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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

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

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



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CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes ü
 No...

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

|                              |  |                              
|----------------------------- |  | -----------------------------
|Class                         |  | Outstanding at August 1, 2002
|                              |  |                              
|Common Stock, Par value $2.50 |  | 223,596,861                  



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TABLE OF CONTENTS



|                              |                                                              |                                                                                       |  |  |  |  |  | 
|----------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                
|                              |                                                              | CONDENSED CONSOLIDATED BALANCE SHEETS                                                
|                              |                                                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                      
|                              |                                                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                      
|                              |                                                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                     
|                              |                                                              | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|Part II. Other Information   
|                              | Item 1. Legal Proceedings                                   
|                              | Item 4. Submission of Matters to a Vote of Security Holders.
|                              | Item 6. Exhibits and Reports on Form 8-K                    
|SIGNATURES                   



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##### Table of Contents



CNA FINANCIAL CORPORATION
INDEX

| |                                                                                       |                                                                                                                       |          |    |   | 
| | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | -------- | -- | - | 
| | PART I. FINANCIAL INFORMATION                                                         |                                                                                                                       | PAGE NO.
| |                                                                                       |                                                                                                                       |          |   
| | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                                          |                                                                                                                       |          |    |  
| |                                                                                       |                                                                                                                       |          |   
| |                                                                                       | CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 (Unaudited) AND DECEMBER 31, 2001                                 |          |    | 1 | 
| |                                                                                       |                                                                                                                       |          |   
| |                                                                                       | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2002 AND 2001 |          |    | 2 | 
| |                                                                                       |                                                                                                                       |          |   
| |                                                                                       | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001           |          |    | 3 | 
| |                                                                                       |                                                                                                                       |          |   
| |                                                                                       | NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) JUNE 30, 2002                                        |          |    | 4 | 
| |                                                                                       |                                                                                                                       |          |   
| | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |                                                                                                                       |          | 31 |  
| |                                                                                       |                                                                                                                       |          |   
| | PART II. OTHER INFORMATION                                                            |                                                                                                                       |          |    |  
| |                                                                                       |                                                                                                                       |          |   
| | ITEM 1. LEGAL PROCEEDINGS                                                             |                                                                                                                       |          | 77 |  
| |                                                                                       |                                                                                                                       |          |   
| | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                           |                                                                                                                       |          | 77 |  
| |                                                                                       |                                                                                                                       |          |   
| | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                              |                                                                                                                       |          | 77 |  
| |                                                                                       |                                                                                                                       |          |   
| | SIGNATURES                                                                            |                                                                                                                       |          | 77 |  





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##### Table of Contents












CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |        |        | 
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------ | ----------- | ------ | ------------ | ------ | ------ | ------ | 
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        | (Unaudited) |        |              |        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        | June 30,    |        | December 31,
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        | 2002        |        | 2001        
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |             
|(In millions, except share data)                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |             
|Assets                                                   |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |             
|                                                         | Investments:                                                                                                                                                                                               |                                                                                       |                            |                                            |        |             |        |              |       
|                                                         |                                                                                                                                                                                                            | Fixed maturity securities available-for-sale (amortized cost of $30,182 and $28,970 ) |                            | $                                          | 30,330 |             |        | $            | 29,164 |       
|                                                         |                                                                                                                                                                                                            | Equity securities available-for-sale (cost of $1,068 and $1,168)                      |                            |                                            | 1,149  |             |        |              | 1,338  |       
|                                                         |                                                                                                                                                                                                            | Mortgage loans and real estate (less accumulated depreciation of $53 and $1)          |                            |                                            | 59     |             |        |              | 35     |       
|                                                         |                                                                                                                                                                                                            | Policy loans                                                                          |                            |                                            | 186    |             |        |              | 194    |       
|                                                         |                                                                                                                                                                                                            | Other invested assets                                                                 |                            |                                            | 1,423  |             |        |              | 1,355  |       
|                                                         |                                                                                                                                                                                                            | Short-term investments                                                                |                            |                                            | 4,097  |             |        |              | 3,740  |       
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       | Total investments          |                                            |        | 37,244      |        |              |        | 35,826 |       
|                                                         | Cash and cash equivalents                                                                                                                                                                                  |                                                                                       |                            | 145                                        |        |             |        | 142          |       
|                                                         | Receivables:                                                                                                                                                                                               |                                                                                       |                            |                                            |        |             |        |              |       
|                                                         |                                                                                                                                                                                                            | Reinsurance                                                                           |                            |                                            | 13,775 |             |        |              | 13,823 |       
|                                                         |                                                                                                                                                                                                            | Insurance                                                                             |                            |                                            | 4,051  |             |        |              | 4,006  |       
|                                                         |                                                                                                                                                                                                            | Less allowance for doubtful accounts                                                  |                            |                                            | (361   | )           |        |              | (351   | )     
|                                                         | Accrued investment income                                                                                                                                                                                  |                                                                                       |                            | 407                                        |        |             |        | 385          |       
|                                                         | Receivables for securities sold                                                                                                                                                                            |                                                                                       |                            | 880                                        |        |             |        | 443          |       
|                                                         | Deferred acquisition costs                                                                                                                                                                                 |                                                                                       |                            | 2,513                                      |        |             |        | 2,424        |       
|                                                         | Prepaid reinsurance premiums                                                                                                                                                                               |                                                                                       |                            | 1,449                                      |        |             |        | 1,221        |       
|                                                         | Federal income taxes recoverable (includes $0 and $617 due from Loews)                                                                                                                                     |                                                                                       |                            |                                           |        |             |        | 611          |       
|                                                         | Deferred income taxes                                                                                                                                                                                      |                                                                                       |                            | 840                                        |        |             |        | 737          |       
|                                                         | Property and equipment at cost (less accumulated depreciation of $761 and $797)                                                                                                                            |                                                                                       |                            | 391                                        |        |             |        | 444          |       
|                                                         | Intangibles                                                                                                                                                                                                |                                                                                       |                            | 247                                        |        |             |        | 265          |       
|                                                         | Other assets                                                                                                                                                                                               |                                                                                       |                            | 2,080                                      |        |             |        | 2,194        |       
|                                                         | Separate account business                                                                                                                                                                                  |                                                                                       |                            | 3,387                                      |        |             |        | 3,798        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            | Total assets                               |        | $           | 67,048 |              |        | $      | 65,968 | 
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       
|Liabilities and Stockholders Equity                     |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |             
|Liabilities:                                             |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |             
|                                                         | Insurance reserves:                                                                                                                                                                                        |                                                                                       |                            |                                            |        |             |        |              |       
|                                                         |                                                                                                                                                                                                            | Claim and claim adjustment expense                                                    |                            | $                                          | 30,386 |             |        | $            | 31,266 |       
|                                                         |                                                                                                                                                                                                            | Unearned premiums                                                                     |                            |                                            | 4,914  |             |        |              | 4,505  |       
|                                                         |                                                                                                                                                                                                            | Future policy benefits                                                                |                            |                                            | 7,158  |             |        |              | 7,306  |       
|                                                         |                                                                                                                                                                                                            | Policyholders funds                                                                  |                            |                                            | 565    |             |        |              | 546    |       
|                                                         | Collateral on loaned securities and derivatives                                                                                                                                                            |                                                                                       |                            | 2,071                                      |        |             |        | 923          |       
|                                                         | Payables for securities purchased                                                                                                                                                                          |                                                                                       |                            | 1,522                                      |        |             |        | 606          |       
|                                                         | Participating policyholders funds                                                                                                                                                                         |                                                                                       |                            | 114                                        |        |             |        | 118          |       
|                                                         | Debt                                                                                                                                                                                                       |                                                                                       |                            | 2,567                                      |        |             |        | 2,567        |       
|                                                         | Reinsurance balances payable                                                                                                                                                                               |                                                                                       |                            | 2,719                                      |        |             |        | 2,723        |       
|                                                         | Federal income taxes payable (includes $63 and $0 due to Loews)                                                                                                                                            |                                                                                       |                            | 69                                         |        |             |        |             |       
|                                                         | Other liabilities                                                                                                                                                                                          |                                                                                       |                            | 2,915                                      |        |             |        | 3,019        |       
|                                                         | Separate account business                                                                                                                                                                                  |                                                                                       |                            | 3,387                                      |        |             |        | 3,798        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       | Total liabilities          |                                            |        | 58,387      |        |              |        | 57,377 |       
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       
|Commitments and contingencies (Note D, F, G, H, J and N) |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |             
|Minority interest                                        |                                                                                                                                                                                                            |                                                                                       | 234                        |                                            |        |             | 224    |             
|Stockholders equity:                                    |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |             
|                                                         | Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270 shares issued
at June 30, 2002 and December 31, 2001; and 223,596,861 shares outstanding at June 30,
2002 and December 31, 2001) |                                                                                       |                            | 565                                        |        |             |        | 565          |       
|                                                         | Additional paid-in capital                                                                                                                                                                                 |                                                                                       |                            | 1,031                                      |        |             |        | 1,031        |       
|                                                         | Retained earnings                                                                                                                                                                                          |                                                                                       |                            | 6,796                                      |        |             |        | 6,683        |       
|                                                         | Accumulated other comprehensive income                                                                                                                                                                     |                                                                                       |                            | 175                                        |        |             |        | 226          |       
|                                                         | Treasury stock, at cost                                                                                                                                                                                    |                                                                                       |                            | (70                                        | )      |             |        | (70          | )     
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       | 8,497                      |                                            |        |             | 8,435  |             
|                                                         | Notes receivable for the issuance of common stock                                                                                                                                                          |                                                                                       |                            | (70                                        | )      |             |        | (68          | )     
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       | Total stockholders equity |                                            |        | 8,427       |        |              |        | 8,367  |       
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            | Total liabilities and stockholders equity |        | $           | 67,048 |              |        | $      | 65,968 | 
|                                                         |                                                                                                                                                                                                            |                                                                                       |                            |                                            |        |             |        |              |        |       

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

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##### Table of Contents






CNA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---- | ------------ | ----- | ---------- | ---- | ------ | ----- | - | - | ----- | ----- | - | - | ------ | ----- | -
|                                                                                 |                                                                                                |      | Three Months |       | Six Months
|                                                                                 |                                                                                                |      |              |       |           
|Period ended June 30                                                             |                                                                                                | 2002 |              | 2001  |            | 2002 |        | 2001 
|(In millions, except per share data)                                             |                                                                                                |      |              |       |            |      |        |      
|Revenues                                                                         |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |      
|                                                                                 | Net earned premiums                                                                            |      | $            | 2,826 |            |      | $      | 1,587 |   |   | $     | 5,663 |   |   | $      | 4,085 |  
|                                                                                 | Net investment income                                                                          |      |              | 502   |            |      |        | 402   |   |   |       | 928   |   |   |        | 909   |  
|                                                                                 | Realized investment (losses) gains, net of participating
policyholders and minority interests |      |              | (162  | )          |      |        | 567   |   |   |       | (161  | ) |   |        | 938   |  
|                                                                                 | Other revenues                                                                                 |      |              | 152   |            |      |        | 152   |   |   |       | 336   |   |   |        | 345   |  
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Total revenues                                                                   |                                                                                                |      | 3,318        |       |            |      | 2,708  |       |   |   | 6,766 |       |   |   | 6,277  |      
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Claims, Benefits and Expenses                                                    |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |      
|                                                                                 | Insurance claims and policyholders benefits                                                   |      |              | 2,382 |            |      |        | 4,277 |   |   |       | 4,692 |   |   |        | 6,346 |  
|                                                                                 | Amortization of deferred acquisition costs                                                     |      |              | 462   |            |      |        | 450   |   |   |       | 902   |   |   |        | 874   |  
|                                                                                 | Other operating expenses                                                                       |      |              | 392   |            |      |        | 498   |   |   |       | 884   |   |   |        | 978   |  
|                                                                                 | Restructuring and other related charges                                                        |      |              |      |            |      |        | 56    |   |   |       |      |   |   |        | 62    |  
|                                                                                 | Interest                                                                                       |      |              | 38    |            |      |        | 41    |   |   |       | 75    |   |   |        | 84    |  
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Total claims, benefits and expenses                                              |                                                                                                |      | 3,274        |       |            |      | 5,322  |       |   |   | 6,553 |       |   |   | 8,344  |      
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Income (loss) from continuing operations before income tax and
minority interest |                                                                                                |      | 44           |       |            |      | (2,614 | )     |   |   | 213   |       |   |   | (2,067 | )    
|Income tax (expense) benefit                                                     |                                                                                                |      | (4           | )     |            |      | 855    |       |   |   | (55   | )     |   |   | 670    |      
|Minority interest                                                                |                                                                                                |      | (5           | )     |            |      | (6     | )     |   |   | (10   | )     |   |   | (12    | )    
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Income (loss) from continuing operations                                         |                                                                                                |      | 35           |       |            |      | (1,765 | )     |   |   | 148   |       |   |   | (1,409 | )    
|Income (loss) from discontinued operations, net of tax of $0, $0,
$9, and $0     |                                                                                                |      |             |       |            |      | 3      |       |   |   | (35   | )     |   |   | 3      |      
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Income (loss) before cumulative effect of a change in accounting
principle       |                                                                                                |      | 35           |       |            |      | (1,762 | )     |   |   | 113   |       |   |   | (1,406 | )    
|Cumulative effect of a change in accounting principle, net of tax
of $33         |                                                                                                |      |             |       |            |      |       |       |   |   |      |       |   |   | (61    | )    
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Net income (loss)                                                                |                                                                                                | $    | 35           |       |            | $    | (1,762 | )     |   | $ | 113   |       |   | $ | (1,467 | )    
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Basic and Diluted Earnings (Loss) Per Share                                      |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |      
|                                                                                 | Income (loss) from continuing operations                                                       |      | $            | 0.16  |            |      | $      | (9.62 | ) |   | $     | 0.67  |   |   | $      | (7.67 | )
|                                                                                 | Income (loss) from discontinued operations, net of tax                                         |      |              |      |            |      |        | 0.01  |   |   |       | (0.16 | ) |   |        | 0.01  |  
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|                                                                                 | Income (loss) before cumulative effect of a change in accounting
principle                     |      |              | 0.16  |            |      |        | (9.61 | ) |   |       | 0.51  |   |   |        | (7.66 | )
|                                                                                 | Cumulative effect of a change in accounting principle, net of tax                              |      |              |      |            |      |        |      |   |   |       |      |   |   |        | (0.34 | )
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Basic and diluted earnings (loss) per share available to common
stockholders     |                                                                                                | $    | 0.16         |       |            | $    | (9.61  | )     |   | $ | 0.51  |       |   | $ | (8.00  | )    
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  
|Weighted average outstanding common stock and common stock
equivalents           |                                                                                                |      | 223.6        |       |            |      | 183.3  |       |   |   | 223.6 |       |   |   | 183.3  |      
|                                                                                 |                                                                                                |      |              |       |            |      |        |       |   |   |       |       |   |   |        |       |  

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

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##### Table of Contents






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

|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |         |        |       |     | 
|------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------- | ----------------- | ------ | ---- | ----- | ------- | ------ | ----- | --- | 
|Six months ended June 30                               |                                                                                                       | 2002                                                              |                                          | 2001             
|(In millions)                                          |                                                                                                       |                                                                   |                                          |                  
|Cash Flows from Operating Activities                   |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|                                                       | Net income (loss)                                                                                     |                                                                   | $                                        | 113               |        |      | $     | (1,467  | )     
|                                                       | Adjustments to reconcile net income (loss) to net cash flows provided
(used) by operating activities: |                                                                   |                                          |                   |        |      |       |         |       
|                                                       |                                                                                                       | Cumulative effect of a change in accounting principle, net of tax |                                          |                   |       |      |       |         | 61     |      
|                                                       |                                                                                                       | Loss on disposals of property and equipment                       |                                          |                   | 7      |      |       |         | 63     |      
|                                                       |                                                                                                       | Minority interest                                                 |                                          |                   | 10     |      |       |         | 12     |      
|                                                       |                                                                                                       | Deferred income tax provision                                     |                                          |                   | (34    | )    |       |         | (83    | )    
|                                                       |                                                                                                       | Net realized investment losses (gains)                            |                                          |                   | 161    |      |       |         | (939   | )    
|                                                       |                                                                                                       | Realized loss from discontinued operations, net of tax            |                                          |                   | 37     |      |       |         |       |      
|                                                       |                                                                                                       | Equity method income                                              |                                          |                   | (47    | )    |       |         | (37    | )    
|                                                       |                                                                                                       | Amortization of intangibles                                       |                                          |                   |       |      |       |         | 11     |      
|                                                       |                                                                                                       | Amortization of bond discount                                     |                                          |                   | (65    | )    |       |         | (124   | )    
|                                                       |                                                                                                       | Depreciation                                                      |                                          |                   | 52     |      |       |         | 72     |      
|                                                       |                                                                                                       | Changes in:                                                       |                                          |                   |        |      |       |         |        |      
|                                                       |                                                                                                       |                                                                   | Receivables, net                         |                   |        | 13   |       |         |        | (996  | )  
|                                                       |                                                                                                       |                                                                   | Deferred acquisition costs               |                   |        | (92  | )     |         |        | (51   | )  
|                                                       |                                                                                                       |                                                                   | Accrued investment income                |                   |        | (24  | )     |         |        | 3     |    
|                                                       |                                                                                                       |                                                                   | Federal income taxes recoverable/payable |                   |        | 696  |       |         |        | (801  | )  
|                                                       |                                                                                                       |                                                                   | Prepaid reinsurance premiums             |                   |        | (228 | )     |         |        | 89    |    
|                                                       |                                                                                                       |                                                                   | Reinsurance balances payable             |                   |        | (4   | )     |         |        | 238   |    
|                                                       |                                                                                                       |                                                                   | Insurance reserves                       |                   |        | (225 | )     |         |        | 2,889 |    
|                                                       |                                                                                                       |                                                                   | Other, net                               |                   |        | 65   |       |         |        | 234   |    
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|                                                       |                                                                                                       |                                                                   |                                          | Total adjustments |        |      | 322   |         |        |       | 641 | 
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|Net cash flows provided (used) by operating activities |                                                                                                       |                                                                   | 435                                      |                   |        |      | (826  | )      
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|Cash Flows from Investing Activities                   |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|                                                       | Purchases of fixed maturity securities                                                                |                                                                   |                                          | (32,543           | )      |      |       | (37,963 | )     
|                                                       | Proceeds from fixed maturity securities:                                                              |                                                                   |                                          |                   |        |      |       |         |       
|                                                       |                                                                                                       | Sales                                                             |                                          |                   | 30,109 |      |       |         | 30,076 |      
|                                                       |                                                                                                       | Maturities, calls and redemptions                                 |                                          |                   | 1,175  |      |       |         | 8,059  |      
|                                                       | Purchases of equity securities                                                                        |                                                                   |                                          | (448              | )      |      |       | (752    | )     
|                                                       | Proceeds from sales of equity securities                                                              |                                                                   |                                          | 516               |        |      |       | 1,652   |       
|                                                       | Change in short-term investments                                                                      |                                                                   |                                          | (317              | )      |      |       | (614    | )     
|                                                       | Change in collateral on loaned securities and derivatives                                             |                                                                   |                                          | 1,148             |        |      |       | 644     |       
|                                                       | Change in other investments                                                                           |                                                                   |                                          | (63               | )      |      |       | (210    | )     
|                                                       | Purchases of property and equipment                                                                   |                                                                   |                                          | (36               | )      |      |       | (70     | )     
|                                                       | Sales of property and equipment                                                                       |                                                                   |                                          |                  |        |      |       | 258     |       
|                                                       | Dispositions                                                                                          |                                                                   |                                          | 71                |        |      |       | 5       |       
|                                                       | Other, net                                                                                            |                                                                   |                                          | (22               | )      |      |       | 21      |       
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|Net cash flows (used) provided by investing activities |                                                                                                       |                                                                   | (410                                     | )                 |        |      | 1,106 |        
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|Net Cash Flows from Financing Activities               |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|                                                       | Principal payments on debt                                                                            |                                                                   |                                          |                  |        |      |       | (262    | )     
|                                                       | Return of policyholder account balances on investment contracts                                       |                                                                   |                                          | (26               | )      |      |       | (38     | )     
|                                                       | Receipts from investment contracts credited to policyholder account balances                          |                                                                   |                                          |                  |        |      |       | 2       |       
|                                                       | Other                                                                                                 |                                                                   |                                          | 4                 |        |      |       | (3      | )     
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|Net cash flows (used) by financing activities          |                                                                                                       |                                                                   | (22                                      | )                 |        |      | (301  | )      
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|Net change in cash and cash equivalents                |                                                                                                       |                                                                   | 3                                        |                   |        |      | (21   | )      
|Cash and cash equivalents, beginning of year           |                                                                                                       |                                                                   | 142                                      |                   |        |      | 163   |        
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|Cash and cash equivalents, end of period               |                                                                                                       | $                                                                 | 145                                      |                   |        | $    | 142   |        
|                                                       |                                                                                                       |                                                                   |                                          |                   |        |      |       |         |       
|Supplemental Disclosures of Cash Flow Information:     |                                                                                                       |                                                                   |                                          |                   |        |      |       |        
|                                                       | Cash paid (received):                                                                                 |                                                                   |                                          |                   |        |      |       |         |       
|                                                       |                                                                                                       | Interest                                                          |                                          | $                 | 87     |      |       | $       | 83     |      
|                                                       |                                                                                                       | Federal income taxes                                              |                                          |                   | (625   | )    |       |         | 182    |      

