192   |        |   |   | 157        |        |   |            | 114   |     |   |   | 131   |     
|Other revenues                                                                                      |                                |            | 109    |      |            |   | 19    |        |   |   | 4          |        |   |            | 90    |     |   |   | 239   |     
|Other expenses                                                                                      |                                |            | 104    |      |            |   | 10    |        |   |   | 2          |        |   |            | 87    |     |   |   | 221   |     
|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |      
|                                                                                                    | Pretax operating income (loss) |            |        | 206  |            |   |       | 184    |   |   |            | 93     |   |            |       | 74  |   |   |       | 43   |  
|Income tax (expense) benefit                                                                        |                                |            | (52    | )    |            |   | (58   | )      |   |   | (27        | )      |   |            | (20   | )   |   |   | (9    | )   
|Minority interest                                                                                   |                                |            |       |      |            |   |      |        |   |   |           |        |   |            | (19   | )   |   |   |      |     
|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |      
|Net operating income (loss),
excluding realized investment
gains                                    |                                |            | 154    |      |            |   | 126   |        |   |   | 66         |        |   |            | 35    |     |   |   | 34    |     
|Realized investment gains
(losses), net of tax,
participating policyholders
and minority interests |                                |            | 267    |      |            |   | 97    |        |   |   | 57         |        |   |            | 63    |     |   |   | 66    |     
|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |      
|Net income (loss)                                                                                   |                                | $          | 421    |      |            | $ | 223   |        |   | $ | 123        |        |   | $          | 98    |     |   | $ | 100   |     
|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |      
|Receivables, net                                                                                    |                                | $          | 4,522  |      |            | $ | 1,207 |        |   | $ | 2,092      |        |   | $          | 918   |     |   | $ | 2,545 |     
|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |      
|Insurance reserves                                                                                  |                                | $          | 11,789 |      |            | $ | 4,052 |        |   | $ | 4,455      |        |   | $          | 2,599 |     |   | $ | 4,189 |     
|                                                                                                    |                                |            |        |      |            |   |       |        |   |   |            |        |   |            |      

[Additional columns below]

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

|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |      |   |  |   |        |        |  
|--------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | ----- | --- | ---------- | - | ----- | --------- | - | - | ------------ | ---- | - | ----- | ---- | - |  | - | ------ | ------ | -
|Nine months ended                                                                                   |                                | Group      |       |     | Life       |   |       | Corporate |   |   |              |      |   |       |      |   | 
|September 30, 2000                                                                                  |                                | Operations |       |     | Operations |   |       | and Other |   |   | Eliminations |      |   | Total |     
|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |     
|(In millions)                                                                                       |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |      |   |  |   |        |       
|                                                                                                   
|Net earned premiums                                                                                 |                                | $          | 2,708 |     |            | $ | 674   |           |   | $ | 1            |      |   | $     | (32  | ) |  | $ | 8,467  |       
|Claims, benefits and expenses                                                                       |                                |            | 2,772 |     |            |   | 990   |           |   |   | 89           |      |   |       | (32  | ) |  |   | 9,508  |       
|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |     
|                                                                                                    | Underwriting loss              |            |       | (64 | )          |   |       | (316      | ) |   |              | (88  | ) |       |      |  |  |   |        | (1,041 | )
|Net investment income                                                                               |                                |            | 121   |     |            |   | 456   |           |   |   | 18           |      |   |       |     |   |  |   | 1,731  |       
|Other revenues                                                                                      |                                |            | 36    |     |            |   | 149   |           |   |   | 13           |      |   |       | (130 | ) |  |   | 529    |       
|Other expenses                                                                                      |                                |            | 36    |     |            |   | 77    |           |   |   | 210          |      |   |       | (130 | ) |  |   | 617    |       
|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |     
|                                                                                                    | Pretax operating income (loss) |            |       | 57  |            |   |       | 212       |   |   |              | (267 | ) |       |      |  |  |   |        | 602    |  
|Income tax (expense) benefit                                                                        |                                |            | (17   | )   |            |   | (72   | )         |   |   | 106          |      |   |       |     |   |  |   | (149   | )     
|Minority interest                                                                                   |                                |            |      |     |            |   |      |           |   |   | (4           | )    |   |       |     |   |  |   | (23    | )     
|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |     
|Net operating income (loss),
excluding realized investment
gains                                    |                                |            | 40    |     |            |   | 140   |           |   |   | (165         | )    |   |       |     |   |  |   | 430    |       
|Realized investment gains
(losses), net of tax,
participating policyholders
and minority interests |                                |            | 41    |     |            |   | 5     |           |   |   | (5           | )    |   |       |     |   |  |   | 591    |       
|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |     
|Net income (loss)                                                                                   |                                | $          | 81    |     |            | $ | 145   |           |   | $ | (170         | )    |   | $     |     |   |  | $ | 1,021  |       
|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |     
|Receivables, net                                                                                    |                                | $          | 1,034 |     |            | $ | 545   |           |   | $ | 893          |      |   | $     |     |   |  | $ | 13,756 |       
|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |     
|Insurance reserves                                                                                  |                                | $          | 2,678 |     |            | $ | 7,572 |           |   | $ | 1,912        |      |   | $     |     |   |  | $ | 39,246 |       
|                                                                                                    |                                |            |       |     |            |   |       |           |   |   |              |      |   |       |     

28



---



##### Table of Contents



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

Note K. Restructuring and Other Related Charges

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

In connection with the IT Plan, the Company incurred $62 million, pretax, of
restructuring and other related charges, primarily related to planned
reductions in the workforce of approximately 260 positions (gross and net), and
software and hardware asset write-offs for the nine months ended September 30,
2001. There were no such charges recorded in the third quarter of 2001. The
Company does not expect to incur significant amounts of additional charges with
respect to the IT Plan in any single future quarter and, as a result, does not
intend to separately classify such expenses as restructuring and related
charges when they occur.

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

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

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

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

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

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

Upon adoption of the IT Plan during the second quarter of 2001, an accrual of
$30 million was established related to $29 million of workforce reductions and
the $1 million of other costs. Approximately $17 million of this accrual has
been paid through September 30, 2001, resulting in an ending accrual of $13
million.

29



---



##### Table of Contents



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

Additionally, at December 31, 2000, an accrual of $7 million of lease
termination costs remained related to the August 1998 restructuring.
Approximately $5 million of these costs were paid during the nine months ended
September 30, 2001, resulting in a remaining accrual of $2 million at September
30, 2001.

Note L. Significant Transactions

Planned Dispositions of Certain Subsidiaries

The Company is attempting to sell certain subsidiaries and expects the sales to
be completed in early 2002. The assets being held for disposition include the
United Kingdom subsidiaries of CNA Re and certain other subsidiaries. The
Company anticipates that it will realize losses in connection with those sales.
In determining the anticipated loss from these sales, the Company estimated
sales proceeds, transactional costs, lease termination costs, employee related
costs and the cost of certain reinsurance transactions. The sale of the United
Kingdom insurance subsidiary will be subject to regulatory approval. During the
second quarter of 2001, an estimated after-tax realized loss of $320 million
was recorded in connection with these planned dispositions.

Individual Life Reinsurance Transaction

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

MARC assumed approximately $294 million of liabilities (primarily future policy
benefits and claim reserves) and approximately $209 million in assets
(primarily uncollected premiums and deferred policy acquisition costs). The
net gain from the reinsurance transaction, which is subject to certain
post-closing adjustments, has been recorded as deferred revenue and will be
recognized in income over the next 6 months as CNA Life Res assumed contracts
are novated to MARC.

The CNA Life Re business contributed net earned premiums of $66 million and
$172 million and pretax operating income of $7 million and $23 million for the
three months and nine months ended September 30, 2000.

Note M. Related Party Transactions

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

CNA and its eligible subsidiaries are included in the consolidated Federal
income tax return of Loews and its eligible subsidiaries. During the first
nine months of 2001 CNA paid Loews

30



---



##### Table of Contents



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

$111 million for income taxes. During the first nine months of 2000, CNA
received a tax refund of $282 million from Loews.

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

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

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

31



---



##### Table of Contents






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

Consolidated Operations

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

Loews Corporation (Loews) owns approximately 89% of the outstanding common
stock of CNA Financial Corporation (CNAF). The following discussion should be
read in conjunction with the Condensed Consolidated Financial Statements and
related Notes found on pages 1 to 31 and with CNAFs Annual Report to
Shareholders for the year ended December 31, 2000.

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

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

32



---



##### Table of Contents



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

Operating Results

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

Consolidated Operations

|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |        |   |   |        |       | 
|---------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---- | ------------ | ----- | ---- | ----------- | ----- | ----- |  | - | ------ | ------ | - | - | ------ | ----- | 
|                                                                             |                                                                   |      | Three Months |       |      | Nine Months |      
|                                                                             |                                                                   |      |              |       |      |             |      
|Period ended September 30                                                    |                                                                   | 2001 |              |       | 2000 |             |       | 2001  |  |   | 2000   |       
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       
|(In millions, except per share data)                                         |                                                                   |      |              |       |      |             |       |       |  |   |        |        |   |   |        |      
|Operating revenues:                                                          |                                                                   |      |              |       |      |             |       |       |  |   |        |        |   |   |        |      
|                                                                             | Net earned premiums                                               |      | $            | 2,529 |      |             | $     | 2,919 |  |   | $      | 6,663  |   |   | $      | 8,467 | 
|                                                                             | Net investment income                                             |      |              | 457   |      |             |       | 601   |  |   |        | 1,385  |   |   |        | 1,731 | 
|                                                                             | Other revenues                                                    |      |              | 162   |      |             |       | 183   |  |   |        | 507    |   |   |        | 529   | 
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       
|Total operating revenues                                                     |                                                                   |      | 3,148        |       |      |             | 3,703 |       |  |   | 8,555  |        |   |   | 10,727 |      
|Claims, benefits and expenses                                                |                                                                   |      | 3,383        |       |      |             | 3,498 |       |  |   | 11,793 |        |   |   | 10,125 |      
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       
|Operating (loss) income before income tax and minority interest              |                                                                   |      | (235         | )     |      |             | 205   |       |  |   | (3,238 | )      |   |   | 602    |      
|Income tax benefit (expense)                                                 |                                                                   |      | 86           |       |      |             | (39   | )     |  |   | 1,145  |        |   |   | (149   | )    
|Minority interest                                                            |                                                                   |      | (6           | )     |      |             | (10   | )     |  |   | (18    | )      |   |   | (23    | )    
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       
|Net operating (loss) income                                                  |                                                                   |      | (155         | )     |      |             | 156   |       |  |   | (2,111 | )      |   |   | 430    |      
|Net realized investment gains, net of tax and minority interest              |                                                                   |      |             |       |      |             | 394   |       |  |   | 550    |        |   |   | 591    |      
|Cumulative effect of a change in accounting principle, net of tax            |                                                                   |      |             |       |      |             |      |       |  |   | (61    | )      |   |   |       |      
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       
|Net (loss) income                                                            |                                                                   | $    | (155         | )     |      | $           | 550   |       |  | $ | (1,622 | )      |   | $ | 1,021  |      
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       
|Basic and diluted (loss) earnings per share:                                 |                                                                   |      |              |       |      |             |       |       |  |   |        |        |   |   |        |      
|                                                                             | Net operating (loss) income                                       |      | $            | (0.84 | )    |             | $     | 0.85  |  |   | $      | (11.47 | ) |   | $      | 2.34  | 
|                                                                             | Net realized investment gains, net of tax and minority interest   |      |              |      |      |             |       | 2.15  |  |   |        | 2.99   |   |   |        | 3.21  | 
|                                                                             | Cumulative effect of a change in accounting principle, net of tax |      |              |      |      |             |       |      |  |   |        | (0.33  | ) |   |        |      | 
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       
|Basic and diluted (loss) earnings per share available to common
stockholders |                                                                   | $    | (0.84        | )     |      | $           | 3.00  |       |  | $ | (8.81  | )      |   | $ | 5.55   |      
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       
|Weighted average outstanding common stock and common stock
equivalents       |                                                                   |      |              |       |      |             |       |       |  |   |        |        |   |   |        |      
|                                                                             | Basic                                                             |      |              | 185.5 |      |             |       | 183.4 |  |   |        | 184.0  |   |   |        | 183.7 | 
|                                                                             | Diluted                                                           |      |              | 185.5 |      |             |       | 183.5 |  |   |        | 184.0  |   |   |        | 183.7 | 
|                                                                             |                                                                   |      |              |       |      |             |       |       |  |   |        |       

The following table summarizes net operating (loss) income by segment for the
three and nine months ended September 30, 2001 and 2000.

Net Operating (Loss) Income by Segment

|                            |  |              |      |   |             |   |     |      |  |   |        |   |  |   |      |  
|--------------------------- |  | ------------ | ---- | - | ----------- | - | --- | ---- |  | - | ------ | - |  | - | ---- | -
|                            |  | Three Months |      |   | Nine Months |  
|                            |  |              |      |   |             |  
|Period ended September 30   |  | 2001         |      |   | 2000        |   |     | 2001 |  |   | 2000   |  
|                            |  |              |      |   |             |   |     |      |  |   |        |  
|(In millions)               |  |              |      |   |             |   |     |      |  |   |        |   |  |   |      |  
|Agency Market Operations    |  | $            | 25   |   |             | $ | 44  |      |  | $ | (705   | ) |  | $ | 154  |  
|Specialty Operations        |  |              | 30   |   |             |   | 42  |      |  |   | (154   | ) |  |   | 126  |  
|CNA Re                      |  |              | (146 | ) |             |   | 22  |      |  |   | (497   | ) |  |   | 66   |  
|Global Operations           |  |              | 11   |   |             |   | 19  |      |  |   | (114   | ) |  |   | 35   |  
|Risk Management             |  |              | 5    |   |             |   | 15  |      |  |   | (545   | ) |  |   | 34   |  
|Group Operations            |  |              | (35  | ) |             |   | 14  |      |  |   | (4     | ) |  |   | 40   |  
|Life Operations             |  |              | 4    |   |             |   | 49  |      |  |   | 73     |   |  |   | 140  |  
|Corporate and Other         |  |              | (49  | ) |             |   | (49 | )    |  |   | (165   | ) |  |   | (165 | )
|                            |  |              |      |   |             |   |     |      |  |   |        |  
|Net operating (loss) income |  | $            | (155 | ) |             | $ | 156 |      |  | $ | (2,111 | ) |  | $ | 430  |  
|                            |  |              |      |   |             |   |     |      |  |   |        |  

33



---



##### Table of Contents



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

The net operating loss was $155 million, or a loss of $0.84 per share, for the
third quarter of 2001 as compared with net operating income of $156 million, or
$0.85 per share, for the same period in 2000. The decline in net operating
results was primarily due to estimated losses related to the September 11, 2001
World Trade Center and related events (WTC) catastrophe of $304 million
after-tax, net of the related corporate aggregate reinsurance treaty benefit,
recorded in the third quarter of 2001. In addition, net operating income for
the third quarter decreased $53 million after-tax due to a decline in limited
partnership income. These declines were partially offset by a $75 million
after-tax benefit related to corporate aggregate reinsurance treaties for core
operations.

Net earned premiums decreased $390 million for the third quarter of 2001 as
compared with the same period in 2000 primarily as a result of ceded premiums
of $315 million for corporate aggregate reinsurance treaties.

Net operating loss was $2,111 million, or a loss of $11.47 per share, for the
nine month period ended September 30, 2001 as compared with net operating
income of $430 million, or $2.34 per share, for the same period in 2000. The
decline in net operating results was principally due to prior year reserve
strengthening of $2.1 billion after-tax recorded in the second quarter of 2001
related to a change in estimate of prior year net loss and allocated loss
adjustment expense reserves and retrospective premium accruals; restructuring
and other related charges of $40 million after-tax; and declines for the third
quarter described above primarily related to the estimated WTC catastrophe. In
addition, net operating income for the nine months ended September 30, 2001
decreased by $134 million after-tax due to a decline in limited partnership
income. These declines were partially offset by a $61 million after-tax
benefit related to corporate aggregate reinsurance treaties for core
operations.