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

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

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include the
accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries,
which include property-casualty insurance companies (principally Continental
Casualty Company (CCC) and The Continental Insurance Company (CIC)) and life
and group insurance companies (principally Continental Assurance Company (CAC),
Valley Forge Life Insurance Company (VFL) and CNA Group Life Assurance Company
(CNAGLA)), collectively CNA or the Company. As of June 30, 2002, Loews
Corporation (Loews) owned approximately 90% of the outstanding common stock of
CNAF.

The accompanying Condensed Consolidated Financial Statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America (GAAP). Certain financial information that is normally
included in annual financial statements, including certain financial statement
footnotes, prepared in accordance with GAAP, is not required for interim
reporting purposes and has been condensed or omitted. These statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in CNAFs Annual Report to Shareholders for the year ended
December 31, 2001 (incorporated by reference in Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2001).

The interim financial data as of June 30, 2002 and 2001 and for the three and
six months ended June 30, 2002 and 2001 are unaudited. However, in the opinion
of management, the interim data includes all adjustments, consisting of normal
recurring accruals, necessary for a fair statement of the Companys results for
the interim periods. The operating results for the interim periods are not
necessarily indicative of the results to be expected for the full year. All
significant intercompany amounts have been eliminated.

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

Note B. Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 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, ceased upon adoption of SFAS
142, which for CNA was January 1, 2002. As required under SFAS 142, the
Company has completed the first step of its initial impairment testing and has
identified $65 million of its $247 million of total net carried goodwill and
indefinite-lived intangible assets, as being impaired. The impaired goodwill
is related to Specialty Lines and Life Operations. The second step of the
impairment testing, which involves quantification of the amount of the
impairment, will be completed in the third quarter of 2002. The initial
impairment loss will be reported as a cumulative effect of a change in
accounting principle as of January 1, 2002, and will require restatement of the
interim 2002 results. Any impairment losses incurred after the initial
application of this standard will be reported in operating income. If the
provisions of SFAS 142,

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

regarding no longer amortizing goodwill and indefinite-lived intangible assets,
were applied to prior periods, net loss for the three and six months ended June
30, 2001 would have been $1,757 million and $1,457 million and basic and
diluted loss per share would have been $9.59 per share and $7.95 per share.

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Effective
January 1, 2002, CNA adopted this statement for all impairments of long-lived
assets and for long-lived assets to be disposed of occurring after January 1,
2002. The adoption of SFAS 144 did not have a significant impact on the net
income or financial position of the Company; however, it did impact the income
statement presentation of certain operations sold in 2002.

Note C. Earnings Per Share

Earnings per share applicable to common stock is based on weighted average
outstanding shares. The computation of earnings per share was as follows.

Earnings (Loss) Per Share

|                                                                                                     |  |              |       |            |  |      |        |      |  |   |       |  |  |   |        |  
|---------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---------- |  | ---- | ------ | ---- |  | - | ----- |  |  | - | ------ | -
|                                                                                                     |  | Three Months |       | Six Months
|                                                                                                     |  |              |       |           
|Period ended June 30                                                                                 |  | 2002         |       | 2001       |  | 2002 |        | 2001
|(In millions, except per share amounts)                                                              |  |              |       |            |  |      |        |     
|                                                                                                     |  |              |       |            |  |      |        |      |  |   |       |  |  |   |        |  
|Net income (loss) applicable to common stock                                                         |  | $            | 35    |            |  | $    | (1,762 | )    |  | $ | 113   |  |  | $ | (1,467 | )
|                                                                                                     |  |              |       |            |  |      |        |      |  |   |       |  |  |   |        |  
|Weighted average outstanding common stock and common
stock equivalents                               |  |              | 223.6 |            |  |      | 183.3  |      |  |   | 223.6 |  |  |   | 183.3  |  
|Effect of dilutive securities, employee stock options                                                |  |              |      |            |  |      |       |      |  |   |      |  |  |   |       |  
|                                                                                                     |  |              |       |            |  |      |        |      |  |   |       |  |  |   |        |  
|Adjusted weighted average outstanding common stock
and common stock equivalents assuming conversions |  |              | 223.6 |            |  |      | 183.3  |      |  |   | 223.6 |  |  |   | 183.3  |  
|                                                                                                     |  |              |       |            |  |      |        |      |  |   |       |  |  |   |        |  
|Basic and diluted earnings (loss) per share
available to common stockholders                         |  | $            | 0.16  |            |  | $    | (9.61  | )    |  | $ | 0.51  |  |  | $ | (8.00  | )
|                                                                                                     |  |              |       |            |  |      |        |      |  |   |       |  |  |   |        |  

Note D. Other Invested Assets

Other invested assets include investments in limited partnerships and certain
derivative securities (See Note E for a discussion of derivative securities).
The Companys limited partnership investments are recorded at fair value,
typically reflecting a reporting lag of up to three months, with changes in
fair value reported in net investment income. Fair value of the Companys
limited partnership investments represents CNAs equity in the partnerships
net assets as determined by the general partner. The carrying value of the
Companys limited partnership investments was $1,400 million and $1,307 million
as of June 30, 2002 and December 31, 2001.

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

Limited partnerships are a relatively small portion of the Companys overall
investment portfolio. The majority of the limited partnerships invest in a
substantial number of securities that are readily marketable. The Company is a
passive investor in such partnerships and does not have influence over the
partnerships management, who are committed to operate them according to
established guidelines and strategies. These strategies may include the use of
leverage and hedging techniques that potentially introduce more volatility and
risk to the partnerships.

The Company has committed approximately $172 million to future capital calls
from various third-party limited partnership investments in exchange for an
ownership interest in the related partnerships.

Note E. Derivative Financial Instruments

The Company accounts for derivatives and hedging in accordance with Statement
of Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities(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. A summary of the recognized
(losses) gains related to derivative financial instruments follows.

Derivative Financial Instruments Recognized (Losses) Gains

|                     |                                                             |      |              |      |            |      |     |      |   |   |      |      |   |   |     |     |  
|-------------------- | ----------------------------------------------------------- | ---- | ------------ | ---- | ---------- | ---- | --- | ---- | - | - | ---- | ---- | - | - | --- | --- | -
|                     |                                                             |      | Three Months |      | Six Months
|                     |                                                             |      |              |      |           
|Period ended June 30 |                                                             | 2002 |              | 2001 |            | 2002 |     | 2001
|(In millions)        |                                                             |      |              |      |            |      |     |     
|                     |                                                             |      |              |      |            |      |     |      |   |   |      |      |   |   |     |    
|General account      |                                                             |      |              |      |            |      |     |      |   |   |      |      |   |   |     |    
|                     | Swaps                                                       |      | $            | 13   |            |      | $   | 2    |   |   | $    | 12   |   |   | $   | (3  | )
|                     | Interest rate caps                                          |      |              |     |            |      |     | 1    |   |   |      |     |   |   |     | 1   |  
|                     | Futures sold, not yet purchased                             |      |              | (1   | )          |      |     | 6    |   |   |      | (1   | ) |   |     | 6   |  
|                     | Forwards                                                    |      |              | (16  | )          |      |     | (3   | ) |   |      | (13  | ) |   |     | (2  | )
|                     | Commitments to purchase government and municipal securities |      |              | (1   | )          |      |     |     |   |   |      | (15  | ) |   |     |    |  
|                     | Equity warrants                                             |      |              |     |            |      |     | (1   | ) |   |      | (1   | ) |   |     | (3  | )
|                     | Collateralized debt obligation liabilities                  |      |              | (8   | )          |      |     |     |   |   |      | (16  | ) |   |     |    |  
|                     | Options purchased                                           |      |              |     |            |      |     | (1   | ) |   |      |     |   |   |     | (1  | )
|                     | Options written                                             |      |              |     |            |      |     | 147  |   |   |      |     |   |   |     | 148 |  
|                     | Options embedded in convertible debt securities             |      |              | (48  | )          |      |     | 40   |   |   |      | (64  | ) |   |     | (23 | )
|                     |                                                             |      |              |      |            |      |     |      |   |   |      |      |   |   |     |     |  
|Total                |                                                             | $    | (61          | )    |            | $    | 191 |      |   | $ | (98  | )    |   | $ | 123 |    
|                     |                                                             |      |              |      |            |      |     |      |   |   |      |      |   |   |     |     |  
|Separate accounts    |                                                             |      |              |      |            |      |     |      |   |   |      |      |   |   |     |    
|                     | Futures purchased                                           |      | $            | (112 | )          |      | $   | (17  | ) |   | $    | (114 | ) |   | $   | (91 | )
|                     | Futures sold, not yet purchased                             |      |              |     |            |      |     |     |   |   |      |     |   |   |     | (1  | )
|                     | Commitments to purchase government and municipal securities |      |              | 2    |            |      |     | (2   | ) |   |      | 2    |   |   |     | (1  | )
|                     | Options purchased                                           |      |              | (1   | )          |      |     |     |   |   |      | (2   | ) |   |     | (1  | )
|                     | Options written                                             |      |              | (1   | )          |      |     | 1    |   |   |      |     |   |   |     | 2   |  
|                     |                                                             |      |              |      |            |      |     |      |   |   |      |      |   |   |     |     |  
|Total                |                                                             | $    | (112         | )    |            | $    | (18 | )    |   | $ | (114 | )    |   | $ | (92 | )  
|                     |                                                             |      |              |      |            |      |     |      |   |   |      |      |   |   |     |     |  

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

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

Derivative Financial Instruments

|                  |                                                             |          |              |       |  |             |     |     |  |   |     |     |  
|----------------- | ----------------------------------------------------------- | -------- | ------------ | ----- |  | ----------- | --- | --- |  | - | --- | --- | -
|                  |                                                             |          | Contractual/ |       |  |             |     |     |  |   |    
|June 30, 2002     |                                                             | Notional |              |       |  |             |     |     |  |  
|(In millions)     |                                                             | Amount   |              | Asset |  | (Liability)
|                  |                                                             |          |              |       |  |            
|General account   |                                                             |          |              |       |  |             |     |     |  |   |     |    
|                  | Swaps                                                       |          | $            | 658   |  |             | $   | 9   |  |   | $   |    |  
|                  | Interest rate caps                                          |          |              | 500   |  |             |     | 1   |  |   |     |    |  
|                  | Futures sold, not yet purchased                             |          |              | 13    |  |             |     |    |  |   |     |    |  
|                  | Forwards                                                    |          |              | 193   |  |             |     |    |  |   |     | (13 | )
|                  | Commitments to purchase government and municipal securities |          |              | 150   |  |             |     |    |  |   |     |    |  
|                  | Equity warrants                                             |          |              | 15    |  |             |     |    |  |   |     |    |  
|                  | Collateralized debt obligation liabilities                  |          |              | 127   |  |             |     |    |  |   |     | (16 | )
|                  | Options purchased                                           |          |              | 10    |  |             |     |    |  |   |     |    |  
|                  | Options embedded in convertible debt securities             |          |              | 780   |  |             |     | 111 |  |   |     |    |  
|                  |                                                             |          |              |       |  |             |     |     |  |   |     |    
|Total             |                                                             | $        | 2,446        |       |  | $           | 121 |     |  | $ | (29 | )  
|                  |                                                             |          |              |       |  |             |     |     |  |   |     |    
|Separate accounts |                                                             |          |              |       |  |             |     |     |  |   |     |    
|                  | Futures purchased                                           |          | $            | 663   |  |             | $   |    |  |   | $   | (1  | )
|                  | Futures sold, not yet purchased                             |          |              | 9     |  |             |     |    |  |   |     |    |  
|                  | Commitments to purchase government and municipal securities |          |              | 36    |  |             |     | 1   |  |   |     |    |  
|                  | Options purchased                                           |          |              | 136   |  |             |     | 1   |  |   |     |    |  
|                  | Options written                                             |          |              | 140   |  |             |     |    |  |   |     | (2  | )
|                  |                                                             |          |              |       |  |             |     |     |  |   |     |    
|Total             |                                                             | $        | 984          |       |  | $           | 2   |     |  | $ | (3  | )  
|                  |                                                             |          |              |       |  |             |     |     |  |   |     |    

Derivative Financial Instruments

|                  |                                                             |          |              |       |  |             |     |     |  |   |     |     |  
|----------------- | ----------------------------------------------------------- | -------- | ------------ | ----- |  | ----------- | --- | --- |  | - | --- | --- | -
|                  |                                                             |          | Contractual/ |       |  |             |     |     |  |   |    
|December 31, 2001 |                                                             | Notional |              |       |  |             |     |     |  |  
|(In millions)     |                                                             | Amount   |              | Asset |  | (Liability)
|                  |                                                             |          |              |       |  |            
|General account   |                                                             |          |              |       |  |             |     |     |  |   |     |    
|                  | Swaps                                                       |          | $            | 504   |  |             | $   | 3   |  |   | $   |    |  
|                  | Interest rate caps                                          |          |              | 500   |  |             |     | 2   |  |   |     |    |  
|                  | Futures sold, not yet purchased                             |          |              | 14    |  |             |     |    |  |   |     |    |  
|                  | Forwards                                                    |          |              | 183   |  |             |     |    |  |   |     | (2  | )
|                  | Commitments to purchase government and municipal securities |          |              | 193   |  |             |     | 14  |  |   |     |    |  
|                  | Equity warrants                                             |          |              | 15    |  |             |     | 1   |  |   |     |    |  
|                  | Collateralized debt obligation liabilities                  |          |              | 170   |  |             |     |    |  |   |     | (38 | )
|                  | Options purchased                                           |          |              | 10    |  |             |     |    |  |   |     |    |  
|                  | Options embedded in convertible debt securities             |          |              | 803   |  |             |     | 189 |  |   |     |    |  
|                  |                                                             |          |              |       |  |             |     |     |  |   |     |    
|Total             |                                                             | $        | 2,392        |       |  | $           | 209 |     |  | $ | (40 | )  
|                  |                                                             |          |              |       |  |             |     |     |  |   |     |    
|Separate accounts |                                                             |          |              |       |  |             |     |     |  |   |     |    
|                  | Futures purchased                                           |          | $            | 884   |  |             | $   |    |  |   | $   | (8  | )
|                  | Futures sold, not yet purchased                             |          |              | 10    |  |             |     |    |  |   |     |    |  
|                  | Commitments to purchase government and municipal securities |          |              | 17    |  |             |     |    |  |   |     |    |  
|                  | Options purchased                                           |          |              | 65    |  |             |     | 1   |  |   |     |    |  
|                  | Options written                                             |          |              | 70    |  |             |     |    |  |   |     |    |  
|                  |                                                             |          |              |       |  |             |     |     |  |   |     |    
|Total             |                                                             | $        | 1,046        |       |  | $           | 1   |     |  | $ | (8  | )  
|                  |                                                             |          |              |       |  |             |     |     |  |   |     |     |  

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##### Table of Contents



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

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

Fair Value Hedges

The Companys hedging activities primarily involve hedging interest rate and
foreign currency exposures. The ineffective portion of fair value hedges was
less than $1 million for both the three and six months ended June 30, 2002 and
2001.

Note F. Legal Proceedings and Contingent Liabilities

Tobacco Litigation

Four CNA insurance subsidiaries 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
1,000 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 judgement motions asserting that they have no duty to defend or to
indemnify as to a number of representative lawsuits. On May 16, 2002 the Delaware
Supreme Court affirmed the trial courts grant of summary judgement to CNA and
other insurers.