Net earned premiums decreased $1,804 million for the nine month period ended
September 30, 2001 as compared with the same period in 2000 mainly as a result
of increased ceded premiums related to corporate aggregate reinsurance
treaties, the change in estimate for retrospective premium accruals recorded in
the second quarter of 2001, and a decline in net earned premiums in Group
Operations, related to the sale of Life Reinsurance, CNAs individual life
reinsurance business, sold via an indemnity reinsurance agreement on December
31, 2000 (See Note L to the Condensed Consolidated Financial Statements for a
discussion of this transaction).

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



| |  | The third quarter of 2001 estimated impact of the WTC catastrophe totaled $727
million pretax, or $472 million after-tax. Including the benefit of the
corporate aggregate reinsurance treaties related to the WTC catastrophe, the
pretax estimated impact was $468 million, or $304 million after-tax. Further
details of the WTC catastrophe are provided below and also in the individual
segment discussions of operations.                                                                                                                               
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The Company recorded an after-tax charge of $2.1 billion ($3.2 billion pretax)
in the second quarter of 2001, related to a change in estimate of prior year
net loss and allocated loss adjustment expense reserves and retrospective
premium accruals. This amount includes the impact of net reserve
strengthening, the related increase in the accrual for insurance-related
assessments and the ceded premiums and interest cost of the aggregate
reinsurance treaty that attached due to the reserve strengthening. Further
details related to the reserve

34



---



##### Table of Contents



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



|  |  | strengthening are discussed below and also in the individual segment discussions of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | In the third quarter of 2001, the Company continued to record ceded premium,
ceded losses and interest related to corporate aggregate reinsurance treaties
in place for the 2001 accident year. The significant reserve additions noted
above fully utilized the limit on the corporate aggregate reinsurance treaty
for the 1999 accident year therefore ceded premium, ceded losses and interest
were recorded related to this treaty during the second quarter of 2001.
Further details regarding the corporate aggregate reinsurance treaties are
discussed below. The discussion in the Corporate Aggregate Reinsurance
Treaties section below includes the amounts related to the 1999 accident year
to provide an overview of the full impact of the aggregate reinsurance
treaties. However, the amounts related to the 1999 accident year for the
second quarter of 2001 are included as part of the Second Quarter 2001 Reserve
Strengthening section which is discussed in more detail below.
| 
| |  | During the nine months ended September 30, 2001, the Company recorded
after-tax restructuring and other related charges of $40 million related to
workforce reductions and asset write-offs resulting from changes in the
Companys information technology organization, which is discussed in more
detail below. There were no such charges recorded in the third quarter of
2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Based upon the significance of the corporate aggregate reinsurance treaties and
the WTC catastrophe, when the Company discusses its underwriting results and
ratios for its property-casualty segments in comparison with prior periods, the
impact of these items is excluded to provide a more meaningful analysis of the
current underlying business results for the quarterly analysis. In addition,
the second quarter of 2001 charges related to reserve strengthening,
restructuring and other related charges, the WTC catastrophe and the corporate
aggregate reinsurance treaties are excluded from the discussion of underwriting
results for the year to date underwriting analysis. The following table
provides the details by segment of underwriting results as reported and also as
adjusted.

For the Quarter Ended September 30, 2001

|                                                                                        |  |            |      |   |            |   |     |        |  |   |            |        |  |      |         |   |          |          |     |           |  |   |      |  
|--------------------------------------------------------------------------------------- |  | ---------- | ---- | - | ---------- | - | --- | ------ |  | - | ---------- | ------ |  | ---- | ------- | - | -------- | -------- | --- | --------- |  | - | ---- | -
|                                                                                        |  | Agency     |      |   |            |   |     |        |  |   |            |        |  |      |         |   | Risk     |          |     | Property- | 
|                                                                                        |  | Market     |      |   | Specialty  |   |     |        |  |   |            | Global |  |      | Manage- |   |          | Casualty |    
|                                                                                        |  | Operations |      |   | Operations |   |     | CNA Re |  |   | Operations |        |  | ment |         |   | Segments |         
|                                                                                        |  |            |      |   |            |   |     |        |  |   |            |        |  |      |         |   |          |         
|(In millions)                                                                           |  |            |      |   |            |   |     |        |  |   |            |        |  |      |         |   |          |          |     |           |  |   |      |  
|Underwriting loss                                                                       |  | $          | (87  | ) |            | $ |    |        |  | $ | (270       | )      |  | $    | (14     | ) |          | $        | (30 | )         |  | $ | (401 | )
|Underwriting impact of
WTC catastrophe including
related corporate
reinsurance treaties |  |            | 13   |   |            |   | 8   |        |  |   | 263        |        |  |      | 10      |   |          |          | 55  |           |  |   | 349  |  
|Underwriting benefit from
Core corporate aggregate
reinsurance treaties                 |  |            | (43  | ) |            |   | (16 | )      |  |   | (3         | )      |  |      | (5      | ) |          |          | (57 | )         |  |   | (124 | )
|                                                                                        |  |            |      |   |            |   |     |        |  |   |            |        |  |      |         |   |          |         
|Adjusted underwriting loss                                                              |  | $          | (117 | ) |            | $ | (8  | )      |  | $ | (10        | )      |  | $    | (9      | ) |          | $        | (32 | )         |  | $ | (176 | )
|                                                                                        |  |            |      |   |            |   |     |        |  |   |            |        |  |      |         |   |          |         

35



---



##### Table of Contents



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

For the Nine Months Ended September 30, 2001

|                                                                                                          |            |        |        |            |           |   |        |   |  |            |      |        |      |   |         |          |      |          |      |           |  |   |        |  
|--------------------------------------------------------------------------------------------------------- | ---------- | ------ | ------ | ---------- | --------- | - | ------ | - |  | ---------- | ---- | ------ | ---- | - | ------- | -------- | ---- | -------- | ---- | --------- |  | - | ------ | -
|                                                                                                          |            | Agency |        |            |           |   |        |   |  |            |      |        |      |   |         |          | Risk |          |      | Property- | 
|                                                                                                          |            | Market |        |            | Specialty |   |        |   |  |            |      | Global |      |   | Manage- |          |      | Casualty |     
|(In millions)                                                                                             | Operations |        |        | Operations |           |   | CNA Re |   |  | Operations |      |        | ment |   |         | Segments |     
|                                                                                                          |            |        |        |            |           |   |        |   |  |            |      |        |      |   |        
|Underwriting loss                                                                                         |            | $      | (1,444 | )          |           | $ | (403   | ) |  | $          | (904 | )      |      | $ | (222    | )        |      | $        | (950 | )         |  | $ | (3,923 | )
|Underwriting impact of WTC catastrophe
including related corporate
reinsurance treaties                   |            |        | 13     |            |           |   | 8      |   |  |            | 263  |        |      |   | 10      |          |      |          | 55   |           |  |   | 349    |  
|Underwriting impact of second quarter
of 2001 reserve adjustment including
corporate reinsurance treaties |            |        | 1,207  |            |           |   | 365    |   |  |            | 587  |        |      |   | 118     |          |      |          | 873  |           |  |   | 3,150  |  
|Underwriting benefit from Core
corporate aggregate reinsurance
treaties                                   |            |        | (38    | )          |           |   | (14    | ) |  |            | (3   | )      |      |   | (4      | )        |      |          | (55  | )         |  |   | (114   | )
|Restructuring and other related charges                                                                   |            |        | 4      |            |           |   | 1      |   |  |            |     |        |      |   | 1       |          |      |          | 1    |           |  |   | 7      |  
|                                                                                                          |            |        |        |            |           |   |        |   |  |            |      |        |      |   |         |          |      |         
|Adjusted underwriting loss                                                                                |            | $      | (258   | )          |           | $ | (43    | ) |  | $          | (57  | )      |      | $ | (97     | )        |      | $        | (76  | )         |  | $ | (531   | )
|                                                                                                          |            |        |        |            |           |   |        |   |  |            |      |        |      |   |         |          |      |         

World Trade Center Catastrophe

During the third quarter of 2001, the Company experienced a severe catastrophe
loss estimated at $468 million pretax net of reinsurance related to the WTC
catastrophe. The loss estimate is based on a total industry loss of $50
billion and includes all lines of insurance. The current estimate takes into
account CNAs substantial reinsurance agreements, including its catastrophe
reinsurance program and corporate reinsurance program. Loss estimates are
subject to considerable uncertainty. Subsequent developments on claims
arising out of the WTC catastrophe could result in an increase in the total
estimated loss, which could be material to the results of operations.

The following table provides managements estimate of losses related to this
catastrophe on a gross basis (before reinsurance) and a net basis (after
reinsurance) on the Companys operating segments.

For the Quarter Ended September 30, 2001

|                         |       |              |     |       |        |   |             |        |  |           |         |     |             |        |                 |                 |  |   |     |     | 
|------------------------ | ----- | ------------ | --- | ----- | ------ | - | ----------- | ------ |  | --------- | ------- | --- | ----------- | ------ | --------------- | --------------- |  | - | --- | --- | 
|                         |       |              |     |       |        |   |             |        |  |           |         |     |             |        | After-tax Corp. |                 |  |   |     |    
|                         |       |              |     |       |        |   | (1)         |        |  |           |         |     |             | Agg.   |                 |                 |  |   |    
|                         |       |              |     |       |        |   | Pre-tax Net |        |  | After-tax |         |     | Reinsurance |        |                 | Total After-tax | 
|(In millions)            |       | Gross Losses |     |       | Impact |   |             | Impact |  |           | Benefit |     |             | impact |                
|                         |       |              |     |       |        |   |             |        |  |           |         |     |             |        |                
|Agency Market Operations |       | $            | 85  |       |        | $ | 57          |        |  | $         | 37      |     |             | $      | 26              |                 |  | $ | 11  |    
|Specialty Operations     |       |              | 15  |       |        |   | 15          |        |  |           | 10      |     |             |        | 5               |                 |  |   | 5   |    
|CNA Re                   |       |              | 662 |       |        |   | 410         |        |  |           | 266     |     |             |        | 90              |                 |  |   | 176 |    
|Global Operations        |       |              | 199 |       |        |   | 15          |        |  |           | 10      |     |             |        | 3               |                 |  |   | 7   |    
|Risk Management          |       |              | 290 |       |        |   | 128         |        |  |           | 83      |     |             |        | 44              |                 |  |   | 39  |    
|Group Operations         |       |              | 322 |       |        |   | 80          |        |  |           | 52      |     |             |        |                |                 |  |   | 52  |    
|Life Operations          |       |              | 75  |       |        |   | 22          |        |  |           | 14      |     |             |        |                |                 |  |   | 14  |    
|Corporate and Other      |       |              |    |       |        |   |            |        |  |           |        |     |             |        |                |                 |  |   |    |    
|                         |       |              |     |       |        |   |             |        |  |           |         |     |             |        |                
|                         | Total |              | $   | 1,648 |        |   | $           | 727    |  |           | $       | 472 |             |        | $               | 168             |  |   | $   | 304 | 
|                         |       |              |     |       |        |   |             |        |  |           |         |     |             |        |                

(1)Pretax impact of the WTC catastrophe before the corporate aggregate
reinsurance treaties. The net impact includes $85 million of reinstatement and
additional premiums.

36



---



##### Table of Contents



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

Second Quarter 2001 Prior Year Reserve Strengthening

During the second quarter of 2001, the Company noted the continued emergence of
adverse loss experience across several lines of business related to prior years
that are discussed in further detail below. The Company completed a number of
reserve studies during the second quarter of 2001 for many of its lines of
business, including those in which these adverse trends were noted. In the
area of asbestos, environmental pollution and other mass tort claims (APMT),
the Company reviewed internal claims data as well as studies generated by
external parties, including a significant industry analysis of asbestos and
environmental pollution exposures by an international rating agency. As a
result of these various reviews, management concluded that ultimate losses,
including losses for APMT, will be higher in the range of possible outcomes
than previously estimated. The Company recorded $2.6 billion pretax to
strengthen reserves ($1.7 billion after-tax) associated with a change in
estimate of prior year net loss and allocated loss adjustment expense reserves
(loss reserves), including $1.2 billion pretax ($0.8 billion after-tax)
related to APMT.

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

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

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

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

37



---



##### Table of Contents



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

Approximately $600 million, excluding the impact of the corporate aggregate
reinsurance treaty, of the adverse loss development is a result of analyses of
several coverages provided to commercial entities written by various segments
of CNA. These analyses showed unexpected increases in the size of claims for
several lines, including commercial automobile liability, general liability and
the liability portion of commercial multiple-peril. In addition, the number of
commercial automobile liability claims was higher than expected. Finally,
several state-specific factors resulted in higher than anticipated losses,
including developments associated with commercial automobile liability coverage
in Ohio and general liability coverage provided to contractors in New York.

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

Approximately $320 million, excluding the impact of the corporate aggregate
reinsurance treaty, of adverse loss development occurred in Specialty
Operations and was caused by coverages provided to healthcare related entities.
The level of paid and reported losses associated with coverages provided to
national long-term care facilities was higher than expected. In addition, the
average size of claims resulting from coverages provided to physicians and
institutions providing healthcare related services increased more than
expected.

Concurrent with the Companys review of loss reserves, the Company completed
comprehensive studies of estimated premium receivable accruals on
retrospectively rated insurance policies and involuntary market facilities. As
a result, the Company recorded a $0.6 billion pretax ($0.4 billion after-tax)
charge related to retrospective premium and other premium accruals (premium
accruals). The studies included the review of all such retrospectively rated
insurance policies and the current estimate of ultimate losses.

As a result of this review and changes in premiums associated with the change
in estimates for loss reserves, the Company recorded a pretax reduction in
premium accruals of $566 million. The effect on net earned premiums was $616
million offset by a reduction of accrued commissions of $50 million.
Approximately $188 million of this amount resulted from a change in estimate in
premiums related to involuntary market facilities, which had an offsetting
impact on net losses, and therefore had no impact on the net operating results
for the quarter. Accruals for ceded premiums related to other reinsurance
treaties increased $83 million due to the reserve strengthening. The remainder
of the decrease in premium accruals relates to the change in estimate of the
amount of retrospective premium receivables as discussed above.

Corporate Aggregate Reinsurance Treaties

In 1999, the Company entered into an aggregate reinsurance treaty related to
the 1999 through 2001 accident years covering substantially all of the
Companys property-casualty lines of business (the Aggregate Cover). The
Company has two sections of coverage under the terms of the Aggregate Cover.
These coverages attach at defined loss and allocated loss adjustment expense
(collectively, losses) ratios for each accident year. Coverage under the
first section of the Aggregate Cover, which is available for all accident years
covered by the contract, has annual limits of $500 million of losses with an
aggregate limit of $1 billion of losses for the three year period. The ceded
premiums are a percentage of ceded losses and for each $500 million
38Table of ContentsCNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, Continuedof limit the premium is $230 million. The second section of the Aggregate
Cover, which is available for accident year 2001 only, provides additional
coverage of up to $510 million of losses for ceded premiums of $310 million.
Under the Aggregate Cover, interest expense on the funds withheld accrues at 8%
per annum. If the aggregate loss ratio for the three-year period exceeds
certain thresholds, additional premiums may be payable and the rate at which
interest expense is accrued would increase to 8.25% per annum.In the first quarter of 2001, the Company triggered the coverage under the
second section of the Aggregate Cover for the 2001 accident year. The Company
has ceded losses and the related ceded premium to this section in all quarters
of 2001. In the third quarter, as a result of losses related to the WTC
catastrophe the limit under this section has been exhausted. In the second
quarter of 2001, the significant reserve additions fully utilized the limit on
the 1999 accident year under the first section. No losses have been ceded to
the remaining $500 million of limit on accident years 2000 and 2001 under the
first section. The impact of the Aggregate Cover on pretax operating results
was as follows:Impact of Aggregate Cover on Pretax Operating Results

|                                         |        |       |     |        |      |   |       | 
|---------------------------------------- | ------ | ----- | --- | ------ | ---- | - | ----- | 
|For the period ended September 30, 2001  |        | Three |     |        | Nine |  
|(In millions)                            | Months |       |     | Months |     
|                                         |        |       |     |        |      |  
|                                         |        |       |     |        |      |   |       | 
|Ceded earned premiums                    |        | $     | 83  |        |      | $ | 543   | 
|Ceded claim and claim adjustment expense |        |       | 288 |        |      |   | 1,010 | 
|Interest charges                         |        |       | 11  |        |      |   | 70    | 
|                                         |        |       |     |        |      |  
|Pretax benefit on operating results      |        | $     | 194 |        |      | $ | 397   | 
|                                         |        |       |     |        |      |  

In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property-casualty
lines of business in the Continental Casualty Company pool (the CCC Cover).
The loss protection provided by the CCC Cover has an aggregate limit of $750
million to $825 million of losses depending on CCCs 2001 actual premium
volume. The CCC Cover provides continuous coverage in excess of the second
section of the Aggregate Covers discussed above. Under the CCC Cover, interest
expense on the funds withheld generally accrues at 8% per annum. The interest
rate increases to 10% per annum if the aggregate loss ratio exceeds certain
thresholds. In the third quarter, as a result of significant losses related to
the WTC catastrophe, significant recoveries were recorded under this treaty.