IGI Contingency

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

CNA has determined that a small portion of the premiums assumed under the IGI
Program related to United States workers compensation carve-out business.
CNA is aware that a number of reinsurers with workers compensation carve-out
insurance exposure have disavowed their obligations under various legal
theories. If one or more such companies are successful in avoiding or reducing
their liabilities, then it is likely that CNAs potential 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.

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

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

CNA has established reserves for its estimated exposure under the program and
an estimate for recoverables from retrocessionaires.

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

California Wage and Hour Litigation

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

Voluntary Market Premium Litigation

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

Other Litigation

CNA and its subsidiaries are also parties to other litigation arising in the
ordinary course of business. Based on the facts and circumstances
currently known, such other litigation will not, in the opinion of
management, materially affect the results of operations or financial
position of CNA.

Note G. 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 and claims settlement practices, loss
payments, pending levels of unpaid claims and product mix, as well as court
decisions, economic conditions and public attitudes. All of these factors can
affect the estimation of reserves.

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

Environmental Pollution and Mass Tort and Asbestos Reserves (APMT)

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

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

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

Environmental Pollution and Mass Tort and Asbestos

|               |  |               |      |                   |  |      |       |               |  |   |      |   |  |   |       |  
|-------------- |  | ------------- | ---- | ----------------- |  | ---- | ----- | ------------- |  | - | ---- | - |  | - | ----- | -
|               |  | June 30, 2002 |      | December 31, 2001
|               |  |               |      |                  
|               |  | Environmental |      |                   |  |      |       | Environmental |  |   |      |  
|               |  | Pollution     |      |                   |  |      |       | Pollution     |  |   |      |  
|               |  | and Mass      |      |                   |  |      |       | and Mass      |  |   |      |  
|               |  | Tort          |      | Asbestos          |  | Tort |       | Asbestos     
|               |  |               |      |                   |  |      |       |              
|(In millions)  |  |               |      |                   |  |      |       |               |  |   |      |   |  |   |       |  
|Gross reserves |  | $             | 754  |                   |  | $    | 1,572 |               |  | $ | 820  |   |  | $ | 1,590 |  
|Ceded reserves |  |               | (195 | )                 |  |      | (353  | )             |  |   | (203 | ) |  |   | (386  | )
|               |  |               |      |                   |  |      |       |               |  |   |      |   |  |   |       |  
|Net reserves   |  | $             | 559  |                   |  | $    | 1,219 |               |  | $ | 617  |   |  | $ | 1,204 |  
|               |  |               |      |                   |  |      |       |               |  |   |      |   |  |   |       |  

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

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

A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress during 2001 or the first six
months of 2002, and it is unclear what positions Congress or the administration
will take and what legislation, if any, will result in the future. If there is
legislation, and in some circumstances even if there is no legislation, the
federal role in environmental cleanup may be significantly reduced in favor of
state action. Substantial changes in the federal statute or the activity of
the EPA may cause states to reconsider their environmental cleanup statutes and
regulations. There can be no meaningful prediction of the pattern of
regulation that would result or the effect upon CNAs results of operations
and/or financial position.

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

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

As of June 30, 2002 and December 31, 2001, CNA carried approximately $559
million and $617 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and mass tort claims. There was no environmental pollution and mass tort net
development for the three and six months ended June 30, 2002. Unfavorable
environmental pollution and mass tort development for the three and six months
ended June 30, 2001 amounted to $449 million and $453 million.

The reserve strengthening in the second quarter of 2001 for environmental
pollution and mass tort reserves was due to reviews completed during the year,
which indicated that paid and reported losses were higher than expectations
based on prior year reviews. Factors that have led to this development include
a number of declaratory judgements filed in 2001 due to an increasingly
favorable legal environment for policyholders in certain courts involving
environmental pollution and mass tort claims, and other unfavorable decisions
regarding cleanup issues. Due to the uncertainties created by these factors,
the ultimate liability of CNA for mass tort claims may also vary substantially
from the amount currently recorded.

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

As of June 30, 2002 and December 31, 2001, CNA carried approximately $1,219
million and $1,204 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
development for the three and six months ended June 30, 2002. Unfavorable
asbestos net claim and claim adjustment reserve development for the three and
six months ended for June 30, 2001 amounted to $748 million and $769 million.
CNA has attempted to manage its asbestos-related exposures by aggressively
resolving older claims.

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. This analysis indicated a
significant increase in claim counts for asbestos-related claims. The factors
that led to the deterioration in claim counts included, 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 continued in 2001 and the first half of 2002. The volume of
new claims 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 some bankruptcy
proceedings asbestos

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

claimants may assert an entitlement to policy proceeds upon confirmation of a
plan of reorganization, rather than when claims would ordinarily be paid to all
claimants. If such assertions are made successfully, they could have the effect
of accelerating claims payment patterns.

In addition, some asbestos-related defendants asserted that their claims for
insurance are not subject to aggregate limits on coverage. CNA has such claims
from a number of insureds. Some of these claims involve insureds facing
exhaustion of products liability aggregate limits in their policies, who have
asserted that their asbestos-related claims fall within so-called
non-products liability coverage contained within their policies rather than
products liability coverage, and that the claimed non-products coverage is
not subject to any aggregate limit. It is difficult to predict the ultimate
size of any of the claims for coverage 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-related claims may vary substantially from the amount currently
recorded. Other variables that will influence CNAs ultimate exposure to
asbestos-related claims will be medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix
of asbestos-related diseases presented 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 mass tort and
asbestos claim and claim adjustment expenses. Management will continue to
review and monitor these liabilities and make further adjustments, including
the potential for further reserve strengthening, as warranted.

Second Quarter 2001 Prior Year Reserve Strengthening

During the second quarter of 2001, the Company noted the continued emergence of
adverse loss experience across several lines of business related to prior
years, which are discussed in further detail below. The Company completed a
number of reserve studies during the second quarter of 2001 for many of its
lines of business, including those in which these adverse trends were noted.
With respect to APMT reserves, 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 claims, would be higher in the range
of possible outcomes than previously estimated. The Company recorded $2.6
billion pretax ($1.7 billion after-tax) of reserve strengthening, net of the
related corporate aggregate reinsurance treaty benefit, associated with a
change in estimate of prior year net loss reserves, including $1.2 billion
pretax ($0.8 billion after-tax) related to APMT.

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

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

Second Quarter 2001 Prior Year Reserve Strengthening

|                                                                                              |                                            |          |       |                                                |       |       |       | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ----- | ---------------------------------------------- | ----- | ----- | ----- | 
|Three months ended June 30, 2001                                                              |                                            | 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 non-APMT adverse reserve development was the result of analyses of several
lines of business. This development related principally to commercial
insurance coverages including automobile liability and multiple-peril, as well
as assumed reinsurance and healthcare-related coverages. A brief summary of
these lines of business and the associated reserve development is discussed
below.

Approximately $600 million, excluding the impact of the corporate aggregate
reinsurance treaty, of the adverse reserve development was 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 of adverse reserve development, excluding the impact
of the corporate aggregate reinsurance treaty, was recorded in Specialty Lines
and was caused by coverages provided to healthcare related entities. The level
of paid and reported losses

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

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.
The studies included the review of all such retrospectively rated insurance
policies and the 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.
Accruals for ceded premiums related to other reinsurance treaties increased $83
million due to the reserve strengthening. The remainder of the decrease in
premium accruals relates to the change in estimate of the amount of
retrospective premium receivables as discussed above.

Note H. Reinsurance

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

The Companys overall reinsurance program includes certain property-casualty
contracts, such as the corporate aggregate reinsurance treaties discussed in
more detail later in this section, that are entered into and accounted for on a
funds withheld basis. Under the funds withheld basis, the Company records
the cash remitted to the reinsurer for the reinsurers margin, or cost of the
reinsurance contract, as ceded premiums. The remainder of the premiums ceded
under the reinsurance contract is recorded as a funds withheld liability. The
Company is required to increase the funds withheld balance at stated interest
crediting rates applied to the funds withheld balance or as otherwise specified
under the terms of the contract. The funds withheld liability is reduced by
any cumulative claim payments made by the Company in excess of the Companys
retention under the reinsurance contract. If the funds withheld liability is
exhausted, interest crediting will cease and additional claim payments are
recoverable from the reinsurer. The funds withheld liability is recorded in
reinsurance balances payable in the Condensed Consolidated Balance Sheets.

Interest cost on these contracts is credited during all periods in which a
funds withheld liability exists. Interest cost, which is included in other net
investment income, was $57 million and $86 million for the second quarter of
2002 and 2001 and $115 million and $122 million for the six

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

months ended June 30, 2002 and 2001. The amount subject to interest crediting
rates on such contracts was $2,889 million and $2,724 million at June 30, 2002
and December 31, 2001.

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

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.

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

Components of Earned Premiums

|                         |                     |        |       |         |  |       |     |     |  |   |       |       |  |   |       |       | 
|------------------------ | ------------------- | ------ | ----- | ------- |  | ----- | --- | --- |  | - | ----- | ----- |  | - | ----- | ----- | 
|Six months ended June 30 |                     | Direct |       | Assumed |  | Ceded |     | Net
|(In millions)            |                     |        |       |         |  |       |     |    
|                         |                     |        |       |         |  |       |     |     |  |   |       |       |  |   |       |      
|2002                     |                     |        |       |         |  |       |     |     |  |   |       |       |  |   |       |      
|                         | Property-casualty   |        | $     | 4,882   |  |       | $   | 409 |  |   | $     | 1,897 |  |   | $     | 3,394 | 
|                         | Accident and health |        |       | 1,860   |  |       |     | 75  |  |   |       | 4     |  |   |       | 1,931 | 
|                         | Life                |        |       | 538     |  |       |     | 18  |  |   |       | 218   |  |   |       | 338   | 
|                         |                     |        |       |         |  |       |     |     |  |   |       |       |  |   |       |       | 
|Total earned premiums    |                     | $      | 7,280 |         |  | $     | 502 |     |  | $ | 2,119 |       |  | $ | 5,663 |      
|                         |                     |        |       |         |  |       |     |     |  |   |       |       |  |   |       |       | 
|2001                     |                     |        |       |         |  |       |     |     |  |   |       |       |  |   |       |      
|                         | Property-casualty   |        | $     | 3,926   |  |       | $   | 372 |  |   | $     | 2,304 |  |   | $     | 1,994 | 
|                         | Accident and health |        |       | 1,754   |  |       |     | 137 |  |   |       | 139   |  |   |       | 1,752 | 
|                         | Life                |        |       | 559     |  |       |     | 119 |  |   |       | 339   |  |   |       | 339   | 
|                         |                     |        |       |         |  |       |     |     |  |   |       |       |  |   |       |       | 
|Total earned premiums    |                     | $      | 6,239 |         |  | $     | 628 |     |  | $ | 2,782 |       |  | $ | 4,085 |      
|                         |                     |        |       |         |  |       |     |     |  |   |       |       |  |   |       |       | 

For 2002, the Company has entered into an aggregate reinsurance treaty covering
substantially all of the Companys property-casualty lines of business (the
2002 Cover). The loss protection provided by the 2002 Cover is dependent on
the level of subject premium, but there is a maximum aggregate limit of $1,125
million. Maximum ceded premium under the contract is $683 million, and
premiums, claims recoveries and interest charges other than the reinsurers
margin and related fees are made on a funds withheld basis. Interest is
credited on funds withheld at 8% per annum, and all premiums are deemed to have
been paid as of January 1, 2002. Ceded premium related to the reinsurers
margin in the amount of $2 million and $5 million was recorded for the 2002
Cover for the three and six months ended June 30, 2002.

The aggregate reinsurance protection from the 2002 Cover attaches at a defined
accident year loss and allocated loss adjustment expense (collectively, losses)
ratio. Under the contract, the Company has the right to elect to cede losses
to the 2002 Cover when its recorded accident year losses exceed the attachment
point. This election period expires March 31, 2004. If no losses are ceded by
this date, the contract is considered to be commuted. If the Company elects to
cede any losses to the 2002 Cover, it must continue to cede all losses subject
to the terms of the contract.

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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 ratios for each accident year. Coverage
under the first section of the Aggregate Cover, which is available for all
accident years covered by the contract, has annual limits of $500 million of
ceded losses with an aggregate limit of $1 billion of ceded losses for the
three year period. The ceded premiums are a percentage of ceded losses and for
each $500 million of limit the ceded premium is $230 million. The second
section of the Aggregate Cover, which was only utilized for accident year 2001,
provides additional coverage of up to $510 million of ceded losses for a
maximum ceded premium of $310 million. Under the Aggregate Cover, interest
charges on the funds withheld accrue at 8% per annum. If the aggregate loss
ratio for the three-year period exceeds certain thresholds, additional premiums
may be payable and the rate at which interest charges are accrued would
increase to 8.25% per annum commencing in 2006.

The coverage under the second section of the Aggregate Cover was triggered for
the 2001 accident year. As a result of losses related to the September 11,
2001 World Trade Center Disaster and related events, the limit under this
section was exhausted. Additionally, as a result of the significant reserve
additions recorded in the second quarter of 2001, the $500 million limit on the
1999 accident year under the first section was also fully utilized. No losses
have been ceded to the remaining $500 million of limit on accident years 2000
and 2001 under the first section.

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

Impact of Aggregate Cover on Pretax Operating Results

|                                         |  |              |     |            |  |      |      |      |  |   |     |   |  |   |      |  
|---------------------------------------- |  | ------------ | --- | ---------- |  | ---- | ---- | ---- |  | - | --- | - |  | - | ---- | -
|                                         |  | Three Months |     | Six Months
|                                         |  |              |     |           
|Period ended June 30                     |  | 2002         |     | 2001       |  | 2002 |      | 2001
|(In millions)                            |  |              |     |            |  |      |      |     
|                                         |  |              |     |            |  |      |      |      |  |   |     |   |  |   |      |  
|Ceded earned premiums                    |  | $            |    |            |  | $    | (418 | )    |  | $ |    |   |  | $ | (460 | )
|Ceded claim and claim adjustment expense |  |              |    |            |  |      | 683  |      |  |   |    |   |  |   | 722  |  
|Interest charges                         |  |              | (12 | )          |  |      | (53  | )    |  |   | (25 | ) |  |   | (59  | )
|                                         |  |              |     |            |  |      |      |      |  |   |     |   |  |   |      |  
|Pretax impact on operating results       |  | $            | (12 | )          |  | $    | 212  |      |  | $ | (25 | ) |  | $ | 203  |  
|                                         |  |              |     |            |  |      |      |      |  |   |     |   |  |   |      |  

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
approximately $760 million of ceded losses. The ceded premiums are a percentage
of ceded losses and for the $760 million of limit, the ceded premium is $456
million. The CCC Cover provides continuous coverage in excess of the second
section of the Aggregate Cover discussed above. Under the CCC Cover, interest
charges on the funds withheld generally accrue at 8% per annum. The interest
rate increases to 10% per annum if the aggregate loss ratio exceeds certain
thresholds. Losses of $563 million have been ceded under the CCC Cover through
June 30, 2002.

16



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

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

Impact of CCC Cover on Pretax Operating Results

|                                         |  |              |    |            |  |      |    |      |  |   |     |   |  |   |    |  
|---------------------------------------- |  | ------------ | -- | ---------- |  | ---- | -- | ---- |  | - | --- | - |  | - | -- | -
|                                         |  | Three Months |    | Six Months
|                                         |  |              |    |           
|Period ended June 30                     |  | 2002         |    | 2001       |  | 2002 |    | 2001
|(In millions)                            |  |              |    |            |  |      |    |     
|                                         |  |              |    |            |  |      |    |      |  |   |     |   |  |   |    |  
|Ceded earned premiums                    |  | $            |   |            |  | $    | (2 | )    |  | $ | (61 | ) |  | $ | (2 | )
|Ceded claim and claim adjustment expense |  |              |   |            |  |      |   |      |  |   | 93  |   |  |   |   |  
|Interest charges                         |  |              | (6 | )          |  |      |   |      |  |   | (16 | ) |  |   |   |  
|                                         |  |              |    |            |  |      |    |      |  |   |     |   |  |   |    |  
|Pretax impact on operating results       |  | $            | (6 | )          |  | $    | (2 | )    |  | $ | 16  |   |  | $ | (2 | )
|                                         |  |              |    |            |  |      |    |      |  |   |     |   |  |   |    |  

Note I. Debt

Debt is composed of the following obligations.

Debt

|                                                              |                                                      |   |          |     |              |   |       |     | 
|------------------------------------------------------------- | ---------------------------------------------------- | - | -------- | --- | ------------ | - | ----- | --- | 
|                                                              |                                                      |   | June 30, |     | December 31,
|                                                              |                                                      |   | 2002     |     | 2001        
|                                                              |                                                      |   |          |     |             
|(In millions)                                                 |                                                      |   |          |     |              |   |       |    
|Variable rate debt:                                           |                                                      |   |          |     |              |   |       |    
|                                                              | Credit facility  CNAF, due April 30, 2004           |   | $        | 250 |              |   | $     | 500 | 
|                                                              | Term Loan due April 29, 2003                         |   |          | 250 |              |   |       |    | 
|                                                              | Credit facility  CNA Surety, due September 30, 2002 |   |          | 75  |              |   |       | 75  | 
|Senior notes:                                                 |                                                      |   |          |     |              |   |       |    
|                                                              | 7.250%, face amount of $134, due March 1, 2003       |   |          | 134 |              |   |       | 133 | 
|                                                              | 6.250%, face amount of $250, due November 15, 2003   |   |          | 250 |              |   |       | 250 | 
|                                                              | 6.500%, face amount of $493, due April 15, 2005      |   |          | 491 |              |   |       | 491 | 
|                                                              | 6.750%, face amount of $250, due November 15, 2006   |   |          | 249 |              |   |       | 249 | 
|                                                              | 6.450%, face amount of $150, due January 15, 2008    |   |          | 149 |              |   |       | 149 | 
|                                                              | 6.600%, face amount of $200, due December 15, 2008   |   |          | 199 |              |   |       | 199 | 
|                                                              | 8.375%, face amount of $70, due August 15, 2012      |   |          | 68  |              |   |       | 68  | 
|                                                              | 6.950%, face amount of $150, due January 15, 2018    |   |          | 148 |              |   |       | 148 | 
|Debenture, 7.250%, face amount of $243, due November 15, 2023 |                                                      |   | 240      |     |              |   | 240   |    
|Capital leases, 8.000%-13.700%, due through December 31, 2011 |                                                      |   | 37       |     |              |   | 38    |    
|Other debt, 1.000%-8.500%, due through 2019                   |                                                      |   | 27       |     |              |   | 27    |    
|                                                              |                                                      |   |          |     |              |   |       |     | 
|Total debt                                                    |                                                      | $ | 2,567    |     |              | $ | 2,567 |    
|                                                              |                                                      |   |          |     |              |   |       |     | 

The Company has a $250 million three-year facility with an April 30, 2004
expiration date. The Company previously had a $250 million 364-day facility
with an expiration date of April 29, 2002. An option to convert the 364-day
facility to a one-year term loan was exercised in April 2002. The term loan
began on April 29, 2002 and expires on April 29, 2003.

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

The Company pays interest on any outstanding debt/borrowings under the one-year
term loan and three-year facility based on a rate determined using the
long-term debt ratings of the Company. The interest rate is equal to the
London Interbank Offering Rate (LIBOR) plus 60.0 basis points for the
one-year term loan and LIBOR plus 57.5 basis points for the three-year
facility. Further, if the Company has outstanding loans greater than 50% of
the amounts available under the three-year facility, the Company also will pay
a utilization fee of 12.5 basis points on such loans.

A Moodys Investors Service (Moodys) downgrade of the CNAF senior debt rating
from Baa2 to Baa3 would increase the facility fee on the three-year component
of the facility from 17.5 basis

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

points to 25.0 basis points. The applicable interest rate on the one-year term
loan would increase from LIBOR plus 60.0 basis points to LIBOR plus 80.0 basis
points and the applicable interest rate on the three-year facility component
would increase from LIBOR plus 57.5 basis points to LIBOR plus 75.0 basis
points. The utilization fee would remain unchanged on the three-year facility
at 12.5 basis points.

The terms of CNAs credit facility requires the Company to maintain certain
financial ratios and combined property-casualty company statutory surplus
levels. At June 30, 2002 and December 31, 2001, CNA was in compliance with all
restrictive debt covenants.

In the normal course of business, CNA has obtained letters of credit in favor
of various unaffiliated insurance companies, regulatory authorities and other
entities. At June 30, 2002 there were approximately $276 million of
outstanding letters of credit.

Note J. Commitments and Contingencies

The Company has a commitment to purchase a $100 million floating rate note
issued by the California Earthquake Authority in the event California
earthquake-related insurance losses exceed $4.9 billion prior to December 31,
2002.

The Company is obligated to make future payments totaling $433 million for
non-cancelable operating leases expiring from 2002 through 2014 primarily for
office space and data processing, office and transportation equipment.
Estimated future minimum payments under these contracts are as follows: $50
million in 2002; $85 million in 2003; $65 million in 2004; $57 million in 2005;
and $176 million in 2006 and beyond. Additionally, the Company has entered
into a limited number of guaranteed payment contracts, primarily relating to
telecommunication services, amounting to approximately $34 million. Estimated
future minimum purchases under these contracts are as follows: $8 million in
2002; $13 million in 2003; $10 million in 2004; and $3 million in 2005.

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

Note K. Comprehensive Income

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

Comprehensive Income (Loss)

|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |   |        |  
|------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---- | ------------ | --- | ---------- | ------ | ---- | ------ | - | ---- | - | ---- | - | ------ | - | ------ | -
|                                                                                                        |                                                                   |                                                                                            |      | Three Months |     | Six Months
|                                                                                                        |                                                                   |                                                                                            |      |              |     |           
|Period ended June 30                                                                                    |                                                                   | 2002                                                                                       |      | 2001         |     | 2002       |        | 2001
|(In millions)                                                                                           |                                                                   |                                                                                            |      |              |     |            |        |     
|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  
|Net income (loss)                                                                                       |                                                                   | $                                                                                          | 35   |              |     | $          | (1,762 | )    |        | $ | 113  |   |      | $ | (1,467 | )
|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  
|Other comprehensive income (loss):                                                                      |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  
|                                                                                                        | Change in unrealized gains/losses on general account investments: |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |   |       
|                                                                                                        |                                                                   | Holding gains/losses arising during the period                                             |      |              | 360 |            |        |      | (66    | ) |      |   | (75  | ) |        |   | 136    |  
|                                                                                                        |                                                                   | Less: unrealized gains at beginning of period included in
realized gains during the period |      |              | (31 | )          |        |      | (1,063 | ) |      |   | (42  | ) |        |   | (1,123 | )
|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  
|                                                                                                        |                                                                   | Net change in unrealized gains/losses on general account
investments                       |      |              | 329 |            |        |      | (1,129 | ) |      |   | (117 | ) |        |   | (987   | )
|                                                                                                        |                                                                   | Net change in unrealized gains/losses on separate accounts and
other                       |      |              | 34  |            |        |      | (22    | ) |      |   | 12   |   |        |   | (3     | )
|                                                                                                        |                                                                   | Foreign currency translation adjustment                                                    |      |              | (20 | )          |        |      | (9     | ) |      |   | (7   | ) |        |   | (5     | )
|                                                                                                        |                                                                   | Allocation to participating policyholders and minority interests                          |      |              | (2  | )          |        |      | 5      |   |      |   | 3    |   |        |   | (3     | )
|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  
|Other comprehensive income (loss), before tax and cumulative effect
of a change in accounting principle |                                                                   |                                                                                            | 341  |              |     |            | (1,155 | )    |        |   | (109 | ) |      |   | (998   | )
|Deferred income tax (expense) benefit related to other comprehensive
income (loss)                      |                                                                   |                                                                                            | (131 | )            |     |            | 391    |      |        |   | 58   |   |      |   | 353    |  
|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  
|Other comprehensive income (loss), before cumulative effect of a
change in accounting principle         |                                                                   |                                                                                            | 210  |              |     |            | (764   | )    |        |   | (51  | ) |      |   | (645   | )
|Cumulative effect of a change in accounting principle, net of tax of
$31                                |                                                                   |                                                                                            |     |              |     |            |       |      |        |   |     |   |      |   | 58     |  
|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  
|Other comprehensive income (loss), net of tax and cumulative effect
of a change in accounting principle |                                                                   |                                                                                            | 210  |              |     |            | (764   | )    |        |   | (51  | ) |      |   | (587   | )
|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  
|Total comprehensive income (loss)                                                                       |                                                                   | $                                                                                          | 245  |              |     | $          | (2,526 | )    |        | $ | 62   |   |      | $ | (2,054 | )
|                                                                                                        |                                                                   |                                                                                            |      |              |     |            |        |      |        |   |      |   |      |   |        |  

During the second quarter of 2002, the Company recorded $292 million pretax of
impairment losses, principally on corporate bonds. Included in the second
quarter 2002 impairment writedowns were $129 million related to debt securities
issued by WorldCom Inc. and $74 million related to Adelphia Communications
Corporation, both of which have recently filed for bankruptcy. These
securities were written down to estimated net realizable value of $33 million
and $29 million, respectively. The remaining $89 million of impairment
writedowns related primarily to issuers in the telecommunications sector. Of
the total amount of impairment writedowns, $76 million and $17 million is
reflected in the above table as unrealized losses at the beginning of the
period included in realized losses during the period for the three and six
months ended June 30, 2002.

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

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

Note L. Business Segments

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

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

The Corporate and Other segment is comprised primarily of losses and expenses
related to the centralized adjusting and settlement of APMT claims, certain
run-off insurance operations and other operations. The Corporate and Other
segments results also include interest expense on corporate borrowings,
eBusiness initiatives and CNA UniSource.

All significant intrasegment income and expenses has been eliminated. Standard
Lines other revenues and expenses include revenues for services provided by
RSKCoSM to other units within the Standard Lines segment that are eliminated at
the consolidated level. Intrasegment revenue and expenses eliminated at the
consolidated level were approximately $29 million and $38 million for the three
months ended June 30, 2002 and 2001, and $65 million and $77 million for the
six months ended June 30, 2002 and 2001.

In the following four tables, the caption net operating income (loss) is used
by the Company as an operating measure of segment performance. Net operating
income (loss) is calculated by deducting net realized investment gains or
losses (investment gains or losses after deduction of related income taxes and
minority interests), gains or losses from discontinued operations, net of tax,
and the cumulative effect of a change in accounting principle, net of tax and
minority interest, from net income. Net realized investment gains or losses
are excluded from net operating income because 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.

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

|                                                                                               |                       |          |       |           |  |        |     |            |  |            |     |           |  |           |     |        |  |   |     |     |  |   |     |    |  |   |     |     |   |   |       |       | 
|---------------------------------------------------------------------------------------------- | --------------------- | -------- | ----- | --------- |  | ------ | --- | ---------- |  | ---------- | --- | --------- |  | --------- | --- | ------ |  | - | --- | --- |  | - | --- | -- |  | - | --- | --- | - | - | ----- | ----- | 
|Three months ended                                                                             |                       | Standard |       | Specialty |  |        |     |            |  | Group      |     | Life      |  | Corporate |     | Elimi- |  |   |     |    
|June 30, 2002                                                                                  |                       | Lines    |       | Lines     |  | CNA Re |     | Operations |  | Operations |     | and Other |  | nations   |     | Total 
|(In millions)                                                                                  |                       |          |       |           |  |        |     |            |  |            |     |           |  |           |     |        |  |   |     |     |  |   |     |    |  |   |     |     |   |   |       |      
|Revenues:                                                                                      |                       |          |       |           |  |        |     |            |  |            |     |           |  |           |     |        |  |   |     |     |  |   |     |    |  |   |     |     |   |   |       |      
|                                                                                               | Net earned premiums   |          | $     | 1,026     |  |        | $   | 541        |  |            | $   | 168       |  |           | $   | 819    |  |   | $   | 235 |  |   | $   | 44 |  |   | $   | (7  | ) |   | $     | 2,826 | 
|                                                                                               | Net investment income |          |       | 131       |  |        |     | 78         |  |            |     | 49        |  |           |     | 42     |  |   |     | 157 |  |   |     | 45 |  |   |     |    |   |   |       | 502   | 
|                                                                                               | Other revenues        |          |       | 80        |  |        |     | 33         |  |            |     |          |  |           |     | 8      |  |   |     | 49  |  |   |     | 15 |  |   |     | (33 | ) |   |       | 152   | 
|                                                                                               |                       |          |       |           |  |        |     |            |  |            |     |           |  |           |     |        |  |   |     |     |  |   |     |    |  |   |     |     |   |   |       |       | 
|Total operating revenues                                                                       |                       |          | 1,237 |           |  |        | 652 |            |  |            | 217 |           |  |           | 869 |        |  |   | 441 |     |  |   | 104 |    |  |   | (40 | )   |   |   | 3,480 |      
|Claims, benefits and expenses                                                                  |                       |          | 1,190 |           |  |        | 582 |            |  |            | 179 |           |  |           | 841 |        |  |   | 384 |     |  |   | 138 |    |  |   | (40 | )   |   |   | 3,274 |      
|                                                                                               |                       |          |       |           |  |        |     |            |  |            |     |           |  |           |     |        |  |   |     |     |  |   |     |    |  |   |     |     |   |   |       |       | 
|Operating income (loss) from
continuing operations before
income tax and minority
interest     |                       |          | 47    |           |  |        | 70  |            |  |            | 38  |           |  |           | 28  |        |  |   | 57  |     |  |   | (34 | )  |  |   |    |     |   |   | 206   |      
|Income tax (expense) benefit                                                                   |                       |          | (10   | )         |  |        | (23 | )          |  |            | (11 | )         |  |           | (9  | )      |  |   | (20 | )   |  |   | 12  |    |  |   |    |     |   |   | (61   | )    
|Minority interest                                                                              |                       |          |      |           |  |        | (5  | )          |  |            |    |           |  |           |    |        |  |   |    |     |  |   |    |    |  |   |    |     |   |   | (5    | )    
|                                                                                               |                       |          |       |           |  |        |     |            |  |            |     |           |  |           |     |        |  |   |     |     |  |   |     |    |  |   |     |     |   |   |       |       | 
|Net operating income (loss)
from continuing operations                                         |                       |          | 37    |           |  |        | 42  |            |  |            | 27  |           |  |           | 19  |        |  |   | 37  |     |  |   | (22 | )  |  |   |    |     |   |   | 140   |      
|Realized investment losses,
net of tax and participating
policyholders and minority
interests |                       |          | (20   | )         |  |        | (17 | )          |  |            | (4  | )         |  |           | (5  | )      |  |   | (47 | )   |  |   | (12 | )  |  |   |    |     |   |   | (105  | )    
|                                                                                               |                       |          |       |           |  |        |     |            |  |            |     |           |  |           |     |        |  |   |     |     |  |   |     |    |  |   |     |     |   |   |       |       | 
|Net income (loss)                                                                              |                       | $        | 17    |           |  | $      | 25  |            |  | $          | 23  |           |  | $         | 14  |        |  | $ | (10 | )   |  | $ | (34 | )  |  | $ |    |     |   | $ | 35    |      
|                                                                                               |                       |          |       |           |  |        |     |            |  |            |     |           |  |           |     |        |  |   |     |     |  |   |     |    |  |   |     |     |   |   |       |       | 

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

|                                                                                                       |                       |          |      |           |   |        |      |            |  |            |      |           |  |           |     |        |  |   |     |     |  |   |        |    |  |   |     |     |   |   |        |       | 
|------------------------------------------------------------------------------------------------------ | --------------------- | -------- | ---- | --------- | - | ------ | ---- | ---------- |  | ---------- | ---- | --------- |  | --------- | --- | ------ |  | - | --- | --- |  | - | ------ | -- |  | - | --- | --- | - | - | ------ | ----- | 
|Three months ended                                                                                     |                       | Standard |      | Specialty |   |        |      |            |  | Group      |      | Life      |  | Corporate |     | Elimi- |  |   |     |    
|June 30, 2001                                                                                          |                       | Lines    |      | Lines     |   | CNA Re |      | Operations |  | Operations |      | and Other |  | nations   |     | Total 
|(In millions)                                                                                          |                       |          |      |           |   |        |      |            |  |            |      |           |  |           |     |        |  |   |     |     |  |   |        |    |  |   |     |     |   |   |        |      
|Revenues:                                                                                              |                       |          |      |           |   |        |      |            |  |            |      |           |  |           |     |        |  |   |     |     |  |   |        |    |  |   |     |     |   |   |        |      
|                                                                                                       | Net earned premiums   |          | $    | (61       | ) |        | $    | 455        |  |            | $    | 144       |  |           | $   | 809    |  |   | $   | 229 |  |   | $      | 24 |  |   | $   | (13 | ) |   | $      | 1,587 | 
|                                                                                                       | Net investment income |          |      | 75        |   |        |      | 73         |  |            |      | 41        |  |           |     | 39     |  |   |     | 141 |  |   |        | 33 |  |   |     |    |   |   |        | 402   | 
|                                                                                                       | Other revenues        |          |      | 87        |   |        |      | 16         |  |            |      |          |  |           |     | 10     |  |   |     | 41  |  |   |        | 40 |  |   |     | (42 | ) |   |        | 152   | 
|                                                                                                       |                       |          |      |           |   |        |      |            |  |            |      |           |  |           |     |        |  |   |     |     |  |   |        |    |  |   |     |     |   |   |        |       | 
|Total operating revenues                                                                               |                       |          | 101  |           |   |        | 544  |            |  |            | 185  |           |  |           | 858 |        |  |   | 411 |     |  |   | 97     |    |  |   | (55 | )   |   |   | 2,141  |      
|Claims, benefits and expenses                                                                          |                       |          | 989  |           |   |        | 986  |            |  |            | 755  |           |  |           | 838 |        |  |   | 357 |     |  |   | 1,396  |    |  |   | (55 | )   |   |   | 5,266  |      
|Restructuring and other related charges                                                                |                       |          | 6    |           |   |        | 2    |            |  |            |     |           |  |           |    |        |  |   | 17  |     |  |   | 31     |    |  |   |    |     |   |   | 56     |      
|                                                                                                       |                       |          |      |           |   |        |      |            |  |            |      |           |  |           |     |        |  |   |     |     |  |   |        |    |  |   |     |     |   |   |        |       | 
|Operating (loss) income from
continuing operations before income
tax and minority interest             |                       |          | (894 | )         |   |        | (444 | )          |  |            | (570 | )         |  |           | 20  |        |  |   | 37  |     |  |   | (1,330 | )  |  |   |    |     |   |   | (3,181 | )    
|Income tax benefit (expense)                                                                           |                       |          | 320  |           |   |        | 147  |            |  |            | 201  |           |  |           | (5  | )      |  |   | (12 | )   |  |   | 459    |    |  |   |    |     |   |   | 1,110  |      
|Minority interest                                                                                      |                       |          |     |           |   |        | (6   | )          |  |            |     |           |  |           |    |        |  |   |    |     |  |   |       |    |  |   |    |     |   |   | (6     | )    
|                                                                                                       |                       |          |      |           |   |        |      |            |  |            |      |           |  |           |     |        |  |   |     |     |  |   |        |    |  |   |     |     |   |   |        |       | 
|Net operating (loss) income from
continuing operations                                                 |                       |          | (574 | )         |   |        | (303 | )          |  |            | (369 | )         |  |           | 15  |        |  |   | 25  |     |  |   | (871   | )  |  |   |    |     |   |   | (2,077 | )    
|Realized investment gains (losses),
net of tax and participating
policyholders and minority interests |                       |          | 333  |           |   |        | 118  |            |  |            | (227 | )         |  |           | 5   |        |  |   | 47  |     |  |   | 36     |    |  |   |    |     |   |   | 312    |      
|Income from discontinued operations,
net of tax of $0                                                  |                       |          |     |           |   |        |     |            |  |            |     |           |  |           |    |        |  |   | 3   |     |  |   |       |    |  |   |    |     |   |   | 3      |      
|                                                                                                       |                       |          |      |           |   |        |      |            |  |            |      |           |  |           |     |        |  |   |     |     |  |   |        |    |  |   |     |     |   |   |        |       | 
|Net (loss) income                                                                                      |                       | $        | (241 | )         |   | $      | (185 | )          |  | $          | (596 | )         |  | $         | 20  |        |  | $ | 75  |     |  | $ | (835   | )  |  | $ |    |     |   | $ | (1,762 | )    
|                                                                                                       |                       |          |      |           |   |        |      |            |  |            |      |           |  |           |     |        |  |   |     |     |  |   |        |    |  |   |     |     |   |   |        |       | 