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

Impact of CCC Cover on Pretax Operating Results

|                                         |        |       |     |        |      |   |     | 
|---------------------------------------- | ------ | ----- | --- | ------ | ---- | - | --- | 
|For the period ended September 30, 2001  |        | Three |     |        | Nine |  
|(In millions)                            | Months |       |     | Months |     
|                                         |        |       |     |        |     
|                                         |        |       |     |        |      |   |     | 
|Ceded earned premiums                    |        | $     | 232 |        |      | $ | 234 | 
|Ceded claim and claim adjustment expense |        |       | 427 |        |      |   | 427 | 
|Interest charges                         |        |       | 15  |        |      |   | 15  | 
|                                         |        |       |     |        |      |  
|Pretax benefit on operating results      |        | $     | 180 |        |      | $ | 178 | 
|                                         |        |       |     |        |      |  

39



---



##### Table of Contents



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

The pretax benefit from the Aggregate Cover and the CCC Cover by operating
segment on estimated losses related to the WTC catastrophe and all other losses
(Core) for the three months ended September 30, 2001, was as follows.

Impact of Aggregate Cover and CCC Cover on Pretax Operating ResultsFor the quarter ended September 30, 2001

|                                    |  |     |     |  |      |   |     |       |  |   |     | 
|----------------------------------- |  | --- | --- |  | ---- | - | --- | ----- |  | - | --- | 
|(In millions)                       |  | WTC |     |  | Core |   |     | Total | 
|                                    |  |     |     |  |      |   |     |       | 
|Agency Market Operations            |  | $   | 40  |  |      | $ | 39  |       |  | $ | 79  | 
|Specialty Operations                |  |     | 7   |  |      |   | 15  |       |  |   | 22  | 
|CNA Re                              |  |     | 139 |  |      |   | 2   |       |  |   | 141 | 
|Global Operations                   |  |     | 5   |  |      |   | 5   |       |  |   | 10  | 
|Risk Management                     |  |     | 68  |  |      |   | 54  |       |  |   | 122 | 
|                                    |  |     |     |  |      |   |     |       | 
|Pretax benefit on operating results |  | $   | 259 |  |      | $ | 115 |       |  | $ | 374 | 
|                                    |  |     |     |  |      |   |     |       | 

The pretax benefit from the Aggregate Cover and the CCC Cover by operating
segment on estimated losses related to the second quarter of 2001 reserve
adjustment, the WTC catastrophe and Core for the nine months ended September
30, 2001 was as follows.

Impact of Aggregate Cover and CCC Cover on Pretax Operating Results

|                                             |  |              |     |  |     |   |     |      |  |   |       |  |  |   |     | 
|-------------------------------------------- |  | ------------ | --- |  | --- | - | --- | ---- |  | - | ----- |  |  | - | --- | 
|For the nine months ended September 30, 2001 |  | Second       |     |  |     |   |     |      |  |   |       |  |  |   |    
|                                             |  | Quarter 2001 |     |  |     |   |     |      |  |   |       |  |  |   |    
|                                             |  | Reserve      |     |  |     |   |     |      |  |   |       |  |  |   |    
|(In millions)                                |  | Adjustment   |     |  | WTC |   |     | Core |  |   | Total | 
|                                             |  |              |     |  |     |   |     |      |  |   |       | 
|Agency Market Operations                     |  | $            | 150 |  |     | $ | 40  |      |  | $ | 26    |  |  | $ | 216 | 
|Specialty Operations                         |  |              |    |  |     |   | 7   |      |  |   | 12    |  |  |   | 19  | 
|CNA Re                                       |  |              | 26  |  |     |   | 139 |      |  |   | 1     |  |  |   | 166 | 
|Global Operations                            |  |              |    |  |     |   | 5   |      |  |   | 2     |  |  |   | 7   | 
|Risk Management                              |  |              | 47  |  |     |   | 68  |      |  |   | 52    |  |  |   | 167 | 
|                                             |  |              |     |  |     |   |     |      |  |   |       | 
|Pretax benefit on operating results          |  | $            | 223 |  |     | $ | 259 |      |  | $ | 93    |  |  | $ | 575 | 
|                                             |  |              |     |  |     |   |     |      |  |   |       | 

2001 Restructuring

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

In connection with the IT Plan, the Company incurred $62 million, pretax, of
restructuring and other related charges, primarily related to planned
reductions in the workforce of approximately 260 positions (gross and net), and
software and hardware asset write-offs for the nine months ended September 30,
2001. There were no charges recorded in the third quarter of 2001. See Note K
of Notes to Condensed Consolidated Financial Statements for further details
regarding this restructuring.

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

40



---



##### Table of Contents



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

As of September 30, 2001, an accrual of approximately $13 million exists
related to the IT Plan. Approximately $12 million of the accrual relates to
workforce reductions with the remainder relating to other costs. Approximately
$8 million of this accrual is expected to be paid out during the remainder of
2001.

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

|                                        |  |      |        | 
|--------------------------------------- |  | ---- | ------ | 
|For the period ended September 30, 2001 |  | Nine |       
|In millions                             |  |      | Months | 
|                                       
|                                        |  |      |        | 
|Agency Market Operations                |  | $    | 4      | 
|Specialty Operations                    |  |      | 1      | 
|Risk Management                         |  |      | 2      | 
|Global Operations                       |  |      | 1      | 
|Life Operations                         |  |      | 17     | 
|Corporate and Other                     |  |      | 37     | 
|                                        |  |      |       
|Total                                   |  | $    | 62     | 
|                                        |  |      |       

In connection with the Companys efforts to reduce its expense structure to
better align expenses with expected premium volume, the Company is in the
process of undertaking a restructuring initiative. The Company is currently
evaluating the impact of this restructuring initiative and expects to finalize
a plan in the fourth quarter. In connection with this plan, the Company
expects to take a restructuring charge before the end of the year. Since the
plan has not been finalized, the amount of the restructuring charge or whether
the Company will realize the expected benefit of any restructuring activities
is unknown. Any restructuring charge may be material and may have an adverse
material effect on results of operations.

Written Premium Adjustment

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

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

Adjustments to Net Written Premiums

|                                        |  |        |     |   |        |   |    | 
|--------------------------------------- |  | ------ | --- | - | ------ | - | -- | 
|                                        |  | Three  |     |   | Nine   |  
|For the period ended September 30, 2001 |  | Months |     |   | Months |  
|                                        |  |        |     |   |        |  
|(In millions)                           |  |        |     |   |        |   |    | 
|Agency Market Operations                |  | $      | (18 | ) |        | $ | 66 | 
|Specialty Operations                    |  |        | (3  | ) |        |   | 15 | 
|Global Operations                       |  |        | (3  | ) |        |   | 6  | 
|Risk Management                         |  |        | (7  | ) |        |   |   | 
|                                        |  |        |     |   |        |  
|Total (increase) decrease               |  | $      | (31 | ) |        | $ | 87 | 
|                                        |  |        |     |   |        |  

41



---



##### Table of Contents



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



---

Discussion of the results of operations for the Companys segments follow.
Based upon the significance of the corporate aggregate reinsurance treaties and
the WTC catastrophe, when the Company discusses its underwriting results and
ratios for its segments in comparison with prior periods, the impact of these
items is excluded to provide a more meaningful analysis of the current
underlying business results for the quarter. In addition, the second quarter of
2001 charges related to reserve strengthening, restructuring and other related
charges, the corporate aggregate reinsurance treaties, and the WTC catastrophe
are excluded from the discussion of underwriting results for the year-to-date
underwriting analysis.


---

Agency Market Operations

Operating Results

|                                                                                                                                      |                                  |                                  |      |              |       |   |             |      |       |   |        |       |       |   |       |      |       |  
|------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | ---- | ------------ | ----- | - | ----------- | ---- | ----- | - | ------ | ----- | ----- | - | ----- | ---- | ----- | -
|                                                                                                                                      |                                  |                                  |      | Three Months |       |   | Nine Months |     
|                                                                                                                                      |                                  |                                  |      |              |       |   |             |     
|Period ended September 30                                                                                                             |                                  | 2001                             |      |              | 2000  |   |             | 2001 |       |   | 2000   |      
|(In millions)                                                                                                                         |                                  |                                  |      |              |       |   |             |      |       |   |        |       |      
|                                                                                                                                      |                                  |                                  |      |              |       |   |             |      |       |   |        |       |       |   |       |     
|Net written premiums                                                                                                                  |                                  | $                                | 719  |              |       | $ | 755         |      |       | $ | 1,786  |       |       | $ | 2,403 |     
|Net earned premiums                                                                                                                   |                                  |                                  | 695  |              |       |   | 807         |      |       |   | 1,639  |       |       |   | 2,477 |     
|Underwriting loss                                                                                                                     |                                  |                                  | (87  | )            |       |   | (132        | )    |       |   | (1,444 | )     |       |   | (341  | )   
|Net operating (loss) income                                                                                                           |                                  |                                  | 25   |              |       |   | 44          |      |       |   | (705   | )     |       |   | 154   |     
|Net operating (loss) income
excluding restructuring and other
related charges                                                         |                                  |                                  | 25   |              |       |   | 44          |      |       |   | (702   | )     |       |   | 154   |     
|Ratios:                                                                                                                               |                                  |                                  |      |              |       |   |             |      |       |   |        |       |       |   |       |     
|                                                                                                                                      | Loss and loss adjustment expense |                                  |      | 72.0         | %     |   |             | 80.5 | %     |   |        | 138.6 | %     |   |       | 80.4 | %    
|                                                                                                                                      | Expense                          |                                  |      | 37.1         |       |   |             | 33.3 |       |   |        | 45.5  |       |   |       | 31.0 |      
|                                                                                                                                      | Dividend                         |                                  |      | 3.3          |       |   |             | 2.5  |       |   |        | 4.0   |       |   |       | 2.4  |      
|                                                                                                                                      |                                  |                                  |      |              |       |   |             |      |       |   |        |      
|                                                                                                                                      |                                  | Combined                         |      |              | 112.4 | % |             |      | 116.3 | % |        |       | 188.1 | % |       |      | 113.8 | %
|                                                                                                                                      |                                  |                                  |      |              |       |   |             |      |       |   |        |      
|Adjusted underwriting loss                                                                                                            |                                  | $                                | (117 | )            |       |   |             |      |       | $ | (258   | )     |       |   |       |     
|                                                                                                                                      |                                  |                                  |      |              |       |   |             |      |       |   |        |       |       |  
|2001 adjusted ratios excluding the
WTC catastrophe, corporate covers,
reserve adjustment and restructuring
and other related charges: |                                  |                                  |      |              |       |   |             |      |       |   |        |       |       |   |       |     
|                                                                                                                                      |                                  | Loss and loss adjustment expense |      |              | 78.3  | % |             |      |       |   |        |       | 75.7  | % |       |      |       |  
|                                                                                                                                      |                                  | Expense                          |      |              | 34.0  |   |             |      |       |   |        |       | 32.5  |   |       |      |       |  
|                                                                                                                                      |                                  | Dividend                         |      |              | 3.0   |   |             |      |       |   |        |       | 2.8   |   |       |      |       |  
|                                                                                                                                      |                                  |                                  |      |              |       |   |             |      |       |   |        |       |       |  
|                                                                                                                                      |                                  | Combined                         |      |              | 115.3 | % |             |      |       |   |        |       | 111.0 | % |       |      |       |  
|                                                                                                                                      |                                  |                                  |      |              |       |   |             |      |       |   |        |       |       |  

Third quarter net operating income for 2001 declined by $19 million as compared
with the same period in the prior year. The after-tax estimated impact, net of
the related corporate aggregate reinsurance treaty benefit, of the WTC
catastrophe recorded in the third quarter of 2001 was $11 million. Net
operating income for the third quarter of 2001 as compared with the same period
in 2000 also decreased $20 million due to a decline in limited partnership
income, $15 million due to a decreased benefit from the use of finite
reinsurance, and $17 million primarily due to non-recurring income in 2000
related to Personal Insurance, which was transferred to Allstate in 1999.
Partially offsetting these declines was a $25 million after-tax benefit from
the corporate aggregate reinsurance treaties related to core operating results
and improved core underwriting results across most commercial lines except for
workers compensation.

42



---



##### Table of Contents



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

The adjusted combined ratio decreased 1.0 points to 115.3% for the three months
ended September 30, 2001 as compared with 2000, and the adjusted underwriting
results improved $15 million. The change in the adjusted underwriting results
and the adjusted combined ratio was driven principally by a decrease in the
loss ratio, partially offset by increases in the adjusted expense and dividend
ratios. The adjusted loss ratio decrease of 2.2 points reflects improved
underwriting results across most commercial lines, except for workers
compensation. Despite a decrease in operating expenses, the adjusted expense
ratio increased as a result of a reduced net earned premium base. The adjusted
dividend ratio increased 0.8 points due to adverse development in dividend
reserves in Commercial Insurance.

Net written premiums for Agency Market Operations in the third quarter of 2001
decreased $36 million over the prior year principally as a result of $64
million of ceded premiums related to the corporate aggregate reinsurance
treaties, partially offset by growth in gross written premiums for workers
compensation and business owners auto policy lines. Net written premiums
benefited $18 million as a result of the adjustment in net written premiums (as
discussed on page 41 of the Managements Discussion and Analysis of Financial
Conditions and Results of Operations (MD&A)). Net earned premiums decreased
$112 million in the third quarter of 2001 as compared with the same period in
2000. This decline is attributable to the declines noted above in net written
premiums as related to the corporate aggregate treaties as well as declines in
earned premiums, particularly in the commercial workers compensation and
packages lines of business, and increased ceded premiums from other than the
corporate aggregate reinsurance treaties.

Net operating income decreased $859 million for the nine months ended September
30, 2001 as compared with the same period in 2000. The after-tax impact, net of
the related corporate aggregate reinsurance treaty benefit, of the second
quarter of 2001 reserve strengthening on Agency Market Operations was $805
million, including $394 million for asbestos, environmental pollution and other
mass tort claims. The remaining reserve strengthening related primarily to
commercial multiple-peril, general liability and commercial automobile
liability coverages. The strengthening was based upon detailed claim reviews,
assessments of legal developments affecting these coverages and actuarial
analyses completed in the second quarter of 2001. In response to the adverse
trends indicated by the reviews, changes were made to more closely involve
legal counsel on claims affected by the legal developments and to discontinue
writing classes of business where adequate pricing cannot be achieved for the
exposure.

In addition to the impact of the reserve strengthening recorded in the second
quarter, net operating income for the first nine months of 2001 declined $11
million as a result of the estimated WTC catastrophe, net of the related
corporate aggregate reinsurance treaty benefit, and $3 million for
restructuring and other related charges. These declines were partially offset
by a $17 million after-tax benefit from corporate aggregate reinsurance
treaties on Core operations. Apart from those charges, net operating income
for the first nine months of 2001 decreased $57 million as compared with the
same period in the prior year due primarily to decreased net investment income,
principally as a result of a $54 million decline in limited partnership income,
$45 million related to the non-recurring ceding commission included in the
first nine months of 2000 related to the transfer of Personal Insurance
business to Allstate in 1999, and decreased benefits from the use of finite
reinsurance. These declines were partially offset by improved core
underwriting results across most commercial lines other than workers
compensation.