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

|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|------------------------------------------------------------------------------------------------------ | --------------------- | -------- | ------ | --------- |  | ------ | ----- | ---------- |  | ---------- | ----- | --------- |  | --------- | ----- | ------ |  | - | ----- | --- |  | - | ----- | -- |  | - | --- | --- | - | - | ------ | ----- | 
|Six months ended                                                                                       |                       | Standard |        | Specialty |  |        |       |            |  | Group      |       | Life      |  | Corporate |       | Elimi- |  |   |       |    
|June 30, 2002                                                                                          |                       | Lines    |        | Lines     |  | CNA Re |       | Operations |  | Operations |       | and Other |  | nations   |       | Total 
|(In millions)                                                                                          |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |      
|Revenues:                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |      
|                                                                                                       | Net earned premiums   |          | $      | 2,036     |  |        | $     | 1,055      |  |            | $     | 305       |  |           | $     | 1,724  |  |   | $     | 475 |  |   | $     | 81 |  |   | $   | (13 | ) |   | $      | 5,663 | 
|                                                                                                       | Net investment income |          |        | 233       |  |        |       | 139        |  |            |       | 83        |  |           |       | 83     |  |   |       | 311 |  |   |       | 79 |  |   |     |    |   |   |        | 928   | 
|                                                                                                       | Other revenues        |          |        | 163       |  |        |       | 87         |  |            |       | 1         |  |           |       | 14     |  |   |       | 94  |  |   |       | 50 |  |   |     | (73 | ) |   |        | 336   | 
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Total operating revenues                                                                               |                       |          | 2,432  |           |  |        | 1,281 |            |  |            | 389   |           |  |           | 1,821 |        |  |   | 880   |     |  |   | 210   |    |  |   | (86 | )   |   |   | 6,927  |      
|Claims, benefits and expenses                                                                          |                       |          | 2,380  |           |  |        | 1,147 |            |  |            | 291   |           |  |           | 1,771 |        |  |   | 769   |     |  |   | 281   |    |  |   | (86 | )   |   |   | 6,553  |      
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Operating income (loss) from continuing operations
before income tax and minority interest             |                       |          | 52     |           |  |        | 134   |            |  |            | 98    |           |  |           | 50    |        |  |   | 111   |     |  |   | (71   | )  |  |   |    |     |   |   | 374    |      
|Income tax (expense) benefit                                                                           |                       |          | (6     | )         |  |        | (47   | )          |  |            | (30   | )         |  |           | (16   | )      |  |   | (39   | )   |  |   | 25    |    |  |   |    |     |   |   | (113   | )    
|Minority interest                                                                                      |                       |          |       |           |  |        | (10   | )          |  |            |      |           |  |           |      |        |  |   |      |     |  |   |      |    |  |   |    |     |   |   | (10    | )    
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Net operating income (loss) from continuing
operations                                                 |                       |          | 46     |           |  |        | 77    |            |  |            | 68    |           |  |           | 34    |        |  |   | 72    |     |  |   | (46   | )  |  |   |    |     |   |   | 251    |      
|Realized investment (losses) gains, net of tax and
participating policyholders and minority
interests |                       |          | (15    | )         |  |        | (21   | )          |  |            | 4     |           |  |           |      |        |  |   | (39   | )   |  |   | (32   | )  |  |   |    |     |   |   | (103   | )    
|Loss from discontinued operations, net of tax of $9                                                    |                       |          |       |           |  |        |      |            |  |            |      |           |  |           |      |        |  |   | (35   | )   |  |   |      |    |  |   |    |     |   |   | (35    | )    
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Net income (loss)                                                                                      |                       | $        | 31     |           |  | $      | 56    |            |  | $          | 72    |           |  | $         | 34    |        |  | $ | (2    | )   |  | $ | (78   | )  |  | $ |    |     |   | $ | 113    |      
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Receivables, net                                                                                       |                       | $        | 6,755  |           |  | $      | 3,169 |            |  | $          | 2,609 |           |  | $         | 558   |        |  | $ | 955   |     |  | $ | 3,419 |    |  | $ |    |     |   | $ | 17,465 |      
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 
|Insurance reserves                                                                                     |                       | $        | 14,200 |           |  | $      | 7,243 |            |  | $          | 5,209 |           |  | $         | 2,160 |        |  | $ | 8,348 |     |  | $ | 5,870 |    |  | $ | (7  | )   |   | $ | 43,023 |      
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |       |    |  |   |     |     |   |   |        |       | 

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

|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |       | 
|------------------------------------------------------------------------------------------------------ | --------------------- | -------- | ------ | --------- |  | ------ | ----- | ---------- |  | ---------- | ----- | --------- |  | --------- | ----- | ------ |  | - | ----- | --- |  | - | ------ | -- |  | - | ---- | --- | - | - | ------ | ----- | 
|Six months ended                                                                                       |                       | Standard |        | Specialty |  |        |       |            |  | Group      |       | Life      |  | Corporate |       | Elimi- |  |   |       |    
|June 30, 2001                                                                                          |                       | Lines    |        | Lines     |  | CNA Re |       | Operations |  | Operations |       | and Other |  | nations   |       | Total 
|(In millions)                                                                                          |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |      
|Revenues:                                                                                              |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |      
|                                                                                                       | Net earned premiums   |          | $      | 797       |  |        | $     | 913        |  |            | $     | 303       |  |           | $     | 1,618  |  |   | $     | 443 |  |   | $      | 38 |  |   | $    | (27 | ) |   | $      | 4,085 | 
|                                                                                                       | Net investment income |          |        | 237       |  |        |       | 165        |  |            |       | 89        |  |           |       | 79     |  |   |       | 272 |  |   |        | 67 |  |   |      |    |   |   |        | 909   | 
|                                                                                                       | Other revenues        |          |        | 170       |  |        |       | 49         |  |            |       |          |  |           |       | 19     |  |   |       | 110 |  |   |        | 81 |  |   |      | (84 | ) |   |        | 345   | 
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |       | 
|Total operating revenues                                                                               |                       |          | 1,204  |           |  |        | 1,127 |            |  |            | 392   |           |  |           | 1,716 |        |  |   | 825   |     |  |   | 186    |    |  |   | (111 | )   |   |   | 5,339  |      
|Claims, benefits and expenses                                                                          |                       |          | 2,005  |           |  |        | 1,502 |            |  |            | 937   |           |  |           | 1,676 |        |  |   | 707   |     |  |   | 1,566  |    |  |   | (111 | )   |   |   | 8,282  |      
|Restructuring and other related charges                                                                |                       |          | 6      |           |  |        | 2     |            |  |            |      |           |  |           |      |        |  |   | 17    |     |  |   | 37     |    |  |   |     |     |   |   | 62     |      
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |       | 
|Operating (loss) income from
continuing operations before income
tax and minority interest             |                       |          | (807   | )         |  |        | (377  | )          |  |            | (545  | )         |  |           | 40    |        |  |   | 101   |     |  |   | (1,417 | )  |  |   |     |     |   |   | (3,005 | )    
|Income tax benefit (expense)                                                                           |                       |          | 298    |           |  |        | 129   |            |  |            | 194   |           |  |           | (10   | )      |  |   | (34   | )   |  |   | 482    |    |  |   |     |     |   |   | 1,059  |      
|Minority interest                                                                                      |                       |          |       |           |  |        | (12   | )          |  |            |      |           |  |           |      |        |  |   |      |     |  |   |       |    |  |   |     |     |   |   | (12    | )    
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |       | 
|Net operating (loss) income from
continuing operations                                                 |                       |          | (509   | )         |  |        | (260  | )          |  |            | (351  | )         |  |           | 30    |        |  |   | 67    |     |  |   | (935   | )  |  |   |     |     |   |   | (1,958 | )    
|Realized investment gains (losses),
net of tax and participating
policyholders and minority interests |                       |          | 411    |           |  |        | 150   |            |  |            | (211  | )         |  |           | 8     |        |  |   | 91    |     |  |   | 100    |    |  |   |     |     |   |   | 549    |      
|Income from discontinued operations,
net of tax of $0                                                  |                       |          |       |           |  |        |      |            |  |            |      |           |  |           |      |        |  |   | 3     |     |  |   |       |    |  |   |     |     |   |   | 3      |      
|Cumulative effect of a change in
accounting principle, net of tax of
$33                               |                       |          | (30    | )         |  |        | (14   | )          |  |            | (5    | )         |  |           | (1    | )      |  |   | (3    | )   |  |   | (8     | )  |  |   |     |     |   |   | (61    | )    
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |       | 
|Net (loss) income                                                                                      |                       | $        | (128   | )         |  | $      | (124  | )          |  | $          | (567  | )         |  | $         | 37    |        |  | $ | 158   |     |  | $ | (843   | )  |  | $ |     |     |   | $ | (1,467 | )    
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |       | 
|Receivables, net                                                                                       |                       | $        | 6,789  |           |  | $      | 2,062 |            |  | $          | 2,126 |           |  | $         | 1,402 |        |  | $ | 674   |     |  | $ | 2,045  |    |  | $ |     |     |   | $ | 15,098 |      
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |       | 
|Insurance reserves                                                                                     |                       | $        | 16,656 |           |  | $      | 6,679 |            |  | $          | 4,902 |           |  | $         | 2,240 |        |  | $ | 8,045 |     |  | $ | 3,386  |    |  | $ |     |     |   | $ | 41,908 |      
|                                                                                                       |                       |          |        |           |  |        |       |            |  |            |       |           |  |           |       |        |  |   |       |     |  |   |        |    |  |   |      |     |   |   |        |       | 

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

Note M. Restructuring and Other Related Charges

2001 Restructuring

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

IT Plan

The overall goal of the IT Plan was to improve technology for the underwriting
function and throughout the Company and to eliminate inefficiencies in the
deployment of IT resources. The changes facilitate a strong focus on
enterprise-wide system initiatives. The IT Plan had two main components, which
included the reorganization of IT resources into the Technology and Operations
Group with a structure based on centralized, functional roles and the
implementation of an integrated technology roadmap that included common
architecture and platform standards that directly support the Companys
strategies.

For the three and six months ended June 30, 2001 the Company incurred $56
million and $62 million pretax of restructuring and other related charges for
the IT Plan primarily related to employee severance charges and the write-off
of impaired assets.

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

IT Plan Accrual

|                                           |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  
|------------------------------------------ |  | ------------- | --- | -------- |  | ----- | --- | ----- |  | - | - |  |  | - | --- | -
|                                           |  | Employee      |     |          |  |       |     |       |  |   |   |  |  |  
|                                           |  | Termination   |     | Impaired |  |       |     |       |  |   |   | 
|                                           |  | and Related   |     | Asset    |  | Other |     |       |  |  
|                                           |  | Benefit Costs |     | Charges  |  | Costs |     | Total
|                                           |  |               |     |          |  |       |     |      
|(In millions)                              |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  
|IT Plan initial accrual                    |  | $             | 29  |          |  | $     | 32  |       |  | $ | 1 |  |  | $ | 62  |  
|Costs that did not require cash in 2001    |  |               |    |          |  |       | (32 | )     |  |   |  |  |  |   | (32 | )
|Payments charged against liability in 2001 |  |               | (19 | )        |  |       |    |       |  |   |  |  |  |   | (19 | )
|                                           |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  
|Accrued costs at December 31, 2001         |  |               | 10  |          |  |       |    |       |  |   | 1 |  |  |   | 11  |  
|Payments charged against liability in 2002 |  |               | (1  | )        |  |       |    |       |  |   |  |  |  |   | (1  | )
|                                           |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  
|Accrued costs at June 30, 2002             |  | $             | 9   |          |  | $     |    |       |  | $ | 1 |  |  | $ | 10  |  
|                                           |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  

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

25



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##### Table of Contents



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

2001 Plan

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

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

2001 Plan Accrual(In millions)

|                                           |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|------------------------------------------ |  | ------------- | --- | ----------- |  | -------- | --- | ----- |  | ----- | --- | - |  | - | --- | - |  | - | --- | -
|                                           |  | Employee      |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |  
|                                           |  | Termination   |     | Lease       |  | Impaired |     |       |  |       |     |   |  |  
|                                           |  | and Related   |     | Termination |  | Asset    |     | Other |  |       |     |  
|                                           |  | Benefit Costs |     | Costs       |  | Charges  |     | Costs |  | Total
|                                           |  |               |     |             |  |          |     |       |  |      
|2001 Plan initial accrual                  |  | $             | 68  |             |  | $        | 56  |       |  | $     | 30  |   |  | $ | 35  |   |  | $ | 189 |  
|Costs that did not require cash in 2001    |  |               |    |             |  |          |    |       |  |       |    |   |  |   | (35 | ) |  |   | (35 | )
|Payments charged against liability in 2001 |  |               | (2  | )           |  |          |    |       |  |       |    |   |  |   |    |   |  |   | (2  | )
|                                           |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|Accrued costs at December 31, 2001         |  |               | 66  |             |  |          | 56  |       |  |       | 30  |   |  |   |    |   |  |   | 152 |  
|Costs that did not require cash in 2002    |  |               |    |             |  |          |    |       |  |       | (25 | ) |  |   |    |   |  |   | (25 | )
|Payments charged against liability in 2002 |  |               | (45 | )           |  |          | (10 | )     |  |       | (1  | ) |  |   |    |   |  |   | (56 | )
|                                           |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|Accrued costs at June 30, 2002             |  | $             | 21  |             |  | $        | 46  |       |  | $     | 4   |   |  | $ |    |   |  | $ | 71  |  
|                                           |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  

Note N. Significant Transactions

National Post Mail Handlers Union Contract Termination

During the second quarter of 2002, the Company announced the sale of the Claims
Administration Corporation and the transfer of the National Post Mail Handlers
Union group benefits plan (the Plan) to First Health Group Corp., effective
July 1, 2002.

The assets and liabilities of the Claims Administration Corporation and the
Plan were $319 million and $308 million at June 30, 2002 and $352 million and
$350 million at December 31, 2001. The revenues of the Claims Administration
Corporation and Plan were $537 million and $516 million for the three months
ended June 30, 2002 and 2001 and $1,153 million and $1,049 million for the six
months ended June 30, 2002 and 2001.

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

Net operating income from the Claims Administration Corporation and the Plan was $4 million and $2 million for the three
months ended June 30, 2002 and 2001 and $7 million and $6 million for the six
months ended June 30, 2002 and 2001.

CNA Vida Disposition

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

CNA Vidas assets and liabilities at December 31, 2001 were $442 million and
$337 million. CNA Vidas net earned premiums were $16 million for the three
months ended June 30, 2001 and $24 million and $49 million for the six months
ended June 30, 2002 and 2001. Net operating income was $2 million for the
three months ended June 30, 2001 and $2 million and $2 million for the six
months ended June 30, 2002 and 2001. CNA Vidas results of operation,
including the loss on sale, is presented as discontinued operations in all
periods presented.

Other Dispositions and Planned Dispositions of Certain Businesses

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

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

In the fourth quarter of 2001, the Company sold certain businesses as planned.
The realized after-tax loss applicable to these businesses recognized in the
second quarter of 2001 was $38 million. Revenues of these businesses included
in the three and six months ended June 30, 2001 totaled approximately $18
million and $25 million. Net operating losses related to these businesses
included in the three and six months ended June 30, 2001 were approximately $14
million and $17 million.

At June 30, 2002, CNA Re U.K. and certain other businesses remain held for
sale. On July 15, 2002, the Company announced that it signed a share purchase
agreement to sell CNA Re U.K. to Tawa U.K. Limited, a subsidiary of Artemis
Group, a French conglomerate. The share purchase agreement includes all
remaining business underwritten since inception by CNA Re

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

U.K. The sale is subject to approval in the United Kingdom by the Financial
Services Authority. Additionally, certain aspects of the transaction also
require approval by the Illinois Insurance Department, which will also conduct
a comprehensive review of the terms of the transaction. While there can be no
assurance that the transaction will close, management believes that all
conditions necessary to close, including regulatory approvals, will be
satisfied and that such closing will occur by the end of 2002. This sale does
not impact CNA Res on-going U.S.-based operations.

CNA Re U.K. will be sold for $1, subject to a completion adjustment at closing
primarily driven by certain operating results between January 1, 2002 and
closing and changes in interest rates. No additional impairment loss is
expected based upon the terms of the sale agreement.

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

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

As of June 30, 2002, CNA Re U.K. contributed revenues of approximately $19
million and $82 million for the three months ended June 30, 2002 and 2001, and
$42 million and $163 million for the six months ended June 30, 2002 and 2001.
CNA Re U.K. contributed net operating income of $2 million and losses of $68 million in the three months ended June 30, 2002 and 2001 and income of $4
million and losses of $67 million for the six months ended June 30, 2002 and
2001. The assets and liabilities of CNA Re U.K., after excluding the effects
of planned concurrent transactions, were approximately $2.3 billion and $2.3
billion as of June 30, 2002 and $2.6 billion and $2.6 billion as of December
31, 2001.

The businesses sold in 2002, excluding both CNA Vida and the National Post Mail
Handlers Contract, and those that continue to be held for disposition as of
June 30, 2002, excluding CNA Re U.K., contributed revenues of approximately $6
million and $34 million for the three months ended June 30, 2002 and 2001, and
$36 million and $73 million for the six months ended June 30, 2002 and 2001.
Additionally, these businesses contributed net operating losses of $12 million
and $9 million in the three months ended June 30, 2002 and 2001 and $15 million
and $14 million for the six months ended June 30, 2002 and 2001. The assets
and liabilities of these businesses were approximately $645 million and $638
million as of June 30, 2002 and $763 million and $750 million as of December
31, 2001. All anticipated sales are expected to be completed in 2002.

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

Note O. Discontinued Operations

CNA reports net assets of discontinued operations, which primarily consist of
run-off operations discontinued in the mid-1990s, in other assets on the
Condensed Consolidated Balance Sheets. The following table provides more
detailed information regarding those net assets.

Discontinued Operations

|                                      |  |          |      |              |  |   |      |  
|------------------------------------- |  | -------- | ---- | ------------ |  | - | ---- | -
|                                      |  | June 30, |      | December 31, | 
|(In millions)                         |  | 2002     |      | 2001        
|                                      |  |          |      |             
|Total investments                     |  | $        | 483  |              |  | $ | 467  |  
|Other assets                          |  |          | 260  |              |  |   | 264  |  
|Insurance reserves                    |  |          | (421 | )            |  |   | (412 | )
|Other liabilities                     |  |          | (24  | )            |  |   | (25  | )
|                                      |  |          |      |              |  |   |      |  
|Net assets of discontinued operations |  | $        | 298  |              |  | $ | 294  |  
|                                      |  |          |      |              |  |   |      |  

Note P. Related Party Transactions

CNA reimburses Loews, or pays directly to Loews employees, approximately $18
million annually for management fees, travel and related expenses, and expenses
of investment facilities and services provided to CNA.