The adjusted combined ratio decreased 2.8 points to 111.0% for the nine months
ended September 30, 2001 as compared with 2000, and the adjusted underwriting
results improved

43



---



##### Table of Contents



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

$83 million. The change in the adjusted underwriting results and the adjusted
combined ratio was driven by a decrease in the adjusted loss ratio, partially
offset by increases in the adjusted expense and dividend ratios. The adjusted
loss ratio decline of 4.7 points reflects lower adverse development excluding
the reserve charge, improved underwriting results across most commercial lines
excluding workers compensation, earned rate achievement and re-underwriting
efforts undertaken last year. The adjusted expense ratio increased 1.5 points
due to the reduced net earned premium base in the current period, partially
offset by lower acquisition expenses, primarily due to higher ceding
commissions. These decreases more than offset the $69 million benefit of the
non-recurring ceding commission included in the first nine months of 2000
related to the transfer of Personal Insurance to Allstate. The
adjusted dividend ratio
increased 0.4 points due to adverse development in dividend reserves in
Commercial Insurance.

Net written premiums for Agency Market Operations for the nine months ended
September 30, 2001 decreased $617 million as compared with the prior year as a
result of $321 million of ceded premiums related to the corporate aggregate
reinsurance treaties, additional ceded premiums arising from the second quarter
of 2001 reserve strengthening and a change in estimate for involuntary market
premium accruals, and $66 million related to the adjustment in net written
premiums (as previously discussed on page 41 of the MD&A). Net earned premiums
likewise decreased $838 million for the first nine months of 2001 as compared
with the same period in 2000. This decline is primarily attributable to the
declines noted above in net written premiums and an additional $100 million in
adverse experience in retrospective premium accruals. The change in estimate
related to retrospective premium receivables was based upon the Companys
completion of comprehensive studies related to estimated premium receivable
accruals on retrospectively rated insurance policies and involuntary market
facilities. The studies included the review of all such retrospectively rated
insurance policies and the current estimate of ultimate losses.

Commercial Insurance achieved an average rate increase of 15% for the third quarter of 2001 for the contracts that renewed during the period and had a retention rate of 75% for those contracts that were up for renewal.

44



---



##### Table of Contents



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

Specialty Operations

Operating Results

|                                                                                                                                      |                                  |                                  |          |      |              |       |     |             |      |       |      |      |       |       |     |   |      |       |  
|------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | -------- | ---- | ------------ | ----- | --- | ----------- | ---- | ----- | ---- | ---- | ----- | ----- | --- | - | ---- | ----- | -
|                                                                                                                                      |                                  |                                  |          |      | Three Months |       |     | Nine Months |     
|                                                                                                                                      |                                  |                                  |          |      |              |       |     |             |     
|Period ended September 30                                                                                                             |                                  | 2001                             |          |      | 2000         |       |     | 2001        |      |       | 2000 |     
|                                                                                                                                      |                                  |                                  |          |      |              |       |     |             |      |       |      |     
|(In millions)                                                                                                                         |                                  |                                  |          |      |              |       |     |             |      |       |      |      |       |       |     |  
|Net written premiums                                                                                                                  |                                  | $                                | 191      |      |              | $     | 241 |             |      | $     | 534  |      |       | $     | 584 |  
|Net earned premiums                                                                                                                   |                                  |                                  | 167      |      |              |       | 234 |             |      |       | 523  |      |       |       | 578 |  
|Underwriting loss                                                                                                                     |                                  |                                  |         |      |              |       | (10 | )           |      |       | (403 | )    |       |       | (17 | )
|Net operating (loss) income                                                                                                           |                                  |                                  | 30       |      |              |       | 42  |             |      |       | (154 | )    |       |       | 126 |  
|Net operating (loss) income excluding restructuring and
other related charges                                                         |                                  |                                  | 30       |      |              |       | 42  |             |      |       | (153 | )    |       |       | 126 |  
|                                                                                                                                     
|Ratios:                                                                                                                               |                                  |                                  |          |      |              |       |     |             |      |       |      |      |       |       |     |  
|                                                                                                                                      |                                  | Loss and loss adjustment expense |          |      | 69.4         | %     |     |             | 79.2 | %     |      |      | 147.3 | %     |     |   | 76.1 | %    
|                                                                                                                                      |                                  | Expense                          |          |      | 30.4         |       |     |             | 25.0 |       |      |      | 29.6  |       |     |   | 26.8 |      
|                                                                                                                                      |                                  | Dividend                         |          |      |             |       |     |             | 0.1  |       |      |      | 0.1   |       |     |   | 0.1  |      
|                                                                                                                                      |                                  |                                  |          |      |              |       |     |             |      |       |      |     
|                                                                                                                                      |                                  |                                  | Combined |      |              | 99.8  | %   |             |      | 104.3 | %    |      |       | 177.0 | %   |   |      | 103.0 | %
|                                                                                                                                      |                                  |                                  |          |      |              |       |     |             |      |       |      |     
|Adjusted underwriting loss                                                                                                            |                                  | $                                | (8       | )    |              |       |     |             |      | $     | (43  | )    |       |       |     |  
|                                                                                                                                      |                                  |                                  |          |      |              |       |     |             |      |       |      |      |       |      
|2001 adjusted ratios excluding the WTC catastrophe,
corporate covers, reserve
adjustment and restructuring and other related
charges: |                                  |                                  |          |      |              |       |     |             |      |       |      |      |       |       |     |  
|                                                                                                                                      | Loss and loss adjustment expense |                                  |          | 76.8 | %            |       |     |             |      |       |      | 80.3 | %     |       |     |   |     
|                                                                                                                                      | Expense                          |                                  |          | 27.4 |              |       |     |             |      |       |      | 27.1 |       |       |     |   |     
|                                                                                                                                      | Dividend                         |                                  |          |     |              |       |     |             |      |       |      | 0.1  |       |       |     |   |     
|                                                                                                                                      |                                  |                                  |          |      |              |       |     |             |      |       |      |      |       |      
|                                                                                                                                      |                                  |                                  | Combined |      |              | 104.2 | %   |             |      |       |      |      |       | 107.5 | %   |   |      |       |  
|                                                                                                                                      |                                  |                                  |          |      |              |       |     |             |      |       |      |      |       |      

Third quarter net operating income for 2001 declined by $12 million as compared with the same period in the prior year. The after-tax estimated impact, net of the related corporate aggregate reinsurance treaty benefit, of the WTC catastrophe was $5 million. In addition, net operating income decreased as a result of lower net investment income, primarily due to an $8 million decline in limited partnership income, a decreased benefit from the use of finite reinsurance and adverse loss experience in the errors & omissions (E&O) and directors & officers (D&O) product lines. These declines were partially offset by a benefit of $10 million after-tax related to corporate aggregate reinsurance treaties on Core operations.

The adjusted combined ratio decreased by 0.1 points to 104.2% for the third quarter of 2001 as compared with the same period in 2000 and the adjusted underwriting results improved by $2 million. This change is due to a decrease in the adjusted loss ratio, partially offset by an increase in the adjusted expense ratio. The adjusted loss ratio decreased due to additional ceded losses related to finite reinsurance treaties and improvements in the healthcare professional liability loss portfolio business, partially offset by adverse loss experience in the third quarter of 2001 in E&O and D&O products. While quarter-over-quarter operating expenses declined, the adjusted expense ratio increased as a result of a decreased net earned premium base. Acquisition and underwriting expenses decreased due to reduced expenses in the healthcare professional liability loss portfolio business and a continued focus on expense management.

45



---



##### Table of Contents



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

Net written premiums for Specialty Operations in the third quarter of 2001 decreased $50 million over the prior year as a result of $18 million of ceded premiums related to the corporate aggregate reinsurance treaties and $24 million of ceded premiums related to additional finite reinsurance treaties. Also contributing to the decline were reduced premiums volume in the healthcare professional liability business due to fewer assumed loss portfolio transfer transactions in 2001. These declines were partially offset by increased production for not-for-profit long term care facilities and a benefit of $3 million related to the adjustment in net written premiums (as discussed on page 41 of the MD&A). Net earned premiums decreased $67 million primarily related to the same reasons noted above.

Net operating income decreased $280 million for the nine months ended September 30, 2001 compared with 2000. The after-tax impact of the second quarter of 2001 reserve strengthening on Specialty Operations was $238 million. The reserve strengthening related primarily to medical malpractice and national for-profit nursing home chains with exposure in Florida and Texas. The strengthening was necessitated by the continuing emergence of reported losses in excess of expectations and a thorough review of claim exposures by the new management team that was put in place during 2000. In response to these adverse trends, Specialty Operations withdrew from writing these coverages in certain states and instituted major rate increases.

In addition to the impact of the second quarter reserve strengthening, net operating income for the first nine months of 2001 decreased by $5 million due to the estimated WTC catastrophe, net of the related corporate aggregate reinsurance treaty benefit, and $1 million for restructuring and other related charges. Partially offsetting these charges was an $8 million benefit due to the corporate aggregate reinsurance treaties related to Core operations. Apart from those charges, net operating income decreased $44 million in the first nine months of 2001 as compared with 2000 due to the decline in underwriting results and decreased net investment income, principally resulting from a $19 million decline in limited partnership income.

The adjusted combined ratio increased by 4.5 points to 107.5% for the first nine months of 2001 as compared with the same period in 2000 and the adjusted underwriting results declined by $26 million. This change is due to increases in the adjusted loss and expense ratios. The adjusted loss ratio increased 4.2 points primarily as a result of favorable loss development recorded in 2000 for the architects and engineers business, partially offset by the third quarter improvements as discussed above. The increase in the adjusted expense ratio is a result of the reduced net earned premium base while overall expenses remained relatively unchanged.

Net written premiums for Specialty Operations for the first nine months of 2001 decreased $50 million as compared with the same period in 2000. Net written premiums decreased $36 million as a result of additional ceded premiums related to the corporate aggregate reinsurance treaties. Net written premiums also decreased $15 million related to the adjustment in net written premiums (as previously discussed on page 41 of the MD&A). Net earned premiums decreased $55 million for the first nine months of 2001 as compared with the same period in 2000 principally due to ceded premiums related to the corporate aggregate reinsurance treaties, adverse experience in retrospective premium accruals recorded in the second quarter of 2001 reserve strengthening, and a decline in premium volume in the healthcare professional liability business. These declines were partially offset by the reserve for retrospective premium increase recorded in 2000.

The non-medical and medical professional liability and financial products lines of business achieved an average of a 20% rate increase for the third quarter of 2001 for the contracts that

46



---



##### Table of Contents



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

renewed during the period and had a retention rate of 80% for the third quarter
of 2001 for those contracts that were up for renewal.

CNA Re

|                                                                                             |                                  |              |       |      |             |   |       |   |  |      |       |      |       |   |       |   |  | 
|-------------------------------------------------------------------------------------------- | -------------------------------- | ------------ | ----- | ---- | ----------- | - | ----- | - |  | ---- | ----- | ---- | ----- | - | ----- | - |  | 
|Operating Results                                                                            |                                  |              |       |      |             |   |       |   |  |      |       |      |       |   |       |  
|                                                                                             |                                  | Three Months |       |      | Nine Months |  
|                                                                                             |                                  |              |       |      |             |   |       |  
|Period ended September 30(In millions)                                                       |                                  |              |       | 2001 |             |   | 2000  |   |  | 2001 |       |      | 2000  |  
|                                                                                             |                                  |              |       |      |             |   |       |   |  |      |       |     
|                                                                                             |                                  |              |       |      |             |   |       |   |  |      |       |      |       |   |       |  
|Net written premiums                                                                         |                                  | $            | 108   |      |             | $ | 214   |   |  | $    | 378   |      |       | $ | 769   |  
|Net earned premiums                                                                          |                                  |              | 149   |      |             |   | 289   |   |  |      | 452   |      |       |   | 802   |  
|Underwriting loss                                                                            |                                  |              | (270  | )    |             |   | (23   | ) |  |      | (904  | )    |       |   | (66   | )
|Net operating (loss) income                                                                  |                                  |              | (146  | )    |             |   | 22    |   |  |      | (497  | )    |       |   | 66    |  
|                                                                                            
|Ratios:                                                                                      |                                  |              |       |      |             |   |       |   |  |      |       |      |       |   |       |  
|Loss and loss adjustment expense                                                             |                                  |              | 237.0 | %    |             |   | 78.1  | % |  |      | 257.3 | %    |       |   | 76.1  | %
|Expense                                                                                      |                                  |              | 44.5  |      |             |   | 29.8  |   |  |      | 42.3  |      |       |   | 32.1  |  
|                                                                                             |                                  |              |       |      |             |   |       |   |  |      |       |     
|Combined                                                                                     |                                  |              | 281.5 | %    |             |   | 107.9 | % |  |      | 299.6 | %    |       |   | 108.2 | %
|                                                                                             |                                  |              |       |      |             |   |       |   |  |      |       |     
|Adjusted underwriting loss                                                                   |                                  | $            | (10   | )    |             |   |       |   |  | $    | (57   | )    |       |   |       |  
|                                                                                             |                                  |              |       |      |             |   |       |   |  |      |       |      |       |  
|2001 adjusted ratios excluding
the WTC catastrophe, corporate
covers and reserve adjustment: |                                  |              |       |      |             |   |       |   |  |      |       |      |       |   |       |  
|                                                                                             | Loss and loss adjustment expense |              |       | 69.4 | %           |   |       |   |  |      |       | 73.5 | %     |   |       |   | 
|                                                                                             | Expense                          |              |       | 35.7 |             |   |       |   |  |      |       | 37.4 |       |   |       |   | 
|                                                                                             |                                  |              |       |      |             |   |       |   |  |     
|                                                                                             |                                  | Combined     |       |      | 105.1       | % |       |   |  |      |       |      | 110.9 | % |       |   |  | 
|                                                                                             |                                  |              |       |      |             |   |       |   |  |      |       |      |       |  

The Company plans to dispose of the United Kingdom subsidiaries of CNA Re, with
the intent of completing the disposition in early 2002. Such a disposition is
subject to regulatory approval. Future writing of all U.S. domiciled business
will be written from our operations in the U.S. The Company cannot provide
assurance that the United Kingdom subsidiaries of CNA Re will be sold. Refer
to the Investments section on the following pages for more information.

Third quarter net operating income declined by $168 million as compared with
the prior year. The after-tax estimated impact, net of the related corporate
aggregate reinsurance treaty benefit, of the WTC catastrophe was $176 million.
In addition, net operating income decreased due to a decline in limited
partnership income of $4 million. Partially offsetting these declines were
lower net catastrophe losses in the current quarter, excluding the WTC
catastrophe, and a $1 million benefit from corporate aggregate reinsurance
treaties on Core operations.

The adjusted combined ratio decreased 2.8 points to 105.1% during the third
quarter of 2001 as compared with the same period in 2000 and the adjusted
underwriting results improved $13 million. The favorable change in the
adjusted combined ratio and the adjusted underwriting results was primarily a
result of a decrease in the adjusted loss ratio of 8.7 points, due to lower net
catastrophe losses excluding the WTC catastrophe and the reduction of business
written in London (with a combined ratio exceeding 100%). While
quarter-over-quarter acquisition and underwriting expenses decreased as a
result of reduced technology costs, the adjusted expense ratio increased due to
a reduced net earned premium base.

47



---



##### Table of Contents



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

Net written premiums for CNA Re for the third quarter of 2001 decreased $106
million over the prior year. Premiums decreased $125 million as a result of
ceded premiums related to the corporate aggregate reinsurance treaties. Also,
in July, S&P downgraded the rating of CNA Reinsurance Company Limited (CNA Re
U.K.) from A to BBB-. This announcement along with CNAs announced intent to
sell the United Kingdom subsidiaries had an adverse impact on the companys
ability to renew business and generate new business in London. These declines
were partially offset by $89 million of reinstatement and additional premiums
as a result of the WTC catastrophe. Net earned premiums decreased $140 million
primarily related to the same reasons noted above.

Net operating income decreased $563 million for the nine months ended September
30, 2001 as compared with the same period in 2000. The after-tax impact, net
of the related corporate aggregate reinsurance treaty benefit, of the second
quarter of 2001 reserve strengthening on CNA Re was $384 million, including
$37 million for asbestos, environmental pollution and other mass tort claims.
The strengthening was based upon second quarter reviews that showed the
emergence of higher than expected reported losses. The reserve strengthening
related to a number of lines, including excess of loss liability and
professional liability in accident years 1997 to 2000.

In addition to the impact of the reserve strengthening recorded in the second
quarter of 2001, net operating income for the first nine months of 2001
decreased by $176 million related to the estimated WTC catastrophe. Partially
offsetting these declines was a benefit of $1 million from corporate aggregate
reinsurance treaties on Core operations. Apart from those items, net operating
income decreased $4 million for the first nine months of 2001 as compared with
the same period in 2000 due to decreased net investment income, including a $10
million decline in limited partnership income, partially offset by lower
current year underwriting costs.

The adjusted combined ratio increased 2.7 points to 110.9% for the nine months
ended September 30, 2001 as compared with the same period in 2000 and the
adjusted underwriting results improved $9 million. The change in the adjusted
combined ratio and adjusted underwriting results is primarily related to
increases in the adjusted expense ratio, partially offset by a decrease in the
adjusted loss ratio. While operating expenses have decreased for the nine
months ended September 30, 2001 as compared with 2000, the expense ratio has
increased due to the reduced net earned premium base. Both acquisition and
underwriting expenses have decreased as a result of reduced technology
expenses. The adjusted loss ratio decreased 2.6 points because of improvements
in the current accident year underwriting results partially offset by increased
adverse development, excluding the reserve charge, of $59 million, in 2001 as
compared with 2000.

Net written premiums for CNA Re decreased $391 million for the first nine
months of 2001 as compared with the same period in 2000 as a result of $161
million of ceded premiums related to the corporate aggregate reinsurance
treaties and decisions made for 2001 not to renew contracts, including
multi-year contracts, that management believed did not meet its underwriting
profitability targets. In addition, premiums decreased as a result of the
announced intention to sell the United Kingdom subsidiaries. These declines
were partially offset by reinstatement and additional premiums of $89 million
related to the WTC catastrophe. Net earned premiums decreased $350 million for
the first nine months of 2001 as compared with the same period in 2000
primarily related to the same reasons noted above.

48



---



##### Table of Contents



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

Global Operations

|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |       |      |      |      |       |       |   |      |       |   | 
|------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | -------- | -------- | ----------- | ----- | ----- | - | ---- | ----- | ---- | ---- | ---- | ----- | ----- | - | ---- | ----- | - | 
|Operating Results                                                                                                                     |                                  |                                  |          |          |             |       |       |   |      |       |      |      |      |       |       |  
|                                                                                                                                      |                                  | Three Months                     |          |          | Nine Months |      
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |      
|Period ended September 30(In millions)                                                                                                |                                  |                                  |          |          |             | 2001  |       |   | 2000 |       |      | 2001 |      |       | 2000  |  
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |       |      |     
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |       |      |      |      |       |       |  
|Net written premiums                                                                                                                  |                                  | $                                | 329      |          |             | $     | 311   |   |      | $     | 919  |      |      | $     | 888   |  
|Net earned premiums                                                                                                                   |                                  |                                  | 308      |          |             |       | 271   |   |      |       | 866  |      |      |       | 811   |  
|Underwriting loss                                                                                                                     |                                  |                                  | (14      | )        |             |       | (12   | ) |      |       | (222 | )    |      |       | (43   | )
|Net operating income (loss)                                                                                                           |                                  |                                  | 11       |          |             |       | 19    |   |      |       | (114 | )    |      |       | 35    |  
|Net operating income (loss)
excluding restructuring and other
related charges                                                         |                                  |                                  | 11       |          |             |       | 19    |   |      |       | (113 | )    |      |       | 35    |  
|                                                                                                                                     
|Ratios:                                                                                                                               |                                  |                                  |          |          |             |       |       |   |      |       |      |      |      |       |       |  
|                                                                                                                                      |                                  | Loss and loss adjustment expense |          |          | 58.6        | %     |       |   | 61.7 | %     |      |      | 75.1 | %     |       |   | 62.2 | %    
|                                                                                                                                      |                                  | Expense                          |          |          | 45.7        |       |       |   | 43.0 |       |      |      | 50.2 |       |       |   | 43.0 |      
|                                                                                                                                      |                                  | Dividend                         |          |          | 0.2         |       |       |   | (0.3 | )     |      |      | 0.3  |       |       |   | 0.1  |      
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |       |      |     
|                                                                                                                                      |                                  |                                  | Combined |          |             | 104.5 | %     |   |      | 104.4 | %    |      |      | 125.6 | %     |   |      | 105.3 | %
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |       |      |     
|Adjusted underwriting loss                                                                                                            |                                  | $                                | (9       | )        |             |       |       |   |      | $     | (97  | )    |      |       |       |  
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |       |      |      |      |      
|2001 adjusted ratios excluding the
WTC catastrophe, corporate covers,
reserve adjustment and
restructuring and other related
charges: |                                  |                                  |          |          |             |       |       |   |      |       |      |      |      |       |       |  
|                                                                                                                                      | Loss and loss adjustment expense |                                  |          | 59.2     | %           |       |       |   |      |       |      | 62.0 | %    |       |       |   |     
|                                                                                                                                      | Expense                          |                                  |          | 43.3     |             |       |       |   |      |       |      | 48.9 |      |       |       |   |     
|                                                                                                                                      | Dividend                         |                                  |          | 0.2      |             |       |       |   |      |       |      | 0.3  |      |       |       |   |     
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |       |      |      |      |      
|                                                                                                                                      |                                  |                                  |          | Combined |             |       | 102.7 | % |      |       |      |      |      |       | 111.2 | % |      |       |   | 
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |   |      |       |      |      |      |      

Third quarter net operating income declined by $8 million as compared with the
prior year. The after-tax estimated impact of the WTC catastrophe was $7
million, net of the benefit of the corporate aggregate reinsurance treaties.
This decline was partially offset by a $3 million after-tax benefit as a result
of corporate aggregate reinsurance treaties on Core operations. Excluding these
items, net operating income decreased $4 million primarily as a result of
declined underwriting results in the Canadian and European operations and
warranty product lines and a decline in limited partnership income of $2
million, partially offset by improved underwriting results in the marine line
of business.

The adjusted combined ratio decreased 1.7 points to 102.7% for the third
quarter of 2001 as compared with the same period in 2000 and the adjusted
underwriting results improved $3 million. These changes were primarily due to
a decrease in the adjusted loss ratio of 2.5 points as a result of improved
underwriting results in the marine line of business. Partially offsetting the
improved adjusted loss ratio were increases in the adjusted dividend ratio and
adjusted expense ratio. The increase in the adjusted dividend ratio of 0.5
points was due to favorable dividend development in 2000 in the surety lines.
The increase in the adjusted expense ratio of 0.3 points was attributable to
increased acquisition expenses in the marine lines of business and increased
underwriting expenses in the European operations.

Net written premiums for Global Operations for the third quarter of 2001
increased $18 million as compared with the same period in 2000. Net written
premiums increased primarily as a result of growth in the commercial casualty
and property lines in the European operations, production

49



---



##### Table of Contents



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

increases in surety
lines and growth in the workers compensation line. These increases were
partially offset by $12 million of additional ceded premiums arising from the
corporate aggregate reinsurance treaties. Net earned premiums increased $37
million primarily related to the same reasons noted above.

Net operating income decreased $149 million for the first nine months of 2001
as compared with the same period in 2000. The after-tax impact of the reserve
strengthening on Global Operations was $87 million, including $25 million for
asbestos, environmental pollution and other mass tort claims. The remaining
reserve strengthening related to the marine business as a result of a second
quarter review in 2001 which indicated an increase in large claim frequency in
marine cargo and hull coverages for accident years 1998 though 2000. In
addition, Global Operations strengthened reserves due to higher than expected
losses
arising from high hazard commercial auto business. In response to these
adverse trends, Global Operations has taken rate action and reduced exposure to
unprofitable marine cargo and hull classes of business and exited the high
hazard commercial auto business.

In addition to the impact of the reserve strengthening, net operating income
for the nine months ended September 30, 2001 decreased by $7 million related to
the estimated WTC catastrophe, net of the benefit of the corporate aggregate
reinsurance treaties, and $1 million of restructuring and other related
charges. Partially offsetting these decreases was a $2 million after-tax
benefit related to the corporate aggregate reinsurance treaties on Core
operations. Apart from these items, net operating income decreased $56 million
for the nine months of 2001 as compared with the prior year due primarily to
writing off unrecoverable deferred acquisition costs and better aligning
premium earnings patterns with the emergence of claims in the vehicle warranty
line of business and a $6 million decline in limited partnership income.

The adjusted combined ratio increased 5.9 points to 111.2% for the first nine
months of 2001 as compared with the same period in 2000 and the adjusted
underwriting results declined $54 million. These changes were principally due
to an increase in the adjusted expense ratio of 5.9 points. The increase in the
expense ratio was attributable to an increase in acquisition expenses primarily
due to the write-off of unrecoverable deferred acquisition costs in the vehicle
warranty line of business in the second quarter of 2001.

Net written premiums for Global Operations for the first nine months of 2001
increased $31 million as compared with the same period in 2000. Net written
premiums increased primarily as a result of growth in the commercial casualty
and property lines in Europe and Canada, as well as production increases in
surety lines. These increases were partially offset by $27 million of
additional ceded premiums arising from the corporate aggregate reinsurance
treaties, declines in the equipment maintenance warranty line of business and
$6 million related to the adjustment in net written premiums (as previously
discussed on page 41 of the MD&A). Net earned premiums increased $55 million
primarily related to the same reasons noted above.

Global Operations achieved 7% average rate increases across its businesses
during the third quarter of 2001 for the contracts that renewed during the
period. Retention rates were in the 88 percent range for those contracts which
were up for renewal. Retention rates do not apply to the Surety and Warranty
businesses.

50



---



##### Table of Contents

]

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

Risk Management

|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |       |      |      |    |   |       |       |   |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | -------------------------------- | -------- | -------- | ----------- | ----- | ----- | ---- | ---- | ----- | ---- | ---- | -- | - | ----- | ----- | - |  |  | 
|Operating Results                                                                                                                     |                                  |                                  |          |          |             |       |       |      |      |       |     
|                                                                                                                                      |                                  | Three Months                     |          |          | Nine Months |      
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |      
|Period ended September 30(In millions)                                                                                                |                                  | 2001                             |          |          | 2000        |       |       | 2001 |      |       | 2000 |     
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |       |      |     
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |       |      |      |    |   |       |      
|Net written premiums                                                                                                                  |                                  | $                                | 46       |          |             | $     | 129   |      |      | $     | 252  |      |    | $ | 506   |      
|Net earned premiums                                                                                                                   |                                  |                                  | 48       |          |             |       | 142   |      |      |       | (94  | )    |    |   | 448   |      
|Underwriting loss                                                                                                                     |                                  |                                  | (30      | )        |             |       | (35   | )    |      |       | (950 | )    |    |   | (106  | )    
|Net operating (loss) income                                                                                                           |                                  |                                  | 5        |          |             |       | 15    |      |      |       | (545 | )    |    |   | 34    |      
|Net operating (loss) income
excluding restructuring and other
related charges                                                         |                                  |                                  | 5        |          |             |       | 15    |      |      |       | (544 | )    |    |   | 34    |      
|                                                                                                                                     
|Ratios:                                                                                                                               |                                  |                                  |          |          |             |       |       |      |      |       |      |      |    |   |       |      
|                                                                                                                                      |                                  | Loss and loss adjustment expense |          |          | 38.9        | %     |       |      | 93.7 | %     |      | NM   |    |   | 92.5  | %    
|                                                                                                                                      |                                  | Expense                          |          |          | 95.3        |       |       |      | 31.1 |       |      | NM   |    |   | 31.2  |      
|                                                                                                                                      |                                  | Dividend                         |          |          | 30.5        |       |       |      | 0.0  |       |      | NM   |    |   | 0.0   |      
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |       |      |     
|                                                                                                                                      |                                  |                                  | Combined |          |             | 164.7 | %     |      |      | 124.8 | %    |      | NM |   |       | 123.7 | %
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |       |      |     
|Adjusted underwriting loss                                                                                                            |                                  | $                                | (32      | )        |             |       |       |      |      | $     | (76  | )    |    |   |       |      
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |       |      |      |    |  
|2001 adjusted ratios excluding the
WTC catastrophe, corporate covers,
reserve adjustment and
restructuring and other related
charges: |                                  |                                  |          |          |             |       |       |      |      |       |      |      |    |   |       |      
|                                                                                                                                      | Loss and loss adjustment expense |                                  |          | 80.9     | %           |       |       |      |      |       |      | 83.8 | %  |   |       |       |  
|                                                                                                                                      | Expense                          |                                  |          | 31.3     |             |       |       |      |      |       |      | 30.1 |    |   |       |       |  
|                                                                                                                                      | Dividend                         |                                  |          | 10.2     |             |       |       |      |      |       |      | 4.3  |    |   |       |       |  
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |       |      |      |   
|                                                                                                                                      |                                  |                                  |          | Combined |             |       | 122.4 | %    |      |       |      |      |    |   | 118.2 | %     |   |  |  | 
|                                                                                                                                      |                                  |                                  |          |          |             |       |       |      |      |       |      |      |    |  

NM = Not Meaningful.

Third quarter net operating income declined by $10 million as compared with the
prior year. The after-tax estimated impact of the WTC catastrophe was $39
million, net of the benefit of the corporate aggregate reinsurance treaties. In
addition, net operating income decreased due to declines in the workers
compensation business, adverse development in the dividend reserves recorded in
the third quarter of 2001, and lower net investment income, of which $5 million
was due to a decline in limited partnership income. These declines were
partially offset by an after-tax benefit of $36 million related to corporate
aggregate reinsurance treaties on Core operations, improved property
underwriting results and an increased benefit from the use of reinsurance.

The adjusted combined ratio decreased 2.4 points to 122.4% for the third
quarter of 2001 as compared with the same period in 2000 and the adjusted
underwriting results improved $3 million. The adjusted loss ratio improved 12.8
points due to improvements in the property business and increased benefit from
the use of reinsurance, partially offset by adverse experience in the workers
compensation business. The adjusted combined ratio was adversely impacted by
adverse development in the dividend reserves recorded in the third quarter
2001.

Net written premiums for Risk Management decreased $83 million for the third
quarter of 2001 as compared with the same period in 2000 as a result of $96
million of ceded premiums related to the corporate aggregate reinsurance
treaties, partially offset by new business production in
the property book of business. Net written premiums benefited $7 million as a
result of the adjustment to written premiums (as discussed on page 41 of the
MD&A).

51



---



##### Table of Contents



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

Net earned premiums decreased $94 million for the third quarter of 2001
as compared with the same period in 2000 due to the reasons noted above.

Net operating income for the nine months ended September 30, 2001 decreased
$579 million. The after-tax impact, net of the related corporate aggregate
reinsurance treaty benefit, of the second quarter of 2001 reserve strengthening
on Risk Management was $575 million, including $322 million for asbestos,
environmental pollution and other mass tort claims. The remaining reserve
strengthening related primarily to adverse experience in liability coverages
and retrospective premium accruals. The change in estimate
was driven by adverse indications in loss reserve and retrospective premium
studies. In addition to the impact of the reserve strengthening, the after-tax
estimated impact of the WTC catastrophe was $39 million, net of the benefit of
the corporate aggregate reinsurance treaties. These losses were offset by an
after-tax benefit of $35 million related to corporate aggregate reinsurance
treaties on Core operations. Apart from those charges, net operating income
was flat for the first nine months of 2001 as compared with the prior year due
to lower net catastrophes of $10 million after-tax, excluding the WTC
catastrophe, and higher adverse development recorded in 2000, partially offset
by a $13 million decrease in limited partnership income and increased dividends
of $12 million.