CNA and its eligible subsidiaries are included in the consolidated federal
income tax return of Loews and its eligible subsidiaries. During the first six
months of 2002, CNA received tax refunds of $634 million from Loews. During
the first six months of 2001, CNA paid Loews $166 million for taxes.

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

CNA assumes the risk for a limited amount of insurance from R.V.I. Guaranty
Company, Inc., a non-consolidated 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 officers, including executive officers. Interest
charged on the principal amount of these stock purchase loans is generally
equivalent to the long-term applicable federal rate, compounded semi-annually,
in effect on the disbursement date of the loan.

Loans made pursuant to the plan are secured by the stock purchased and
generally have a ten year term. The outstanding aggregate loan balance was $29
million at the end of the second quarter of 2002 for all participants who were
then Company officers.

CCC provided an excess of loss reinsurance contract to the insurance
subsidiaries of CNA Surety Corporation (Surety), a 64% owned and consolidated
subsidiary of CNA, over a period that expired on December 31, 2000 (the stop
loss contract). The stop loss contract limits the net loss ratios for Surety
with respect to certain accounts and lines of insurance business. In

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

the event that Suretys accident year net loss ratio exceeds 24% for 1997
through 2000 (the contractual loss ratio), the stop loss contract requires CCC
to pay amounts equal to the amount, if any, by which Suretys actual accident
year net loss ratio exceeds the contractual loss ratio multiplied by the
applicable net earned premiums. The minority shareholders of CNA Surety do not
share in any losses that apply to this contract. There were no reinsurance
balances payable under this stop loss contract as of June 30, 2002 as all
balances were paid during the first six months of 2002. Reinsurance balances
payable at December 31, 2001 were $22 million.

30



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##### Table of Contents






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

Consolidated Operations

The following discussion highlights significant factors influencing the
consolidated operations and financial condition of CNA Financial Corporation
(CNAF) and its controlled subsidiaries (collectively CNA or the Company). CNA
is one of the largest insurance organizations in the United States and, based
on net written premiums, is the ninth largest property-casualty company and the
40th largest life insurance company.

As of June 30, 2002, Loews Corporation (Loews) owned approximately 90% of the
outstanding common stock of CNAF. The following discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and related
Notes found on pages 1 to 30 and with CNAFs Annual Report to Shareholders for
the year ended December 31, 2001.

On July 25, 2002, CNA announced that Stephen W. Lilienthal will become Chief
Executive Officer of CNAF and Chairman and Chief Executive Officer of CNA
insurance companies effective August 26, 2002. Mr. Lilienthal will succeed
Bernard L. Hengesbaugh, who will become Chairman of the Board of CNAF.

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

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

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

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

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

The following discussion of operating results focuses on net operating
income. Net operating income is calculated by deducting net realized
investment gains or losses (investment gains or losses after deduction of
related income taxes and minority interest), gains or losses from discontinued
operations, net of tax, and the cumulative effect of a change in accounting
principle, net of tax and minority interest, from net income. Net operating
income, as defined above, is used in managements discussion of the results of
operations because net realized 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.

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

Operating Results

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

Consolidated Operations
(In millions, except per share data)

|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------ | ---- | ------------ | ----- | ---------- | ---- | ------ | ------ | - | - | ----- | ----- | - | - | ------ | ------ | -
|                                                                                           |                                                                          |      | Three Months |       | Six Months
|                                                                                           |                                                                          |      |              |       |           
|Period ended June 30                                                                       |                                                                          | 2002 |              | 2001  |            | 2002 |        | 2001  
|                                                                                           |                                                                          |      |              |       |            |      |        |        |  
|Operating revenues:                                                                        |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |       
|                                                                                           | Net earned premiums                                                      |      | $            | 2,826 |            |      | $      | 1,587  |   |   | $     | 5,663 |   |   | $      | 4,085  |  
|                                                                                           | Net investment income                                                    |      |              | 502   |            |      |        | 402    |   |   |       | 928   |   |   |        | 909    |  
|                                                                                           | Other revenues                                                           |      |              | 152   |            |      |        | 152    |   |   |       | 336   |   |   |        | 345    |  
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  
|Total operating revenues                                                                   |                                                                          |      | 3,480        |       |            |      | 2,141  |        |   |   | 6,927 |       |   |   | 5,339  |       
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |       
|Claims, benefits and expenses                                                              |                                                                          |      | 3,274        |       |            |      | 5,266  |        |   |   | 6,553 |       |   |   | 8,282  |       
|Restructuring and other related charges                                                    |                                                                          |      |             |       |            |      | 56     |        |   |   |      |       |   |   | 62     |       
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  
|Operating income (loss) from continuing operations before income
tax and minority interest |                                                                          |      | 206          |       |            |      | (3,181 | )      |   |   | 374   |       |   |   | (3,005 | )     
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |       
|Income tax (expense) benefit                                                               |                                                                          |      | (61          | )     |            |      | 1,110  |        |   |   | (113  | )     |   |   | 1,059  |       
|Minority interest                                                                          |                                                                          |      | (5           | )     |            |      | (6     | )      |   |   | (10   | )     |   |   | (12    | )     
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  
|Net operating income (loss) from continuing operations                                     |                                                                          |      | 140          |       |            |      | (2,077 | )      |   |   | 251   |       |   |   | (1,958 | )     
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |       
|Realized investment (losses) gains, net of tax and minority interest                       |                                                                          |      | (105         | )     |            |      | 312    |        |   |   | (103  | )     |   |   | 549    |       
|Income (loss) from discontinued operations, net of tax of $0, $0,
$9 and $0                |                                                                          |      |             |       |            |      | 3      |        |   |   | (35   | )     |   |   | 3      |       
|Cumulative effect of a change in accounting principle, net of tax
of $33                   |                                                                          |      |             |       |            |      |       |        |   |   |      |       |   |   | (61    | )     
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  
|Net income (loss)                                                                          |                                                                          | $    | 35           |       |            | $    | (1,762 | )      |   | $ | 113   |       |   | $ | (1,467 | )     
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  
|Basic and diluted earnings (loss) per share:                                               |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |       
|                                                                                           | Net operating income (loss) from continuing operations                   |      | $            | 0.62  |            |      | $      | (11.32 | ) |   | $     | 1.12  |   |   | $      | (10.68 | )
|                                                                                           | Net realized investment (losses) gains, net of tax and minority interest |      |              | (0.46 | )          |      |        | 1.70   |   |   |       | (0.45 | ) |   |        | 3.01   |  
|                                                                                           | Income (loss) from discontinued operations, net of tax                   |      |              |      |            |      |        | 0.01   |   |   |       | (0.16 | ) |   |        | 0.01   |  
|                                                                                           | Cumulative effect of a change in accounting principle, net of tax        |      |              |      |            |      |        |       |   |   |       |      |   |   |        | (0.34  | )
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  
|Basic and diluted earnings (loss) per share available to common stockholders               |                                                                          | $    | 0.16         |       |            | $    | (9.61  | )      |   | $ | 0.51  |       |   | $ | (8.00  | )     
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  
|Weighted average outstanding common stock and common stock equivalents                     |                                                                          |      | 223.6        |       |            |      | 183.3  |        |   |   | 223.6 |       |   |   | 183.3  |       
|                                                                                           |                                                                          |      |              |       |            |      |        |        |   |   |       |       |   |   |        |        |  

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

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

Net Operating Income (Loss) by Segment
(In millions)

|                            |  |              |     |            |  |      |        |      |  |   |     |   |  |   |        |  
|--------------------------- |  | ------------ | --- | ---------- |  | ---- | ------ | ---- |  | - | --- | - |  | - | ------ | -
|                            |  | Three Months |     | Six Months
|                            |  |              |     |           
|Period ended June 30        |  | 2002         |     | 2001       |  | 2002 |        | 2001
|                            |  |              |     |            |  |      |        |     
|Standard Lines              |  | $            | 37  |            |  | $    | (574   | )    |  | $ | 46  |   |  | $ | (509   | )
|Specialty Lines             |  |              | 42  |            |  |      | (303   | )    |  |   | 77  |   |  |   | (260   | )
|CNA Re                      |  |              | 27  |            |  |      | (369   | )    |  |   | 68  |   |  |   | (351   | )
|Group Operations            |  |              | 19  |            |  |      | 15     |      |  |   | 34  |   |  |   | 30     |  
|Life Operations             |  |              | 37  |            |  |      | 25     |      |  |   | 72  |   |  |   | 67     |  
|Corporate and Other         |  |              | (22 | )          |  |      | (871   | )    |  |   | (46 | ) |  |   | (935   | )
|                            |  |              |     |            |  |      |        |      |  |   |     |   |  |   |        |  
|Net operating income (loss) |  | $            | 140 |            |  | $    | (2,077 | )    |  | $ | 251 |   |  | $ | (1,958 | )
|                            |  |              |     |            |  |      |        |      |  |   |     |   |  |   |        |  

Net operating income was $140 million, or $0.62 per share, for the second
quarter of 2002 as compared with a net operating loss of $2,077 million, or
$11.32 per share, for the same period in 2001. The improvement in net
operating results was due principally to after-tax prior year reserve
strengthening of $2,079 million recorded in the second quarter of 2001 related
to a change in estimate of prior year net loss reserves and retrospective
premium accruals. Additionally, second quarter 2001 results include
restructuring and other related charges of $36 million after-tax and an $8
million charge related to corporate aggregate reinsurance treaties for core
operations. Excluding these 2001 significant items, net operating results
improved $94 million due to higher net investment income, driven primarily by
increased limited partnership income, and improved underwriting results in the
property-casualty segments, partially offset by a reduced benefit from the use
of reinsurance in 2002.

The Company reported net realized investment losses of $105 million for the
second quarter of 2002 compared with net realized investment gains of $312
million for the same period in 2001. The net realized investment losses for
the second quarter of 2002 were due to $190 million of impairment losses on
fixed income securities, primarily in the telecommunication and cable
industries, partially offset by net realized investment gains of $85 million
from other investment activity in the quarter.

Net income was $35 million, or $0.16 per share, for the second quarter of 2002
as compared with a net loss of $1,762 million, or $9.61 per share, for the same
period in 2001.

Net earned premiums increased $1,239 million for the second quarter of 2002 as
compared with the same period in 2001. Second quarter results for 2001
included reductions in net earned premiums totaling $1,036 million related to
the corporate aggregate reinsurance treaties, additional ceded premiums and a
change in estimate for retrospective premium accruals arising from the reserve
strengthening and a change in estimate for involuntary market premium accruals.
Excluding these 2001 significant items, net earned premiums increased $203
million due primarily to a strong increased rate trend in the property-casualty
segments, reduced use of property-casualty reinsurance and premium growth in
the Group and Life Operations. This increase was partially offset by decreased
net earned premiums in CNA Res U.K. operations resulting from the decision
made in the third quarter of 2001 to cease writing new business in the U.K.
subsidiaries of CNA Re (CNA Re U.K.).

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

Net operating income was $251 million, or $1.12 per share, for the six months
ended June 30, 2002 as compared with a net operating loss of $1,958 million, or
$10.68 per share, for the same period in 2001. The improvement in net
operating results was due principally to after-tax reserve strengthening of
$2,079 million recorded in the second quarter of 2001 related to a change in
estimate of prior year net loss and retrospective premium accruals.
Additionally, 2001 results include restructuring and other related charges of
$40 million after-tax and a $14 million charge related to corporate aggregate
reinsurance treaties for core operations. Excluding these 2001 significant
items, net operating results increased $76 million due primarily to improved
underwriting results in the property-casualty segments, partially offset by a
reduced benefit from the use of reinsurance in 2002.

Net income was $113 million, or $0.51 per share, for the six months ended June
30, 2002 as compared with a net loss of $1,467 million, or $8.00 per share, for
the same period in 2001. Net realized investment gains for the six months
ended June 30, 2002 decreased $652 million as compared with the same period in
2001. See the discussion of realized investment losses in the Investments
section for additional information. Loss from discontinued operations, net of
tax, of $35 million for the six months ended June 30, 2002 and income from
discontinued operations of $3 million for the same period in 2001 relate to the
operating results and loss on sale of Life Operations Chilean-based
subsidiaries (CNA Vida), which was sold in the first quarter of 2002. Included
in net income for 2001 was a charge of $61 million, net of tax, for the
cumulative effect of a change in accounting principle for derivative financial
instruments.

Net earned premiums increased $1,578 million for the six months ended June 30,
2002 as compared with the same period in 2001. The 2001 results included
reductions in net earned premiums totaling $1,079 million related to the
corporate aggregate reinsurance treaties, additional ceded premiums and a
change in estimate for retrospective premium accruals arising from the reserve
strengthening and a change in estimate for involuntary market premium accruals.
Excluding these 2001 significant items, net earned premiums increased $499
million due primarily to a strong increased rate trend in the property-casualty
segments, reduced use of property-casualty reinsurance and premium growth in
the Group and Life Operations. This increase was partially offset by decreased
net earned premiums in CNA Res U.K. operations resulting from the decision
made in the third quarter of 2001 to cease writing new business in CNA Re U.K.

The second quarter 2001 net operating loss includes the following, which are
described in more detail on the following pages.



| |  | The Company recorded an after-tax charge of $2.1 billion ($3.2 billion
pretax), or $11.34 per share, related to a change in estimate of prior
year net loss reserves and retrospective premium accruals. This
amount included the impact of net reserve strengthening, the related
increase in the accrual for insurance-related assessments and the
ceded premiums and interest cost of the corporate aggregate
reinsurance treaty that attached due to the reserve strengthening.
Further details related to the reserve strengthening are discussed
below as well as in the individual segment discussions of operations.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  | In the second quarter of 2001, the Company recorded ceded premiums,
ceded losses and interest charges related to corporate aggregate
reinsurance treaties in place for the 1999 through 2001 accident
years. The discussion in the Reinsurance section below includes all
premiums, losses and interest charges related to these treaties.
However, in all other sections of the Managements Discussion and
Analysis (MD&A) the applicable amounts ceded to these treaties as a
result of the second quarter 2001 reserve strengthening are included
in the quantification of this significant item. The ceded premiums,
ceded losses and interest charges related to the aggregate reinsurance
treaties not related to this significant item are described as Core.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The Company recorded after-tax restructuring and other related charges
of $36 million, or $0.20 per share, related to workforce reductions
and asset write-offs resulting from changes in the Companys
information technology organization, which is discussed in more detail
below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Based upon the significance of the second quarter 2001 reserve strengthening,
corporate aggregate reinsurance treaties and restructuring and other related
charges, the underwriting impact of these items is discussed in the aggregate
in the following sections. When the Company discusses its 2001 underwriting
results and ratios for its property-casualty segments, the discussion will
compare 2001 underwriting results and ratios excluding the effect of these
significant items. When the Company discusses its 2002 underwriting results
and ratios for its property-casualty segments, the discussion will include the
impact of the corporate aggregate reinsurance treaties. The following table
provides the details by segment of 2001 underwriting results as reported and
adjusted.

Underwriting Results by Segment
(In millions)

|                                                                                                                                          |  |          |      |           |  |        |      |          |  |                   |      |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---- | --------- |  | ------ | ---- | -------- |  | ----------------- | ---- | - |  | - | ------ | -
|                                                                                                                                          |  | Standard |      | Specialty |  |        |      |          |  | Property-Casualty
|For the three months ended June 30, 2001                                                                                                  |  | Lines    |      | Lines     |  | CNA Re |      | Segments
|                                                                                                                                          |  |          |      |           |  |        |      |         
|Underwriting loss, as reported                                                                                                            |  | $        | (976 | )         |  | $      | (502 | )        |  | $                 | (611 | ) |  | $ | (2,089 | )
|Underwriting impact of second quarter
2001 reserve strengthening net of the
related benefit of the corporate
aggregate reinsurance treaty |  |          | 911  |           |  |        | 410  |          |  |                   | 587  |   |  |   | 1,908  |  
|Underwriting benefit from corporate
aggregate reinsurance treaties for Core
operations                                                    |  |          | 5    |           |  |        | 1    |          |  |                   | 1    |   |  |   | 7      |  
|Restructuring and other related charges                                                                                                   |  |          | 5    |           |  |        | 2    |          |  |                   |     |   |  |   | 7      |  
|                                                                                                                                          |  |          |      |           |  |        |      |          |  |                   |      |   |  |   |        |  
|Adjusted underwriting loss*                                                                                                               |  | $        | (55  | )         |  | $      | (89  | )        |  | $                 | (23  | ) |  | $ | (167   | )
|                                                                                                                                          |  |          |      |           |  |        |      |          |  |                   |      |   |  |   |        |  

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

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

Underwriting Results by Segment
(In millions)

|                                                                                                                                          |  |          |        |           |  |        |      |          |  |          |      |   |  |           |        |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------ | --------- |  | ------ | ---- | -------- |  | -------- | ---- | - |  | --------- | ------ | -
|                                                                                                                                          |  |          |        |           |  |        |      |          |  |          |      |   |  | Property-
|                                                                                                                                          |  | Standard |        | Specialty |  |        |      |          |  | Casualty
|For the six months ended June 30, 2001                                                                                                    |  | Lines    |        | Lines     |  | CNA Re |      | Segments
|                                                                                                                                          |  |          |        |           |  |        |      |         
|Underwriting loss, as reported                                                                                                            |  | $        | (1,059 | )         |  | $      | (531 | )        |  | $        | (634 | ) |  | $         | (2,224 | )
|Underwriting impact of second quarter
2001 reserve strengthening net of the
related benefit of the corporate
aggregate reinsurance treaty |  |          | 911    |           |  |        | 410  |          |  |          | 587  |   |  |           | 1,908  |  
|Underwriting benefit from corporate
aggregate reinsurance treaties for
Core operations                                                    |  |          | 7      |           |  |        | 3    |          |  |          |     |   |  |           | 10     |  
|Restructuring and other related charges                                                                                                   |  |          | 5      |           |  |        | 2    |          |  |          |     |   |  |           | 7      |  
|                                                                                                                                          |  |          |        |           |  |        |      |          |  |          |      |   |  |           |        |  
|Adjusted underwriting loss*                                                                                                               |  | $        | (136   | )         |  | $      | (116 | )        |  | $        | (47  | ) |  | $         | (299   | )
|                                                                                                                                          |  |          |        |           |  |        |      |          |  |          |      |   |  |           |        |  

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

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. With
respect to environmental pollution and mass tort and asbestos (APMT) reserves,
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 claims, would be higher in the range of possible
outcomes than previously estimated. The Company recorded $2.6 billion pretax
($1.7 billion after-tax) of reserve strengthening, net of the related corporate
aggregate reinsurance treaty benefit, associated with a change in estimate of
prior year net loss reserves, including $1.2 billion pretax ($0.8 billion
after-tax) related to APMT.