The adjusted combined ratio decreased 5.5 points to 118.2% for the nine months
ended September 30, 2001 as compared with the same period in 2000 and the
adjusted underwriting results improved by $30 million. This change is
primarily due to a decrease in the loss ratio of 8.7 points primarily as a
result of $16 million, or 3.7 points, of lower non-WTC catastrophes in the nine
months ended September 30, 2001 as compared with the same period in the prior
year and improvement in the casualty business, partially offset by increases in
the adjusted loss ratio in workers compensation. Partially offsetting the
improved loss ratio, was an increase in the dividend ratio due to adverse
development in dividend reserves recorded in 2001.

Net written premiums for Risk Management decreased $254 million for the first
nine months of 2001 as compared with the same period in 2000 as a result of
$232 million of ceded premiums related to the corporate aggregate reinsurance
treaties, a change in estimate for involuntary market premium accruals and a
continued focus on re-underwriting the book of business. Net earned premiums
decreased $542 million for the first nine months of 2001 as compared with the
same period in 2000 attributable to $265 million in adverse experience in
retrospective premium accruals recorded in the second quarter reserve
strengthening as well as the declines noted above. The change in estimate
related to retrospective premium receivables was based upon the Companys
completion of comprehensive studies of estimated premium receivable accruals on
retrospectively rated insurance policies and involuntary market facilities. The
studies included the review of all such retrospectively rated insurance
policies and the current estimate of ultimate losses.

52



---



##### Table of Contents



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

Group Operations

|                                       |  |              |     |   |             |   |     |      |  |   |       |   |  |   |       | 
|-------------------------------------- |  | ------------ | --- | - | ----------- | - | --- | ---- |  | - | ----- | - |  | - | ----- | 
|Operating Results                      |  |              |     |   |             |   |     |      |  |   |       |   |  |   |       | 
|                                       |  | Three Months |     |   | Nine Months |  
|                                       |  |              |     |   |             |  
|Period ended September 30(In millions) |  | 2001         |     |   | 2000        |   |     | 2001 |  |   | 2000  |  
|                                       |  |              |     |   |             |   |     |      |  |   |       |  
|                                       |  |              |     |   |             |   |     |      |  |   |       |   |  |   |       | 
|Net earned premiums                    |  | $            | 931 |   |             | $ | 947 |      |  | $ | 2,579 |   |  | $ | 2,708 | 
|Net operating (loss) income            |  |              | (35 | ) |             |   | 14  |      |  |   | (4    | ) |  |   | 40    | 

Net earned premiums for Group Operations decreased $16 million, or 2%, to $931
million for the third quarter of 2001 as compared with the same period in 2000.
Net earned premiums declined $66 million as a result of the sale of the Life
Reinsurance business (Life Reinsurance) on December 31, 2000 and $39 million in
the group reinsurance line of business primarily as a result of terminating
unprofitable contracts with independent underwriting agencies that occurred in
2000. See Note L of the Condensed Consolidated Financial Statements for a
discussion of the Life Reinsurance transaction. These declines were partially
offset by increases of $78 million in Federal Markets, mainly due to the
mailhandlers health benefit plan, and growth of $11 million in Group Benefits,
particularly in the disability lines.

Net operating income decreased by $49 million to a loss of $35 million in the
third quarter of 2001 as compared with income of $14 million for the same
period in 2000. This decrease is primarily a result of after-tax losses related
to the estimated WTC catastrophe of $39 million in the Group Benefits line of
business and $13 million in group reinsurance. Net operating income also
decreased due to the loss of income resulting from the sale of Life Reinsurance
of $4 million and a decline of $4 million in limited partnership income in
2001. Partially offsetting these declines were improvements resulting from
exiting unprofitable lines of business in 2000 and increased net investment
income overall.

Net earned premiums for Group Operations decreased $129 million, or 5%, to
$2,579 million for the nine months ended September 30, 2001 as compared with
the same period in 2000. Net earned premiums declined $172 million as a result
of the sale of Life Reinsurance and $121 million in the group reinsurance line
of business primarily as a result of terminating unprofitable contracts with
independent underwriting agencies in 2000. These declines were partially offset
by increases in Federal Markets of $114 million and in Group Benefits of $50
million, particularly in the disability and group long term care lines of
business.

Net operating income decreased by $44 million to a loss of $4 million for the
first nine months of 2001 as compared with the same period in 2000. This
decrease is related primarily to losses as a result of the estimated WTC
catastrophe in the third quarter as discussed above. Net operating income also
declined $15 million as a result of the sale of Life Reinsurance and $10
million due to a decline in limited partnership income. Partially offsetting
these declines were improved group long term care results.

53



---



##### Table of Contents



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

Life Operations

|                                             |  |              |     |  |             |   |     |      |  |   |       |  |  |   |       | 
|-------------------------------------------- |  | ------------ | --- |  | ----------- | - | --- | ---- |  | - | ----- |  |  | - | ----- | 
|Operating Results                            |  |              |     |  |             |   |     |      |  |   |       |  |  |   |       | 
|                                             |  | Three Months |     |  | Nine Months |  
|                                             |  |              |     |  |             |  
|Period ended September 30(In millions)       |  | 2001         |     |  | 2000        |   |     | 2001 |  |   | 2000  | 
|                                             |  |              |     |  |             |   |     |      |  |   |       | 
|                                             |  |              |     |  |             |   |     |      |  |   |       |  |  |   |       | 
|Sales volume*                                |  | $            | 663 |  |             | $ | 698 |      |  | $ | 2,286 |  |  | $ | 2,382 | 
|Net earned premiums                          |  |              | 248 |  |             |   | 236 |      |  |   | 740   |  |  |   | 674   | 
|Net operating income                         |  |              | 4   |  |             |   | 49  |      |  |   | 73    |  |  |   | 140   | 
|Net operating income excluding restructuring |  |              | 4   |  |             |   | 49  |      |  |   | 84    |  |  |   | 140   | 

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

Sales volume for Life Operations decreased $35 million to $663 million for the
third quarter of 2001 as compared with the same period in 2000. Sales volume
decreased as a result of a decline in the sale of variable annuities, exiting
the viatical line of business and declines in the Chile annuity business. Net
earned premiums increased $12 million, or 5%, to $248 million for the third
quarter of 2001 as compared with the same period in 2000. This improvement is
primarily attributable to improved sales of structured settlement annuities and
Long Term Care products, partially offset by declines in the Chile annuity
business.

Net operating income decreased by $45 million to $4 million for the third
quarter of 2001 as compared with the same period in 2000. This decrease is
related to the after-tax losses for the estimated WTC catastrophe of $14
million, lower investment performance in the Index 500 product sold to
institutions, decreased net investment income primarily due to a $5 million
decline in limited partnership income, and higher mortality experience in the
Universal Life business.

Sales volume for Life Operations decreased by $96 million to $2,286 million for
the nine months ended September 30, 2001 as compared with the same period in
2000. This decline was driven primarily by declines in the sales of variable
annuities and as a result of exiting the viatical line of business. These
declines were partially offset by increased renewals and increased new sales in
Long Term Care products. Net earned premiums increased $66 million, or 10%, to
$740 million for the nine months ended September 30, 2001 as compared with the
same period in 2000. This improvement is primarily attributable to improved
sales of structured settlement annuities and Long Term Care products, partially
offset by declines in the Chile annuity business.

Excluding restructuring charges, net operating income decreased by $56 million
to $84 million for the nine months ended September 30, 2001 as compared with
the same period in 2000. This decrease relates primarily to decreased net
investment income primarily due to a $17 million decline in limited partnership
income and losses related to the estimated WTC catastrophe of $14 million. In
addition, net operating income decreased as a result of lower investment yields
in Long Term Care products and lower investment performance in the Index 500
product.

54



---



##### Table of Contents



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

Corporate and Other

Net operating losses remained flat at $49 million and $165 million for the
third quarter and first nine months of 2001 as compared with the same periods
of 2000.

Included in the nine months ended September 30, 2001 was $23 million in
restructuring and other related charges. See Note K to the Condensed
Consolidated Financial Statements for a discussion of Restructuring and Other
Related Charges.

Environmental Pollution and Other Mass Tort and Asbestos Reserves

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

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

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

A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress during 2000 or the first nine
months of 2001, and it is unclear what positions Congress or the administration
and what legislation, if any, will result in the future. If there is
legislation, and in some circumstances even if there is no legislation, the
federal role in environmental cleanup
may be significantly reduced in favor of state action. Substantial changes in
the federal statute or the activity of the EPA may cause states to

55



---



##### Table of Contents



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

reconsider
their environmental cleanup statutes and regulations. There can be no
meaningful prediction of the pattern of regulation that would result or the
effect upon CNAs results of operations and/or financial position.

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

As of September 30, 2001 and December 31, 2000, CNA carried approximately $649
million and $347 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims. There was no environmental pollution and other mass
tort net claim and claim adjustment expense reserve development for the three
months ended September 30, 2001. Unfavorable environmental pollution and other
mass tort net claim and claim adjustment expense reserve development for the
three months ended September 30, 2000 amounted to $15 million. Unfavorable
environmental pollution and other mass tort net claim and claim adjustment
expense reserve development for the nine months ended September 30, 2001 and
2000 amounted to $453 million and $36 million. The Company made environmental
pollution-related claim payments and other mass tort-related claim payments of
$135 million and $153 million in calendar year 2000 and the nine months ended
September 30, 2001 respectively, net of reinsurance.

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

As of September 30, 2001 and December 31, 2000, CNA carried approximately
$1,233 million and $603 million of net claim and claim adjustment expense
reserves, net of reinsurance recoverables, for reported and unreported
asbestos-related claims. There was no asbestos net claim and claim adjustment
expense reserve development for the three months ended September 30, 2001.
Unfavorable asbestos net claim and claim adjustment expense reserve development
for the three months ended September 30, 2000 amounted to $12 million.
Unfavorable asbestos net claim and claim adjustment expense reserve development
for the nine months ended September 30, 2001 and 2000 amounted to $769 million
and $43 million. The Company made asbestos-related claim payments of $126
million and $78 million in calendar year 2000 and the nine months ended
September 30, 2001 respectively, net of reinsurance, excluding payments made in
connection with the 1993 settlement of litigation related to Fibreboard
Corporation. CNA has attempted to manage its asbestos exposures by aggressively
resolving old accounts.

The reserve strengthening in the second quarter of 2001 for asbestos-related
claims was based on a management review of developments with respect to these
exposures conducted in the second quarter, as well as a review of the results
of CNAs annual analysis of these claims.

56



---



##### Table of Contents



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

This analysis indicated a
significant increase in claim counts for asbestos-related claims. The factors
that have led to the deterioration in claim counts include, among other things,
intensive advertising campaigns by lawyers for asbestos claimants and the
addition of new defendants such as the distributors and installers of asbestos
containing products. New claim filings increased significantly in 2000 over
1999 and that trend continues thus far in 2001. The volume of new claims has
caused the bankruptcies of numerous asbestos defendants. Those bankruptcies
also may result in increased liability for remaining defendants under
principles of joint and several liability.

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

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

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

57



---



##### Table of Contents



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

Investments

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

|                                                                |        |              |     |   |             |   |     |      |     |   |       |   |       |   |       |   |      | 
|--------------------------------------------------------------- | ------ | ------------ | --- | - | ----------- | - | --- | ---- | --- | - | ----- | - | ----- | - | ----- | - | ---- | 
|Net Investment Income                                           |        |              |     |   |             |   |     |      |     |   |       |   |       |   |       |  
|                                                                |        | Three Months |     |   | Nine Months |  
|                                                                |        |              |     |   |             |   |     |     
|Period ended September 30(In millions)                          |        | 2001         |     |   | 2000        |   |     | 2001 |     |   | 2000  |  
|                                                                |        |              |     |   |             |   |     |      |     |   |       |  
|                                                                |        |              |     |   |             |   |     |      |     |   |       |   |       |   |       |  
|Fixed maturity securities:                                      |        |              |     |   |             |   |     |      |     |   |       |   |       |   |       |  
|                                                                | Bonds: |              |     |   |             |   |     |      |     |   |       |   |       |   |       |   |     
|                                                                |        | Taxable      |     | $ | 445         |   |     | $    | 391 |   |       | $ | 1,270 |   |       | $ | 1141 | 
|                                                                |        | Tax-exempt   |     |   | 24          |   |     |      | 52  |   |       |   | 86    |   |       |   | 168  | 
|Limited Partnerships                                            |        |              | 20  |   |             |   | 100 |      |     |   | 52    |   |       |   | 258   |  
|Short-term investments                                          |        |              | 34  |   |             |   | 61  |      |     |   | 113   |   |       |   | 152   |  
|Other, including interest and funds withheld and other deposits |        |              | (48 | ) |             |   | 8   |      |     |   | (89   | ) |       |   | 49    |  
|                                                                |        |              |     |   |             |   |     |      |     |   |       |  
|Gross Investment Income                                         |        |              | 475 |   |             |   | 612 |      |     |   | 1,432 |   |       |   | 1,768 |  
|Investment expense                                              |        |              | (18 | ) |             |   | (11 | )    |     |   | (47   | ) |       |   | (37   | )
|                                                                |        |              |     |   |             |   |     |      |     |   |       |  
|Net investment income                                           |        | $            | 457 |   |             | $ | 601 |      |     | $ | 1,385 |   |       | $ | 1,731 |  
|                                                                |        |              |     |   |             |   |     |      |     |   |       |  

During the first quarter of 2001, the Company reclassified equity method income
from limited partnership investments. This income was previously classified in
realized investment gains, net of participating policyholders and minority
interests. Effective in 2001, equity method income from limited partnership
investments is classified in net investment income and amounts in 2000 have
been reclassified to conform to the new presentation. Income from limited
partnership investments decreased $80 million and $206 million for the three
and nine month periods ended September 30, 2001 as compared with the same
periods in 2000. During the three and nine month periods ended September 30,
2000 market conditions allowed for very favorable investment results relative
to the investment strategies of certain limited partnerships held. In
addition, certain partnerships that were very successful during year 2000 have
been dissolved and are no longer held. Investment results for the same periods
in 2001 were, in general, less than expected.

Also during the first quarter of 2001, the Company reclassified interest on
funds withheld and other deposits. This expense was previously classified in
other operating expenses and is now classified in net investment income.
Interest on funds withheld and other deposits was $84 million and $28 million
for the third quarter of 2001 and 2000. Interest on funds withheld and other
deposits was $206 million and $64 million for the nine months ended September
30, 2001 and 2000.

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

58



---



##### Table of Contents



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

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

|                                                               |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |       |     |     |      |     |     |      |     | 
|-------------------------------------------------------------- | -------------------------- | --------------------------------- | ------------------------------- | ------------------------------- | ----------- | --- | ---- | ---- | --- | -- | ---- | ----- | --- | --- | ---- | --- | --- | ---- | --- | 
|Net Realized Investment Gains                                  |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |       |     |     |      |    
|                                                               |                            | Three Months                      |                                 |                                 | Nine Months |    
|                                                               |                            |                                   |                                 |                                 |             |     |      |      |     |   
|Period ended September 30(In millions)                         |                            | 2001                              |                                 |                                 | 2000        |     |      | 2001 |     |    | 2000 |      
|                                                               |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |      
|                                                               |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |       |     |     |      |    
|Realized investment gains (losses):                            |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |       |     |     |      |    
|                                                               | Fixed maturity securities: |                                   |                                 |                                 |             |     |      |      |     |    |      |       |     |     |      |     |    
|                                                               |                            | U.S. Government bonds             |                                 | $                               | 49          |     |      | $    | 24  |    |      | $     | 156 |     |      | $   | 21  |     
|                                                               |                            | Corporate and other taxable bonds |                                 |                                 | (73         | )   |      |      | (21 | )  |      |       | (79 | )   |      |     | (68 | )   
|                                                               |                            | Tax-exempt bonds                  |                                 |                                 | 7           |     |      |      | 22  |    |      |       | 45  |     |      |     | (25 | )   
|                                                               |                            | Asset-backed bonds                |                                 |                                 |            |     |      |      | (7  | )  |      |       | 55  |     |      |     | (65 | )   
|                                                               |                            | Redeemable Preferred Stock        |                                 |                                 |            |     |      |      |    |    |      |       | (21 | )   |      |     | (3  | )   
|                                                               |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |      
|                                                               |                            |                                   | Total fixed maturity securities |                                 |             | (17 | )    |      |     | 18 |      |       |     | 156 |      |     |     | (140 | )  
|                                                               | Equity securities          |                                   |                                 | 39                              |             |     |      | 612  |     |    |      | 1,126 |     |     |      | 987 |    
|                                                               | Derivative securities      |                                   |                                 | (29                             | )           |     |      | (8   | )   |    |      | (26   | )   |     |      | 13  |    
|                                                               | Other assets               |                                   |                                 | 10                              |             |     |      | (13  | )   |    |      | (304  | )   |     |      | 50  |    
|                                                               |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |      
|                                                               |                            |                                   |                                 | Total realized investment gains |             |     | 3    |      |     |    | 609  |       |     |     | 952  |     |     |      | 910 | 
|Allocated to participating policyholders and minority interest |                            |                                   | (2                              | )                               |             |     | (3   | )    |     |    | (12  | )     |     |     |     |    
|Income tax expense                                             |                            |                                   | (1                              | )                               |             |     | (212 | )    |     |    | (390 | )     |     |     | (319 | )  
|                                                               |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |      
|Net realized investment gains                                  |                            | $                                 |                                |                                 |             | $   | 394  |      |     | $  | 550  |       |     | $   | 591  |    
|                                                               |                            |                                   |                                 |                                 |             |     |      |      |     |    |      |      

Net realized investment gains decreased $394 million for the third quarter of
2001 compared with the same period in 2000. This change is primarily a result
of realized gains in the third quarter of 2000 for the sale of Global Crossing
Ltd. common stock (Global Crossing) of $149 million (this position was entirely
sold as of the second quarter of 2001) and Canary Wharf Group plc common stock
(Canary Wharf) of $192 million.

Net realized investment gains decreased $41 million for the nine months ended
September 30, 2001 as compared with the same period in 2000. This decrease is
primarily a result of the estimated losses recorded for the planned
dispositions of the United Kingdom subsidiaries of CNA Re described in more
detail below as well as decreases in after-tax gains from the sale of Canary
Wharf of $34 million for the first nine months of 2001 as compared with $233
million in the same period of 2000. These declines were partially offset by
after-tax gains from the sale of Global Crossing and its related hedge of $647
million in the first nine months of 2001 as compared with $315 million in the
same period of 2000 as well as gains of $58 million, as adjusted, resulting
from the sale of a New York real estate property and gains from the sale of
fixed maturity security investments in the first quarter of 2001.

The Company is attempting to sell certain subsidiaries and expects the sales to
be completed in early 2002. The assets being held for disposition include the
United Kingdom subsidiaries of CNA Re and certain other subsidiaries. The
Company anticipates that it will realize losses in connection with those sales.
In determining the anticipated loss from these sales, the Company estimated
sales proceeds, transactional costs, lease termination costs, employee related
costs and the cost of certain reinsurance transactions. The sale of the United
Kingdom insurance subsidiary will be subject to regulatory approval. During the
second quarter of 2001, an estimated after-tax realized loss of $320 million
was recorded in connection with these planned dispositions.

59



---



##### Table of Contents



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

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

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

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

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

60



---



##### Table of Contents



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

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

|                                                                           |                                                                 |               |        |        |              |   |        |          |  |   |                    |        |  
|-------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------- | ------ | ------ | ------------ | - | ------ | -------- |  | - | ------------------ | ------ | -
|                                                                           |                                                                 |               |        |        |              |   |        |          |  |   | Nine Months Ended  |       
|                                                                           |                                                                 |               |        |        |              |   |        |          |  |   | September 30, 2001 |       
|                                                                           |                                                                 |               |        |        |              |   |        |          |  |   | Change in          |       
|                                                                           |                                                                 |               |        |        |              |   |        |          |  |   | Unrealized         |       
|General Account Investments                                                |                                                                 | September 30, |        |        | December 31, |   |        | Gains    | 
|                                                                           |                                                                 | 2001          |        |        | 2000         |   |        | (Losses) | 
|                                                                           |                                                                 |               |        |        |              |   |        |          |  |  
|(In millions)                                                              |                                                                 |               |        |        |              |   |        |          |  |   |                    |       
|                                                                          
|Fixed maturity securities:                                                 |                                                                 |               |        |        |              |   |        |          |  |   |                    |       
|                                                                           | U.S. Treasury securities and obligations of government agencies |               | $      | 5,678  |              |   | $      | 5,298    |  |   | $                  | 84     |  
|                                                                           | Asset-backed securities                                         |               |        | 8,197  |              |   |        | 7,623    |  |   |                    | 182    |  
|                                                                           | Tax-exempt securities                                           |               |        | 2,229  |              |   |        | 3,349    |  |   |                    | (45    | )
|                                                                           | Taxable securities                                              |               |        | 12,428 |              |   |        | 10,328   |  |   |                    | 307    |  
|                                                                           | Redeemable preferred stock                                      |               |        | 46     |              |   |        | 54       |  |   |                    |       |  
|                                                                           |                                                                 |               |        |        |              |   |        |          | 
|Total fixed maturity securities                                            |                                                                 |               | 28,578 |        |              |   | 26,652 |          |  |   | 528                |       
|                                                                           |                                                                 |               |        |        |              |   |        |          | 
|Equity securities:                                                         |                                                                 |               |        |        |              |   |        |          |  |   |                    |       
|                                                                           | Common stock                                                    |               |        | 1,101  |              |   |        | 2,216    |  |   |                    | (1,223 | )
|                                                                           | Non-redeemable preferred stock                                  |               |        | 319    |              |   |        | 196      |  |   |                    | (13    | )
|                                                                           |                                                                 |               |        |        |              |   |        |          | 
|Total equity securities                                                    |                                                                 |               | 1,420  |        |              |   | 2,412  |          |  |   | (1,236             | )     
|Short-term investments                                                     |                                                                 |               | 4,788  |        |              |   | 4,723  |          |  |   | (10                | )     
|Other investments                                                          |                                                                 |               | 1,594  |        |              |   | 1,335  |          |  |   |                   |       
|                                                                           |                                                                 |               |        |        |              |   |        |          | 
|Total investments                                                          |                                                                 | $             | 36,380 |        |              | $ | 35,122 |          |  |   | (718               | )     
|                                                                           |                                                                 |               |        |        |              |   |        |          |  |  
|Separate account business and other                                        |                                                                 |               |        |        |              |   |        |          |  |   | 105                |       
|                                                                           |                                                                 |               |        |        |              |   |        |          |  |   |                   
|Change in unrealized gains (losses) reported in other comprehensive income |                                                                 |               |        |        |              |   |        |          |  | $ | (613               | )     
|                                                                           |                                                                 |               |        |        |              |   |        |          |  |   |                   

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

Investments in the general account, excluding $89 million of net unrealized
losses related to the adoption of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activitiesand the Statement of Financial Accounting
Standards No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities(collectively referred to as SFAS 133), as of January 1,
2001, had a total net unrealized gain of $681 million at September 30, 2001
compared with $1,310 million at December 31, 2000. The unrealized position at
September 30, 2001 was composed of a net unrealized gain of $629 million for
fixed maturities, and an unrealized gain of $61 million for equity securities,
and a net unrealized loss of $9 million for short-term investments.

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

61



---



##### Table of Contents



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, 91% and 93% of which were rated as investment grade at September
30, 2001 and December 31, 2000. The following table summarizes the ratings of
CNAs general account bond portfolio at carrying value.

|                                                 |  |               |        |  |   |  |     |      |              |   |        |  |  |  |     |  
|------------------------------------------------ |  | ------------- | ------ |  | - |  | --- | ---- | ------------ | - | ------ |  |  |  | --- | -
|General Account Bond Ratings                     |  |               |        |  |   |  |     |      |              |   |        |  |  |  |     |  
|                                                 |  | September 30, |        |  |   |  |     |      | December 31, |   |        |  |  | 
|                                                 |  | 2001          |        |  | % |  |     | 2000 |              |   | %      | 
|                                                 |  |               |        |  |   |  |     |      |              |   |        | 
|(In millions)                                    |  |               |        |  |   |  |     |      |              |   |        |  |  |  |     |  
|                                                
|U.S. Government and affiliated agency securities |  | $             | 6,389  |  |   |  | 22  | %    |              | $ | 8,689  |  |  |  | 32  | %
|Other AAA rated                                  |  |               | 9,573  |  |   |  | 34  |      |              |   | 7,120  |  |  |  | 27  |  
|AA and A rated                                   |  |               | 6,056  |  |   |  | 21  |      |              |   | 5,954  |  |  |  | 22  |  
|BBB rated                                        |  |               | 4,053  |  |   |  | 14  |      |              |   | 3,066  |  |  |  | 12  |  
|Below investment-grade                           |  |               | 2,461  |  |   |  | 9   |      |              |   | 1,769  |  |  |  | 7   |  
|                                                 |  |               |        |  |   |  |     |      |              |   |        | 
|Total                                            |  | $             | 28,532 |  |   |  | 100 | %    |              | $ | 26,598 |  |  |  | 100 | %
|                                                 |  |               |        |  |   |  |     |      |              |   |        | 

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

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

Included in CNAs general account fixed maturity securities at September 30,
2001 are $8,197 million of asset-backed securities, at fair value, consisting
of approximately 61% in collateralized mortgage obligations (CMOs), 15% in U.S.
government agency issued pass-through certificates, 15% in corporate
asset-backed obligations and 9% in corporate mortgage-backed pass-through
certificates. The majority of CMOs held are actively traded in liquid markets
and are priced by broker-dealers.

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

|                             |  |               |       |  |              |   |       | 
|---------------------------- |  | ------------- | ----- |  | ------------ | - | ----- | 
|Short-term investments       |  |               |       |  |              |   |       | 
|                             |  | September 30, |       |  | December 31, |  
|                             |  | 2001          |       |  | 2000         |  
|                             |  |               |       |  |              |  
|(In millions)                |  |               |       |  |              |   |       | 
|                            
|Commercial paper             |  | $             | 2,234 |  |              | $ | 3,291 | 
|U.S. Treasury securities     |  |               | 162   |  |              |   | 383   | 
|Money Market funds           |  |               | 2,086 |  |              |   | 620   | 
|Other                        |  |               | 306   |  |              |   | 429   | 
|                             |  |               |       |  |              |  
|Total short-term investments |  | $             | 4,788 |  |              | $ | 4,723 | 
|                             |  |               |       |  |              |  

62



---



##### Table of Contents



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

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

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

Market Risk

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

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

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

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, 2001 and December 31, 2000 due to instantaneous parallel increases in the
period end yield curve of 100 and 150 basis points.

63



---



##### Table of Contents



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

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

Equity price risk was measured assuming an instantaneous 10% and 25% decline in
the S & P 500 Index (Index) from its level at September 30, 2001 and December
31, 2000 with all other variables held constant. The Companys equity holdings
were assumed to be highly and positively correlated with the Index. At
September 30, 2001, a 10% and 25% decrease in the Index would result in a $391
million and $977 million decrease compared to $457 million and $1,042 million
decrease at December 31, 2000, in the market rate of the Companys equity
investments.

Of these amounts, under the 10% and 25% scenarios, $140 million and $350
million at September 30, 2001 and $167 million and $418 million at December 31,
2000 pertained to decreases in the market value of the separate account
investments. These decreases would substantially be offset by decreases in
related separate account liabilities to customers. Similarly, increases in the
market value of the separate account equity investments would also be offset by
increases in the same related separate account liabilities by the same
approximate amounts.

64



---



##### Table of Contents



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

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

|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     |     |   |      |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | ------ | --------- | - | ------ | ------------------- | ------ | - | ------ | --- | --- | - | ---- | ---- | ---- | -
|                                                          |                             |                         |        |        |           |   |        | Increase (Decrease)
|Market Risk Scenario 1                                    |                             |                         |        |        |           |  
|September 30, 2001                                        |                             | Market                  |        |        | Interest  |   |        | Currency            |        |   | Equity |    
|                                                          |                             | Value                   |        |        | Rate Risk |   |        | Risk                |        |   | Risk   |    
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     |     |  
|(In millions)                                             |                             |                         |        |        |           |   |        |                     |        |   |        |     |     |   |      |     
|                                                         
|Held for Other Than Trading Purposes:                     |                             |                         |        |        |           |   |        |                     |        |   |        |     |     |   |      |     
|General Account:                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         | $      | 28,578 |           |   | $      | (1,342              | )      |   | $      | (66 | )   |   | $    | (59  | )   
|                                                          | Equity securities           |                         |        | 1,420  |           |   |        |                    |        |   |        | (27 | )   |   |      | (137 | )   
|                                                          | Short-term investments      |                         |        | 4,788  |           |   |        | (1                  | )      |   |        | (1  | )   |   |      | (1   | )   
|                                                          | Limited partnerships        |                         |        | 1,344  |           |   |        | 53                  |        |   |        |    |     |   |      | (55  | )   
|                                                          | Other invested assets       |                         |        | 252    |           |   |        |                    |        |   |        |    |     |   |      |     |     
|                                                          | Interest rate caps          |                         |        | 1      |           |   |        | 1                   |        |   |        |    |     |   |      |     |     
|                                                          | Interest rate swaps         |                         |        | (1     | )         |   |        | 3                   |        |   |        |    |     |   |      |     |     
|                                                          | Other derivative securities |                         |        | (2     | )         |   |        |                    |        |   |        | 19  |     |   |      | 1    |     
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    
|                                                          |                             | Total general account   |        |        | 36,380    |   |        |                     | (1,286 | ) |        |     | (75 | ) |      |      | (251 | )
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    
|Separate accounts:                                        |                             |                         |        |        |           |   |        |                     |        |   |        |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 2,096  |           |   |        | (116                | )      |   |        |    |     |   |      |     |     
|                                                          | Equity securities           |                         |        | 145    |           |   |        |                    |        |   |        |    |     |   |      | (14  | )   
|                                                          | Short-term investments      |                         |        | 162    |           |   |        |                    |        |   |        |    |     |   |      |     |     
|                                                          | Other invested assets       |                         |        | 456    |           |   |        |                    |        |   |        |    |     |   |      | (46  | )   
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    
|                                                          |                             | Total separate accounts |        |        | 2,859     |   |        |                     | (116   | ) |        |     |    |   |      |      | (60  | )
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    
|Total all securities held for other than trading purposes |                             |                         | 39,239 |        |           |   | (1,402 | )                   |        |   | (75    | )   |     |   | (311 | )   
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    
|Held for Trading Purposes:                                |                             |                         |        |        |           |   |        |                     |        |   |        |     |     |   |      |     
|Separate accounts:                                        |                             |                         |        |        |           |   |        |                     |        |   |        |     |     |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 234    |           |   |        | (4                  | )      |   |        |    |     |   |      | (2   | )   
|                                                          | Equity securities           |                         |        | 9      |           |   |        |                    |        |   |        |    |     |   |      | (1   | )   
|                                                          | Short-term investments      |                         |        | 198    |           |   |        |                    |        |   |        |    |     |   |      |     |     
|                                                          | Limited partnerships        |                         |        | 374    |           |   |        |                    |        |   |        |    |     |   |      | (3   | )   
|                                                          | Equity indexed futures      |                         |        |       |           |   |        | 2                   |        |   |        |    |     |   |      | (74  | )   
|                                                          | Other derivative securities |                         |        | (1     | )         |   |        | 2                   |        |   |        |    |     |   |      |     |     
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    
|Total all securities held for trading purposes            |                             |                         | 814    |        |           |   |       |                     |        |   |       |     |     |   | (80  | )   
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    
|Total all securities                                      |                             | $                       | 40,053 |        |           | $ | (1,402 | )                   |        | $ | (75    | )   |     | $ | (391 | )   
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    
|Debt (carrying value)                                     |                             | $                       | 2,084  |        |           | $ | (98    | )                   |        | $ |       |     |     | $ |     |     
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |    