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

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

Second Quarter 2001 Prior Year Reserve Strengthening
(In millions)

|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |       |       | 
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ----- | ---- | -------- | --- | --------- | - | --------- | --- | ----- | --- | --------- | --- |  | -- | ----- | ----- |  | ---- | ----- | ----- | 
|                                                                                             |                                                                                      |       |      | Standard |     | Specialty |   |           |     |       |     | Corporate |     |  |    |      
|For the three months ended June 30, 2001                                                     |                                                                                      | Lines |      | Lines    |     | CNA Re    |   | and Other |     | Total
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |          
|Net reserve strengthening excluding the impact
of the corporate aggregate reinsurance treaty |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |      
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |      
|                                                                                             | APMT                                                                                 |       | $    |         |     |           | $ |          |     |       | $   | 57        |     |  | $  | 1,140 |       |  | $    | 1,197 |      
|                                                                                             | Non-APMT                                                                             |       |      | 523      |     |           |   | 407       |     |       |     | 574       |     |  |    | 90    |       |  |      | 1,594 |      
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |       |      
|                                                                                             |                                                                                      | Total |      |          | 523 |           |   |           | 407 |       |     |           | 631 |  |    |       | 1,230 |  |      |       | 2,791 | 
|Pretax benefit from corporate aggregate
reinsurance treaty on accident year 1999             |                                                                                      |       | (197 | )        |     |           |  |           |     |       | (26 | )         |     |  |   |       |       |  | (223 | )*   
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |      
|Accrual for insurance-related assessments                                                    |                                                                                      |       | 48   |          |     |           |  |           |     |       |    |           |     |  |   |       |       |  | 48   |      
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |       |      
|                                                                                             | Net reserve strengthening and related accruals                                       |       |      | 374      |     |           |   | 407       |     |       |     | 605       |     |  |    | 1,230 |       |  |      | 2,616 |      
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |      
|Change in estimate of premium accruals                                                       |                                                                                      |       | 629  |          |     |           | 3 |           |     |       | (13 | )         |     |  | (3 | )     |       |  | 616  |      
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |      
|Reduction of related commission accruals                                                     |                                                                                      |       | (50  | )        |     |           |  |           |     |       |    |           |     |  |   |       |       |  | (50  | )    
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |       |      
|                                                                                             | Net premium and related accrual reductions                                           |       |      | 579      |     |           |   | 3         |     |       |     | (13       | )   |  |    | (3    | )     |  |      | 566   |      
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |      
|                                                                                             | Total pretax second quarter 2001 reserve
strengthening and other related accruals    |       | $    | 953      |     |           | $ | 410       |     |       | $   | 592       |     |  | $  | 1,227 |       |  | $    | 3,182 |      
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |       |      
|                                                                                             | Total after-tax second quarter 2001 reserve
strengthening and other related accruals |       | $    | 619      |     |           | $ | 277       |     |       | $   | 384       |     |  | $  | 799   |       |  | $    | 2,079 |      
|                                                                                             |                                                                                      |       |      |          |     |           |   |           |     |       |     |           |     |  |    |       |       |  |      |       |      

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

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

Approximately $600 million of the adverse reserve development, excluding the
impact of the corporate aggregate reinsurance treaty, was 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.

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

Approximately $320 million of adverse reserve development, excluding the impact
of the corporate aggregate reinsurance treaty, was recorded in Specialty Lines
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.
The studies included the review of all such retrospectively rated insurance
policies and the estimates 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.
Accruals for ceded premiums related to other reinsurance treaties increased $83
million due to the reserve strengthening. The remainder of the decrease in
premium accruals relates to the change in estimate of the amount of
retrospective premium receivables as discussed above.

Reinsurance

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

The Companys overall reinsurance program includes certain property-casualty
contracts, such as the corporate aggregate reinsurance treaties discussed in
more detail later in this section, that are entered into and accounted for on a
funds withheld basis. Under the funds withheld basis, the Company records the cash remitted to
the reinsurer for the reinsurers margin, or cost of the reinsurance contract, as ceded premiums. The remainder of the premiums ceded under the reinsurance contract is recorded as a funds withheld liability. The Company is required to increase the funds withheld
balance at stated interest crediting rates applied to the funds withheld
balance or as otherwise specified under the terms of the contract. The funds
withheld liability is reduced by any cumulative claim payments made by the
Company in excess of the Companys retention under the reinsurance contract.
If the funds withheld liability is exhausted, interest crediting will cease and
additional claim payments are recoverable from the reinsurer. The funds
withheld liability is recorded in reinsurance balances payable in the Condensed
Consolidated Balance Sheets.

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

Interest cost on these contracts is credited during all periods in which a
funds withheld liability exists. Interest cost, which is included in other net
investment income, was $57 million and $86 million for the second quarter of
2002 and 2001 and $115 million and $122 million for the six months ended June
30, 2002 and 2001. The amount subject to interest crediting rates on such
contracts was $2,889 million and $2,724 million at June 30, 2002 and December
31, 2001.

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

For 2002, the Company has entered into an aggregate reinsurance treaty covering
substantially all of the Companys property-casualty lines of business (the
2002 Cover). The loss protection provided by the 2002 Cover is dependent on
the level of subject premium, but there is a maximum aggregate limit of $1,125
million. Maximum ceded premium under the contract is $683 million, and
premiums, claims recoveries and interest charges other than the reinsurers
margin and related fees are made on a funds withheld basis. Interest is
credited on funds withheld at 8% per annum, and all premiums are deemed to have
been paid as of January 1, 2002. Ceded premium related to the reinsurers
margin in the amount of $2 million and $5 million was recorded for the 2002
Cover for the three months and six months ended June 30, 2002.

The aggregate reinsurance protection from the 2002 Cover attaches at a defined
accident year loss and allocated loss adjustment expense (collectively, losses)
ratio. Under the contract, the Company has the right to elect to cede losses
to the 2002 Cover when its recorded accident year losses exceed the attachment
point. This election period expires March 31, 2004. If no losses are ceded by
this date, the contract is considered to be commuted. If the Company elects to
cede any losses to the 2002 Cover, it must continue to cede all losses subject
to the terms of the contract.

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 ratios for each accident year. Coverage
under the first section of the Aggregate Cover, which is available for all
accident years covered by the contract, has annual limits of $500 million of
ceded losses with an aggregate limit of $1 billion of ceded losses for the
three year period. The ceded premiums are a percentage of ceded losses and for
each $500 million of limit the ceded premium is $230 million. The second
section of the Aggregate Cover, which was only utilized for accident year 2001,
provides additional coverage of up to $510 million of ceded losses for a
maximum ceded premium of $310 million. Under the Aggregate Cover, interest
charges on the funds withheld accrue at 8% per annum. If the aggregate loss
ratio for the three-year period exceeds certain thresholds, additional premiums
may be payable and the rate at which interest charges are accrued would
increase to 8.25% per annum commencing in 2006.

The coverage under the second section of the Aggregate Cover was triggered for
the 2001 accident year. As a result of losses related to the September 11,
2001 World Trade Center Disaster and related events (WTC event), the limit
under this section was exhausted. Additionally, as a result of the significant
reserve additions recorded in the second quarter of 2001, the $500 million
limit on the 1999 accident year under the first section was also fully

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

utilized. 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
(In millions)

|                                         |  |              |     |            |  |      |      |      |  |   |     |   |  |   |      |  
|---------------------------------------- |  | ------------ | --- | ---------- |  | ---- | ---- | ---- |  | - | --- | - |  | - | ---- | -
|                                         |  | Three Months |     | Six Months
|                                         |  |              |     |           
|Period ended June 30                     |  | 2002         |     | 2001       |  | 2002 |      | 2001
|                                         |  |              |     |            |  |      |      |     
|Ceded earned premiums                    |  | $            |    |            |  | $    | (418 | )    |  | $ |    |   |  | $ | (460 | )
|Ceded claim and claim adjustment expense |  |              |    |            |  |      | 683  |      |  |   |    |   |  |   | 722  |  
|Interest charges                         |  |              | (12 | )          |  |      | (53  | )    |  |   | (25 | ) |  |   | (59  | )
|                                         |  |              |     |            |  |      |      |      |  |   |     |   |  |   |      |  
|Pretax impact on operating results       |  | $            | (12 | )          |  | $    | 212  |      |  | $ | (25 | ) |  | $ | 203  |  
|                                         |  |              |     |            |  |      |      |      |  |   |     |   |  |   |      |  

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
approximately $760 million of ceded losses. The ceded premiums are a percentage
of ceded losses and for the $760 million of limit, the ceded premium is $456
million. The CCC Cover provides continuous coverage in excess of the second
section of the Aggregate Cover discussed above. Under the CCC Cover, interest
charges on the funds withheld generally accrue at 8% per annum. The interest
rate increases to 10% per annum if the aggregate loss ratio exceeds certain
thresholds. Losses of $563 million have been ceded under the CCC Cover through
June 30, 2002.

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

Impact of CCC Cover on Pretax Operating Results
(In millions)

|                                         |  |              |    |            |  |      |    |      |  |   |     |   |  |   |    |  
|---------------------------------------- |  | ------------ | -- | ---------- |  | ---- | -- | ---- |  | - | --- | - |  | - | -- | -
|                                         |  | Three Months |    | Six Months
|                                         |  |              |    |           
|Period ended June 30                     |  | 2002         |    | 2001       |  | 2002 |    | 2001
|                                         |  |              |    |            |  |      |    |     
|Ceded earned premiums                    |  | $            |   |            |  | $    | (2 | )    |  | $ | (61 | ) |  | $ | (2 | )
|Ceded claim and claim adjustment expense |  |              |   |            |  |      |   |      |  |   | 93  |   |  |   |   |  
|Interest charges                         |  |              | (6 | )          |  |      |   |      |  |   | (16 | ) |  |   |   |  
|                                         |  |              |    |            |  |      |    |      |  |   |     |   |  |   |    |  
|Pretax impact on operating results       |  | $            | (6 | )          |  | $    | (2 | )    |  | $ | 16  |   |  | $ | (2 | )
|                                         |  |              |    |            |  |      |    |      |  |   |     |   |  |   |    |  

The impact by operating segment of the 2002 Cover, Aggregate Cover and the CCC
Cover on pretax operating results was as follows:

Impact of 2002 Cover, Aggregate Cover and CCC Cover on Pretax Operating Results
(In millions)

|                                   |  |              |     |            |  |      |     |      |  |   |     |   |  |   |     |  
|---------------------------------- |  | ------------ | --- | ---------- |  | ---- | --- | ---- |  | - | --- | - |  | - | --- | -
|                                   |  | Three Months |     | Six Months
|                                   |  |              |     |           
|Period ended June 30               |  | 2002         |     | 2001       |  | 2002 |     | 2001
|                                   |  |              |     |            |  |      |     |     
|Standard Lines                     |  | $            | (14 | )          |  | $    | 186 |      |  | $ | (28 | ) |  | $ | 182 |  
|Specialty Lines                    |  |              | (3  | )          |  |      | (4  | )    |  |   | (5  | ) |  |   | (6  | )
|CNA Re                             |  |              | (3  | )          |  |      | 25  |      |  |   | 19  |   |  |   | 25  |  
|Corporate and Other                |  |              |    |            |  |      | 3   |      |  |   |    |   |  |   |    |  
|                                   |  |              |     |            |  |      |     |      |  |   |     |   |  |   |     |  
|Pretax impact on operating results |  | $            | (20 | )          |  | $    | 210 |      |  | $ | (14 | ) |  | $ | 201 |  
|                                   |  |              |     |            |  |      |     |      |  |   |     |   |  |   |     |  

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

2001 Restructuring

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

IT Plan

The overall goal of the IT Plan was to improve technology for the underwriting
function and throughout the Company and to eliminate inefficiencies in the
deployment of IT resources. The changes facilitated a strong focus on
enterprise-wide system initiatives. The IT Plan had two main components, which
included the reorganization of IT resources into the Technology and Operations
Group with a structure based on centralized, functional roles and the
implementation of an integrated technology roadmap that included common
architecture and platform standards that directly support the Companys
strategies.

For the three and six months ended June 30, 2001 the Company incurred $56
million and $62 million pretax of restructuring and other related charges for
the IT Plan related primarily to employee severance charges and the write-off
of impaired assets.

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

Pretax Restructuring and Other Related Charges
(In millions)

|                                   |  |        |    |        |  |   |    | 
|---------------------------------- |  | ------ | -- | ------ |  | - | -- | 
|                                   |  | Three  |    | Six   
|For the period ended June 30, 2001 |  | Months |    | Months
|                                   |  |        |    |       
|Standard Lines                     |  | $      | 6  |        |  | $ | 6  | 
|Specialty Lines                    |  |        | 2  |        |  |   | 2  | 
|CNA Re                             |  |        |   |        |  |   |   | 
|Life Operations                    |  |        | 17 |        |  |   | 17 | 
|Corporate and Other                |  |        | 31 |        |  |   | 37 | 
|                                   |  |        |    |        |  |   |    | 
|Total                              |  | $      | 56 |        |  | $ | 62 | 
|                                   |  |        |    |        |  |   |    | 

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

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

IT Plan Accrual
(In millions)

|                                           |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  
|------------------------------------------ |  | ------------- | --- | -------- |  | ----- | --- | ----- |  | - | - |  |  | - | --- | -
|                                           |  | Employee      |     |          |  |       |     |       |  |   |   |  |  |  
|                                           |  | Termination   |     | Impaired |  |       |     |       |  |   |   | 
|                                           |  | and Related   |     | Asset    |  | Other |     |       |  |  
|                                           |  | Benefit Costs |     | Charges  |  | Costs |     | Total
|                                           |  |               |     |          |  |       |     |      
|IT Plan initial accrual                    |  | $             | 29  |          |  | $     | 32  |       |  | $ | 1 |  |  | $ | 62  |  
|Costs that did not require cash in 2001    |  |               |    |          |  |       | (32 | )     |  |   |  |  |  |   | (32 | )
|Payments charged against liability in 2001 |  |               | (19 | )        |  |       |    |       |  |   |  |  |  |   | (19 | )
|                                           |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  
|Accrued costs at December 31, 2001         |  |               | 10  |          |  |       |    |       |  |   | 1 |  |  |   | 11  |  
|Payments charged against liability in 2002 |  |               | (1  | )        |  |       |    |       |  |   |  |  |  |   | (1  | )
|                                           |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  
|Accrued costs at June 30, 2002             |  | $             | 9   |          |  | $     |    |       |  | $ | 1 |  |  | $ | 10  |  
|                                           |  |               |     |          |  |       |     |       |  |   |   |  |  |   |     |  

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

2001 Plan

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

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

No restructuring and other related charges related to the 2001 Plan have been
incurred in 2002; however, payments were made during the six months ended June
30, 2002 related to amounts accrued as of December 31, 2001. The following
table summarizes the remaining 2001 Plan accrual as of June 30, 2002 and the
activity in that accrual since inception. Approximately $35 million of the
remaining accrual is expected to be paid during the remainder of 2002.

2001 Plan Accrual
(In millions)

|                                           |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|------------------------------------------ |  | ------------- | --- | ----------- |  | -------- | --- | ----- |  | ----- | --- | - |  | - | --- | - |  | - | --- | -
|                                           |  | Employee      |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |  
|                                           |  | Termination   |     | Lease       |  | Impaired |     |       |  |       |     |   |  |  
|                                           |  | and Related   |     | Termination |  | Asset    |     | Other |  |       |     |  
|                                           |  | Benefit Costs |     | Costs       |  | Charges  |     | Costs |  | Total
|                                           |  |               |     |             |  |          |     |       |  |      
|2001 Plan initial accrual                  |  | $             | 68  |             |  | $        | 56  |       |  | $     | 30  |   |  | $ | 35  |   |  | $ | 189 |  
|Costs that did not require cash in 2001    |  |               |    |             |  |          |    |       |  |       |    |   |  |   | (35 | ) |  |   | (35 | )
|Payments charged against liability in 2001 |  |               | (2  | )           |  |          |    |       |  |       |    |   |  |   |    |   |  |   | (2  | )
|                                           |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|Accrued costs at December 31, 2001         |  |               | 66  |             |  |          | 56  |       |  |       | 30  |   |  |   |    |   |  |   | 152 |  
|Costs that did not require cash in 2002    |  |               |    |             |  |          |    |       |  |       | (25 | ) |  |   |    |   |  |   | (25 | )
|Payments charged against liability in 2002 |  |               | (45 | )           |  |          | (10 | )     |  |       | (1  | ) |  |   |    |   |  |   | (56 | )
|                                           |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|Accrued costs at June 30, 2002             |  | $             | 21  |             |  | $        | 46  |       |  | $     | 4   |   |  | $ |    |   |  | $ | 71  |  
|                                           |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  

Reserves  Estimates and Uncertainties

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

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

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

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

discussion of Environmental Pollution and Mass Tort and Asbestos Reserves in
the MD&A for further information on APMT.

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

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

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

Terrorism Exposure

CNA and the insurance industry incurred substantial losses related to the
tragic events of September 11, 2001. For the most part, the Company believes
the industry was able to absorb the loss of capital from these losses, but the
capacity to withstand the effect of any additional terrorism events was
significantly diminished. The public debate following September 11 centered on
the role, if any, the U.S. federal government should play in providing a
terrorism backstop for the industry. Several legislative proposals were
introduced, but as yet, Congress has not enacted any of the proposed solutions.

Without any federal backstop in place, the Company is exposed to potentially
material losses arising from a future terrorism event. Accordingly, the
Companys results of operations and financial condition could be materially
adversely impacted by a future terrorism event. The Company is attempting to
mitigate this exposure through its underwriting practices, policy terms and
conditions, and the use of reinsurance. The Company is generally prohibited
from excluding terrorism exposure from its primary workers compensation,
individual life and group life and health policies. The Companys current
reinsurance arrangements either exclude terrorism coverage or significantly
limit the level of coverage.