65



---



##### Table of Contents



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

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

66



---



##### Table of Contents



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

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

|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |      |      |   |      |      |      |  
|--------------------------------------------------------- | --------------------------- | ----------------------- | ------ | ------ | --------- | - | ------ | ------------------- | ------ | - | ------ | ---- | ---- | - | ---- | ---- | ---- | -
|                                                          |                             |                         |        |        |           |   |        | Increase (Decrease) |       
|Market Risk Scenario 2                                    |                             |                         |        |        |           |   |       
|September 30, 2001                                        |                             | Market                  |        |        | Interest  |   |        | Currency            |        |   | Equity |     
|                                                          |                             | Value                   |        |        | Rate Risk |   |        | Risk                |        |   | Risk   |     
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |      |      |  
|(In millions)                                             |                             |                         |        |        |           |   |        |                     |        |   |        |      |      |   |      |     
|                                                         
|Held for Other Than Trading Purposes:                     |                             |                         |        |        |           |   |        |                     |        |   |        |      |      |   |      |     
|General Account:                                          |                             |                         |        |        |           |   |        |                     |        |   |        |      |      |   |      |     
|                                                          | Fixed maturity securities   |                         | $      | 28,578 |           |   | $      | (1,996              | )      |   | $      | (131 | )    |   | $    | (147 | )   
|                                                          | Equity securities           |                         |        | 1,420  |           |   |        |                    |        |   |        | (55  | )    |   |      | (343 | )   
|                                                          | Short-term investments      |                         |        | 4,788  |           |   |        | (2                  | )      |   |        | (3   | )    |   |      | (1   | )   
|                                                          | Limited partnerships        |                         |        | 1,344  |           |   |        | 79                  |        |   |        |     |      |   |      | (138 | )   
|                                                          | Other invested assets       |                         |        | 252    |           |   |        |                    |        |   |        |     |      |   |      |     |     
|                                                          | Interest rate caps          |                         |        | 1      |           |   |        | 2                   |        |   |        |     |      |   |      |     |     
|                                                          | Interest rate swaps         |                         |        | (1     | )         |   |        | 4                   |        |   |        |     |      |   |      |     |     
|                                                          | Other derivative securities |                         |        | (2     | )         |   |        |                    |        |   |        | 38   |      |   |      | 2    |     
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     
|                                                          |                             | Total general account   |        |        | 36,380    |   |        |                     | (1,913 | ) |        |      | (151 | ) |      |      | (627 | )
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     
|Separate accounts:                                        |                             |                         |        |        |           |   |        |                     |        |   |        |      |      |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 2,096  |           |   |        | (169                | )      |   |        |     |      |   |      |     |     
|                                                          | Equity securities           |                         |        | 145    |           |   |        |                    |        |   |        |     |      |   |      | (36  | )   
|                                                          | Short-term investments      |                         |        | 162    |           |   |        |                    |        |   |        |     |      |   |      |     |     
|                                                          | Other invested assets       |                         |        | 456    |           |   |        |                    |        |   |        |     |      |   |      | (115 | )   
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     
|                                                          |                             | Total separate accounts |        |        | 2,859     |   |        |                     | (169   | ) |        |      |     |   |      |      | (151 | )
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     
|Total all securities held for other than trading purposes |                             |                         | 39,239 |        |           |   | (2,082 | )                   |        |   | (151   | )    |      |   | (778 | )   
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     
|Held for Trading Purposes:                                |                             |                         |        |        |           |   |        |                     |        |   |        |      |      |   |      |     
|Separate accounts:                                        |                             |                         |        |        |           |   |        |                     |        |   |        |      |      |   |      |     
|                                                          | Fixed maturity securities   |                         |        | 234    |           |   |        | (5                  | )      |   |        |     |      |   |      | (5   | )   
|                                                          | Equity securities           |                         |        | 9      |           |   |        |                    |        |   |        |     |      |   |      | (2   | )   
|                                                          | Short-term investments      |                         |        | 198    |           |   |        |                    |        |   |        |     |      |   |      | (1   | )   
|                                                          | Limited partnerships        |                         |        | 374    |           |   |        |                    |        |   |        |     |      |   |      | (6   | )   
|                                                          | Equity indexed futures      |                         |        |       |           |   |        | 3                   |        |   |        |     |      |   |      | (185 | )   
|                                                          | Other derivative securities |                         |        | (1     | )         |   |        | 3                   |        |   |        |     |      |   |      |     |     
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     
|Total all securities held for trading purposes            |                             |                         | 814    |        |           |   | 1      |                     |        |   |       |      |      |   | (199 | )   
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     
|Total all securities                                      |                             | $                       | 40,053 |        |           | $ | (2,081 | )                   |        | $ | (151   | )    |      | $ | (977 | )   
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     
|Debt (carrying value)                                     |                             | $                       | 2,084  |        |           | $ | (143   | )                   |        | $ |       |      |      | $ |     |     
|                                                          |                             |                         |        |        |           |   |        |                     |        |   |        |     

67



---



##### Table of Contents



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

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

Liquidity and Capital Resources

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

For the nine months ended September 30, 2001, net cash used in operating
activities was $767 million as compared with $896 million for the same period
in 2000. The improvement related primarily to decreased paid claim and claim
adjustment expenses, partially offset by increased payments of income taxes.

For the nine months ended September 30, 2001, net cash inflows from investing
activities was $408 million as compared with $1,312 million for the same period
in 2000. Cash flows from investing activities were principally related to
increased net purchases of invested assets related to investing $1 billion of
proceeds from the rights offering completed in the third quarter of 2001.

68



---



##### Table of Contents



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

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, 2001,
net cash provided from financing activities was $317 million as compared with
$395 million used for the same period in 2000. CNA completed a common stock
rights offering on September 26, 2001, successfully raising $1 billion (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, and an
additional 0.3 million shares in the third quarter of 2001 subsequent to the
rights offering, increasing its ownership percentage of CNA to 88.6%. Partially
offsetting this cash inflow were reductions to the Companys commercial paper
borrowings of $610 million.

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

The Company is closely managing the cash flows related to claims and
reinsurance recoverables from the WTC catastrophe. It is anticipated that
significant claim payments will be made prior to receipt of the corresponding
reinsurance recoverables. The Company does not anticipate any liquidity
problems resulting from these payments. As of November 2, 2001, the Company has
paid $107 million in claims.

CNAs estimated gross losses for the WTC catastrophe is $1,648 million pretax
($1,071 million after-tax). Approximately 41%, 40% and 17% of the reinsurance
recoverables on the estimated losses related to the WTC catastrophe are from
companies with Standard & Poors ratings of AAA, AA or A, respectively.

As of April 30, 2001, CNAF replaced its $750 million revolving credit facility
(the Prior Facility) with a new $500 million revolving credit facility (the New
Facility). No loans were outstanding under either the Prior Facility or the
New Facility at any time during 2001. The Prior Facility was scheduled to
expire on May 10, 2001. The New Facility is split into two parts, a $250
million component with a 364-day expiration date (with an option by CNAF to
turn this part of the New Facility into a one-year term loan) and a $250
million component with a 3-year expiration date. The Company pays a facility
fee, which varies based on the long-term debt ratings of the Company, to the
lenders of the New Facility for having funds available for loans under both
components of the New Facility. On October 10, 2001, S&P lowered the Companys
long-term debt rating from BBB to BBB-. As a result of this action, the
facility fee on the 364-day component increased from 12.5 basis points to 15
basis points and the facility fee on the 3-year component increased from 15
basis points to 17.5 basis points. If the Companys Moodys debt rating
declines two levels from the current level, the facility fee goes to 20 basis
points on the 364-day component and to 25 basis points on the 3-year component.
The facility is subject to certain restrictive covenants.

In addition to the facility fees, if the Company borrows under the New
Facility, the Company at its current debt ratings will pay an interest rate on
outstanding loans equal to the London Interbank Offering Rate (LIBOR) plus 60
basis points for the 364-day component and LIBOR plus 57.5 basis points for the
3-year component. If the Companys Moodys debt rating is lowered two levels
from the current level, the Company will pay an interest rate on the
outstanding loans equal to the LIBOR plus 80 basis points for the 364-day
component and LIBOR plus 75 basis points for the 3-year component.

69



---



##### Table of Contents



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

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

The New Facility is used for general corporate purposes including support for
the commercial paper program, which currently has $17 million of loans
outstanding. There are currently no bank loans drawn under the facility.

Following the announcement of second quarter 2001 earnings, the Companys
commercial paper rating was placed under review by S&P. During the review
period, the Company through an affiliated company held varying amounts of its
commercial paper with the intent to put it back into the market after the
review was completed. On October 10, 2001 S&P lowered the Companys commercial
paper rating from A2 to A3, and maintained the CreditWatch Negative status.

The commercial paper rating downgrade, the impacts of the WTC catastrophe, and
an overall decline in the market will make it difficult, if not impossible, to
reissue the commercial paper currently held by CCC. Management intends to seek
alternative financing to replace the Companys commercial paper. The Company
expects to finalize a refinancing plan in the fourth quarter. The financing
costs on any new securities issued under this plan likely will have a higher
cost than the commercial paper program being replaced. As of September 30,
2001, the Company through its affiliates held $383 million of its commercial
paper.

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

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

UR = Under Review; CWN = CreditWatch Negative

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

Each of the four rating agencies, A.M. Best, S&P, Moodys and Fitch, have
undertaken reviews of all rated insurance industry companies following the
September 11, 2001 WTC catastrophe.

A.M. Best affirmed the ratings of the CCC, CAC, and CIC pools at A. S&P
lowered the CCC and CAC Pool ratings to A- and A+ following their analysis
of the impact of the second quarter reserve adjustment. CNAFs senior debt and
commercial paper ratings were also lowered to BBB- and A3. S&P has maintained
the CreditWatch Negative status for all CNA ratings pending their review of the
impact of the WTC catastrophe. Moodys has reaffirmed the ratings of CIC, CAC
and commercial paper. As a result of the WTC catastrophe and second quarter
reserve adjustment, CCC and the senior debt ratings remain under review.
Management anticipates a decision on CCCs ratings to be made by Moodys within
4-6 weeks. Fitch affirmed the rating of CAC and placed CCC under review.

70



---



##### Table of Contents



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

On August 27, 2001, A.M. Best lowered the rating of CNA Re UK from A- to B+
and changed the status to under review with developing implications. A.M. Best
stated that the rating action follows uncertainty surrounding the future
ownership and operating status of the company.

Agency ratings are not a recommendation to buy, sell or hold any security, and
may be revised or withdrawn at any time by the issuing organization. Each
agencys rating should be evaluated independently of any other agencys rating.

Accounting Pronouncements

In the first quarter of 2001, the Company adopted the SFAS 133. The Companys
initial adoption of SFAS 133 did not have a significant impact on the equity of
the Company; however, adoption of SFAS 133 resulted in an after-tax decrease to
first quarter 2001 earnings of $61 million. Of this transition amount,
approximately $58 million related to investments and investment-related
derivatives. Because the Company already carried its investment and
investment-related derivatives at fair value through other comprehensive
income, there was an equal and offsetting favorable adjustment of $58 million
to stockholders equity (accumulated other comprehensive income). The
remainder of the transition adjustment is attributable to collateralized debt
obligation products that are derivatives under SFAS 133. See Note D for a
complete discussion of the Companys adoption of these accounting
pronouncements.

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

Additionally, CNAs property-casualty companies implemented a change, effective
January 1, 2001, in the timing of recording written premiums for policies with
future effective dates. This change was made in conjunction with changes
required by Codification related to the recording of written premiums. The
effect of this change was to reduce net written premiums by $87 million for the
nine months ended September 30, 2001. This change has no impact on net earned
premiums or net income.

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

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

71



---



##### Table of Contents



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

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets(SFAS 142). SFAS 142 changes the
accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach. Amortization of goodwill
and indefinite-lived intangible assets, including goodwill recorded in past
business combinations, will cease upon adoption of SFAS 142, which for CNA will
be January 1, 2002. The Company is in the process of quantifying the impact
this new standard will have on its operations and intangible assets.
Amortization of goodwill and intangible assets amounted to $4 million and $15
million for the three months and nine months ended September 30, 2001 and $6
million and $16 million for the three months and nine months ended September
30, 2000.

In October of 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes FASB Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The provisions
of this statement are effective for CNA beginning January 1, 2002. The Company
is in the process of quantifying the impact this new standard will have on its
operations and financial position.

FORWARD LOOKING STATEMENTS

This quarterly report includes a number of statements which relate to
anticipated future events (forward-looking statements) rather than actual
present conditions or historical events. You can identify forward-looking
statements because generally they include words such as believes, expects,
intends, anticipates, estimates, and similar expressions. Forward-looking
statements in this quarterly report include expected losses in the Companys
insurance business, including losses for asbestos, environmental pollution and
other mass tort claims; the Companys expectations concerning its revenues,
earnings, expenses and investment activities; expected cost savings and other
results from the Companys restructuring activities; and expected proceeds and
terms of, and other matters concerning, the Companys planned disposition of
its U.K. reinsurance business. Forward-looking statements, by their nature,
are subject to a variety of risks and uncertainties that could cause actual
results to differ materially from the results expected in the forward-looking
statement. Many of these risks and uncertainties cannot be controlled by the
Company. Some examples of these risks and uncertainties are:



| |  | general economic and business conditions;                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------
| 
| |  | changes in financial markets such as fluctuations in interest rates, credit conditions and currency, commodity and stock
prices;
| 
| |  | changes in foreign, political, social and economic conditions;                                                                  
| 
| |  | regulatory initiatives and compliance with governmental regulations, judicial decisions and rulings;                            
| 
| |  | the impact of competitive products, policies and pricing and the competitive environment in which the Company operates;         
| 
| |  | product and policy demand and market responses;                                                                                 
| 
| |  | development of claims and the impact on loss reserves;                                                                          

72



---



##### Table of Contents



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



| |  | the performance of reinsurance companies under reinsurance contracts with us;                                                                                                                                                                                                                                                   
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | results of financing efforts;                                                                                                                                                                                                                                                                                                   
| 
| |  | changes in our composition of operation segments;                                                                                                                                                                                                                                                                               
| 
| |  | exposure to liabilities due to claims made by insured and others relating to asbestos remediation and health-based asbestos
impairments, and exposure to liabilities for environmental pollution and other mass tort claims; the sufficiency of the
Companys loss reserves and the possibility of future increases in reserves;
| 
| |  | the possibility of downgrades in the Companys ratings by ratings agencies and changes in rating agency policies and practices; and                                                                                                                                                                                             
| 
| |  | the actual closing of contemplated transactions and agreements.                                                                                                                                                                                                                                                                 

Any forward-looking statements made in this quarterly report are made by the
Company as of the date of this report. The Company does not have any
obligation to update or revise any forward-looking statement contained in this
prospectus supplement and the accompanying prospectus, even if our expectations
or any related facts or circumstances change.

73



---



##### Table of Contents









CNA FINANCIAL CORPORATION
Part II Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K:

On September 13, 2001, CNA
Financial Corporation filed a report on Form 8-K to announce it is
extending the expiration date for its pending rights offering.

On September 14, 2001, CNA
Financial Corporation filed a report on Form 8-K related to its
announcement of the Companys loss exposure relating to the
September 11, 2001, attack on the World Trade Center in New York
City and further extending the expiration date for its rights
offering.




SIGNATURES

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

|      |  |                  |  |                                                                                                      
|----- |  | ---------------- |  | -----------------------------------------------------------------------------------------------------
|      |  |                  |  | CNA FINANCIAL CORPORATION                                                                            
|     
|Date: |  | November 9, 2001 |  | By: /s/ ROBERT V. DEUTSCH     
Robert V. Deutsch
Executive Vice President and
Chief Financial Officer

74