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

Standard Lines

The following table summarizes key components of operating results for Standard
Lines.

Operating Results
(In millions)

|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |       |       |  
|-------------------------------- | -------------------------------- | -------- | ----- | ------------ | ----- | ---------- | ---- | ---- | ----- | - | ----- | ---- | ----- | - | ------ | ----- | ----- | -
|                                 |                                  |          |       | Three Months |       | Six Months
|                                 |                                  |          |       |              |       |           
|Period ended June 30             |                                  | 2002     |       | 2001         |       | 2002       |      | 2001
|                                 |                                  |          |       |              |       |            |      |      |       |  
|Net written premiums             |                                  | $        | 1,050 |              |       | $          | 375  |      |       | $ | 2,127 |      |       | $ | 1,270  |      
|Net earned premiums              |                                  |          | 1,026 |              |       |            | (61  | )    |       |   | 2,036 |      |       |   | 797    |      
|Underwriting loss                |                                  |          | (96   | )            |       |            | (976 | )    |       |   | (204  | )    |       |   | (1,059 | )    
|Net investment income            |                                  |          | 131   |              |       |            | 75   |      |       |   | 233   |      |       |   | 237    |      
|Net operating income (loss)      |                                  |          | 37    |              |       |            | (574 | )    |       |   | 46    |      |       |   | (509   | )    
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|Ratios                           |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|                                 | Loss and loss adjustment expense |          |       | 78.1         | %     |            |      | N/A  |       |   |       | 77.6 | %     |   |        | 154.6 | %    
|                                 | Expense                          |          |       | 29.8         |       |            |      | N/A  |       |   |       | 30.9 |       |   |        | 72.5  |      
|                                 | Dividend                         |          |       | 1.5          |       |            |      | N/A  |       |   |       | 1.5  |       |   |        | 5.9   |      
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|                                 |                                  | Combined |       |              | 109.4 | %          |      |      | N/A   |   |       |      | 110.0 | % |        |       | 233.0 | %
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|2001 adjusted underwriting loss* |                                  |          |       |              |       | $          | (55  | )    |       |   |       |      |       | $ | (136   | )    
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|2001 adjusted ratios*            |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|                                 | Loss and loss adjustment expense |          |       |              |       |            |      | 72.9 | %     |   |       |      |       |   |        | 73.4  | %    
|                                 | Expense                          |          |       |              |       |            |      | 30.5 |       |   |       |      |       |   |        | 31.5  |      
|                                 | Dividend                         |          |       |              |       |            |      | 2.5  |       |   |       |      |       |   |        | 2.6   |      
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      
|                                 |                                  | Combined |       |              |       |            |      |      | 105.9 | % |       |      |       |   |        |       | 107.5 | %
|                                 |                                  |          |       |              |       |            |      |      |       |   |       |      |       |   |        |      

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

Net operating results improved $611 million for the second quarter of 2002 as
compared with the same period in 2001. The after-tax impact of the second
quarter 2001 reserve strengthening, net of the related corporate aggregate
reinsurance treaty benefit, was $619 million for Standard Lines. The reserve
strengthening related primarily to commercial multiple-peril, general
liability, commercial automobile liability coverages, large account liability
coverages and related retrospective premium accruals. 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 could not be achieved for the exposure. In addition to the impact of
the 2001 reserve strengthening, net operating results for the second quarter of
2001 included $7 million related to the cost of the corporate aggregate
reinsurance treaties from core operations and $4 million for restructuring and
other related charges.

Excluding these 2001 significant items, net operating results decreased $19
million for the second quarter of 2002 as compared with the same period in
2001. This decrease was due primarily to a decline in underwriting results,
partially offset by expense savings resulting from the 2001 Plan and an
increase in net investment income, including $14 million related to limited
partnership income.

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

The combined ratio increased 3.5 points for the second quarter of 2002 as
compared with the adjusted combined ratio for the same period in 2001, and
underwriting results declined by $41 million as compared with the adjusted
underwriting results for the same period in 2001. This change was due to an
increase in the loss ratio, partially offset by decreases in both the expense
and dividend ratios. The loss ratio increased 5.2 points due principally to a
net cost of reinsurance in 2002 as compared with a significant benefit from the
use of reinsurance in 2001 and prior year reserve development of $38 million
recorded in 2002, primarily in the Excess & Surplus lines of business. The
expense ratio decreased 0.7 points as a result of lower underwriting expenses
resulting from decreased head count due to the 2001 Plan, partially offset by
increased acquisition expenses. The dividend ratio decreased 1.0 points due to
favorable current accident year dividends and adverse dividend reserve
development recorded in 2001.

Net written premiums increased $675 million for the second quarter of 2002 as
compared with the same period in 2001. Second quarter results for 2001
included reductions in net written premiums totaling $628 million related to
the corporate aggregate reinsurance treaties, additional ceded premiums arising
from the reserve strengthening and a change in estimate for involuntary market
premium accruals. Excluding these 2001 significant items, net written premiums
increased $47 million. This increase was due to strong rate increases and
lower ceded premiums. These increases were partially offset by lower net
written premiums for the Casualty lines of business.

Net earned premiums increased $1,087 million for the second quarter of 2002 as
compared with the same period in 2001. Second quarter results for 2001
included reductions in net earned premiums totaling $993 million related to the
corporate aggregate reinsurance treaties, additional ceded premiums and a
change in estimate for retrospective premium accruals arising from the reserve
strengthening and a change in estimate for involuntary market premium accruals.
Excluding these 2001 significant items, net earned premiums increased $94
million due primarily to the increase in net written premiums noted above.

Net operating results improved $555 million for the six months ended June 30,
2002 as compared with the same period in 2001. Included in the 2001 results
were $619 million related to the second quarter 2001 reserve strengthening, $9
million related to the cost of corporate aggregate reinsurance treaties from
core operations and $4 million for restructuring and other related charges.
Excluding these 2001 significant items, net operating results declined $77
million for the six months ended June 30, 2002 as compared with the same period
in 2001. This decline was due primarily to decreased underwriting results and
lower net investment income, partially offset by expense savings resulting from
the 2001 Plan.

The combined ratio increased 2.5 points for the six months ended June 30, 2002
as compared with the adjusted combined ratio for the same period in 2001, and
underwriting results declined by $68 million as compared with the adjusted
underwriting results for the same period in 2001. This change was due to an
increase in the loss ratio, partially offset by decreases in both the expense
and dividend ratios. The loss ratio increased 4.2 points, the expense ratio
decreased 0.6 points and the dividend ratio decreased 1.1 points primarily as a
result of the second quarter activity described above.

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

Net written premiums increased $857 million for the six months ended June 30,
2002 as compared with the same period in 2001. The 2001 results included
reductions in net written premiums totaling $656 million related to the
corporate aggregate reinsurance treaties, additional ceded premiums arising
from the reserve strengthening and a change in estimate for involuntary market
premium accruals. Excluding these 2001 significant items, net written premiums
increased $201 million primarily as a result of strong rate increases, a higher
level of new business and lower ceded premiums.

Net earned premiums increased $1,239 million for the six months ended June 30,
2002 as compared with the same period in 2001. The 2001 results included
reductions in net earned premiums totaling $1,021 million related to the
corporate aggregate reinsurance treaties, additional ceded premiums and a
change in estimate for retrospective premium accruals arising from the reserve
strengthening and a change in estimate for involuntary market premium accruals.
Excluding these 2001 significant items, net earned premiums increased $218
million due primarily to the increases in net written premium noted above.

Standard Lines achieved an average rate increase of 28% in the second quarter
of 2002 for contracts that renewed during the period and had a retention rate
of 66% for those contracts that were up for renewal.

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

Specialty Lines

The following table summarizes key components of operating results for
Specialty Lines.

Operating Results
(In millions)

|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |       |       |  
|-------------------------------- | -------------------------------- | -------- | --- | ------------ | ----- | ---------- | ---- | ----- | ----- | - | ----- | ---- | ----- | - | ---- | ----- | ----- | -
|                                 |                                  |          |     | Three Months |       | Six Months
|                                 |                                  |          |     |              |       |           
|Period ended June 30             |                                  | 2002     |     | 2001         |       | 2002       |      | 2001 
|                                 |                                  |          |     |              |       |            |      |       |       |  
|Net written premiums             |                                  | $        | 578 |              |       | $          | 516  |       |       | $ | 1,124 |      |       | $ | 933  |      
|Net earned premiums              |                                  |          | 541 |              |       |            | 455  |       |       |   | 1,055 |      |       |   | 913  |      
|Underwriting loss                |                                  |          | (14 | )            |       |            | (502 | )     |       |   | (35   | )    |       |   | (531 | )    
|Net investment income            |                                  |          | 78  |              |       |            | 73   |       |       |   | 139   |      |       |   | 165  |      
|Net operating income (loss)      |                                  |          | 42  |              |       |            | (303 | )     |       |   | 77    |      |       |   | (260 | )    
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|Ratios                           |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|                                 | Loss and loss adjustment expense |          |     | 70.5         | %     |            |      | 159.9 | %     |   |       | 70.9 | %     |   |      | 114.2 | %    
|                                 | Expense                          |          |     | 32.1         |       |            |      | 50.2  |       |   |       | 32.3 |       |   |      | 43.8  |      
|                                 | Dividend                         |          |     | 0.1          |       |            |      | 0.3   |       |   |       | 0.1  |       |   |      | 0.2   |      
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|                                 |                                  | Combined |     |              | 102.7 | %          |      |       | 210.4 | % |       |      | 103.3 | % |      |       | 158.2 | %
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|2001 adjusted underwriting loss* |                                  |          |     |              |       | $          | (89  | )     |       |   |       |      |       | $ | (116 | )    
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|2001 adjusted ratios*            |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|                                 | Loss and loss adjustment expense |          |     |              |       |            |      | 70.9  | %     |   |       |      |       |   |      | 70.2  | %    
|                                 | Expense                          |          |     |              |       |            |      | 47.4  |       |   |       |      |       |   |      | 42.0  |      
|                                 | Dividend                         |          |     |              |       |            |      | 0.3   |       |   |       |      |       |   |      | 0.2   |      
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      
|                                 |                                  | Combined |     |              |       |            |      |       | 118.6 | % |       |      |       |   |      |       | 112.4 | %
|                                 |                                  |          |     |              |       |            |      |       |       |   |       |      |       |   |      |      

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

Net operating results improved $345 million for the second quarter of 2002 as
compared with the same period in 2001. The after-tax impact of the second
quarter 2001 reserve strengthening, net of the related corporate aggregate
reinsurance treaty benefit, was $277 million for Specialty Lines. The reserve
strengthening related primarily to medical malpractice and national for-profit
nursing home chains with exposure in Florida and Texas. This strengthening was
necessitated by the continuing emergence of reported losses in excess of
expectations and a thorough review of claim exposures. In response to these
adverse trends, Specialty Lines withdrew from writing these coverages in
certain states and instituted large rate increases. Additionally, reserve
strengthening related to the marine business resulted from an increase in large
claim frequency in marine cargo and hull coverages for accident years 1998
through 2000. Also, Specialty Lines strengthened reserves due to higher than
expected losses arising from the high-hazard commercial auto business.
Specialty Lines has taken rate action and reduced exposure to unprofitable
marine cargo and hull classes of business and has exited the high-hazard
commercial auto business. In addition to the impact of the 2001 reserve
strengthening, net operating results for the second quarter of 2001 declined $2
million related to the cost of the corporate aggregate reinsurance treaties
from core operations and $1 million for restructuring and other related
charges.

Excluding these 2001 significant items, net operating results increased $65
million for the second quarter of 2002 as compared with the same period in
2001. This increase was due primarily to improved underwriting results in 2002
and the impact of better aligning premium earnings patterns with the emergence
of claims in the vehicle warranty line of business, which reduced operating
results in 2001.

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

The combined ratio decreased 15.9 points for the second quarter of 2002 as
compared with the adjusted combined ratio for the same period in 2001, and
underwriting results improved by $75 million as compared with the adjusted
underwriting results for the same period in 2001. This change was due to
decreases in the loss, expense and dividend ratios. The loss ratio decreased
0.4 points primarily as a result of rate increases across the entire book of
business, partially offset by a net cost of reinsurance in 2002 as compared
with a significant benefit from the use of reinsurance in 2001. The expense
ratio decreased 15.3 points primarily as a result of the 2001 write-off of
unrecoverable deferred acquisition costs in the vehicle warranty line of
business.

Net written premiums increased $62 million for the second quarter of 2002 as
compared with the same period in 2001. Second quarter results for 2001
included reductions in net written premiums totaling $12 million related to the
corporate aggregate reinsurance treaties, additional ceded premiums arising
from the reserve strengthening and a change in estimate for involuntary market
premium accruals. Excluding these 2001 significant items, net written premiums
increased $50 million due primarily to growth in CNA Pro and CNA HealthPro as a
result of increased new business and strong rate increases.

Net earned premiums increased $86 million for the second quarter of 2002 as
compared with the same period in 2001. Second quarter results for 2001
included reductions in net earned premiums totaling $26 million related to the
corporate aggregate reinsurance treaties, additional ceded premiums and a
change in estimate for retrospective premium accruals arising from the reserve
strengthening and a change in estimate for involuntary market premium accruals.
Excluding these 2001 significant items, net earned premiums increased $60
million due primarily to the increases in net written premiums noted above.

Net operating results improved $337 million for the six months ended June 30,
2002 as compared with the same period in 2001. Included in the 2001 results
were $277 million related to the second quarter 2001 reserve strengthening, $4
million related to the cost of the corporate aggregate reinsurance treaties
from core operations and $1 million for restructuring and other related
charges. Excluding these 2001 significant items, net operating results
improved $55 million for the six months ended June 30, 2002 as compared with
the same period in 2001. This improvement was due primarily to improved
current year underwriting results and the impact of the 2001 vehicle warranty
charge noted above, partially offset by decreased net investment income.

The combined ratio decreased 9.1 points for the six months ended June 30, 2002
as compared with the adjusted combined ratio for the same period in 2001, and
underwriting results improved by $81 million as compared with the adjusted
underwriting results for the same period in 2001. This change was due to
decreases in both the expense and dividend ratios, partially offset by an
increase in the loss ratio. The loss ratio increased 0.7 points primarily as a
result of a net cost of reinsurance in 2002 as compared with a significant
benefit from the use of reinsurance in 2001, partially offset by rate increases
across the entire book of business. The expense ratio decreased 9.7 points
primarily as a result of the 2001 write-off of unrecoverable deferred
acquisition costs in the vehicle warranty line of business. In addition, the
expense ratio decreased as a result of lower underwriting expenses resulting
from decreased staff levels due to the 2001 Plan and other expense reduction
initiatives.

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

Net written premiums increased $191 million for the six months ended June 30,
2002 as compared with the same period in 2001. The 2001 results included
reductions in net written premiums totaling $23 million related to the
corporate aggregate reinsurance treaties, additional ceded premiums arising
from the reserve strengthening and a change in estimate for involuntary market
premium accruals. Excluding these 2001 significant items, net written premiums
increased $168 million due primarily to growth in CNA Pro and Marine as a
result of increased new business and strong rate increases. Net earned
premiums increased $142 million for the six months ended June 30, 2002 as
compared with the same period in 2001, due primarily to the increases in net
written premium noted above and adverse experience in retrospective premium
accruals recorded in the second quarter 2001 reserve strengthening.

Specialty Lines achieved an average rate increase of 24% in the second quarter
of 2002 for contracts that renewed during the period and had a retention rate
of 76% for those contracts that were up for renewal. Retention rates above
apply to Specialty Lines excluding the CNA Guaranty and Credit, Surety and
Warranty businesses.

CNA Re

The following table summarizes key components of operating results for CNA Re.

Operating Results
(In millions)

|                                 |                                  |          |          |      |              |       |            |       |       |       |     |      |   |      |      |       |       |       |  
|-------------------------------- | -------------------------------- | -------- | -------- | ---- | ------------ | ----- | ---------- | ----- | ----- | ----- | --- | ---- | - | ---- | ---- | ----- | ----- | ----- | -
|                                 |                                  |          |          |      | Three Months |       | Six Months
|                                 |                                  |          |          |      |              |       |           
|Period ended June 30             |                                  | 2002     |          | 2001 |              | 2002  |            | 2001 
|                                 |                                  |          |          |      |              |       |            |       |       |       |    
|Net written premiums             |                                  | $        | 160      |      |              | $     | 69         |       |       | $     | 327 |      |   | $    | 270  |      
|Net earned premiums              |                                  |          | 168      |      |              |       | 144        |       |       |       | 305 |      |   |      | 303  |      
|Underwriting (loss) income       |                                  |          | (11      | )    |              |       | (611       | )     |       |       | 14  |      |   |      | (634 | )    
|Net investment income            |                                  |          | 49       |      |              |       | 41         |       |       |       | 83  |      |   |      | 89   |      
|Net operating income (loss)      |                                  |          | 27       |      |              |       | (369       | )     |       |       | 68  |      |   |      | (351 | )    
|Ratios                           |                                  |          |          |      |              |       |            |       |       |       |     |      |   |      |      |      
|                                 | Loss and loss adjustment expense |          |          | 79.5 | %            |       |            | 479.4 | %     |       |     | 62.4 | % |      |      | 267.2 | %    
|                                 | Expense                          |          |          | 27.3 |              |       |            | 43.5  |       |       |     | 33.1 |   |      |      | 41.3  |      
|                                 |                                  |          |          |      |              |       |            |       |       |       |     |      |   |      |      |      
|                                 |                                  |          | Combined |      |              | 106.8 | %          |       |       | 522.9 | %   |      |   | 95.5 | %    |       |       | 308.5 | %
|                                 |                                  |          |          |      |              |       |            |       |       |       |     |      |   |      |      |      
|2001 adjusted underwriting loss* |                                  |          |          |      |              | $     | (23        | )     |       |       |     |      |   | $    | (47  | )    
|                                 |                                  |          |          |      |              |       |            |       |       |       |     |      |   |      |      |      
|2001 adjusted ratios*            |                                  |          |          |      |              |       |            |       |       |       |     |      |   |      |      |      
|                                 | Loss and loss adjustment expense |          |          |      |              |       |            | 75.8  | %     |       |     |      |   |      |      | 75.6  | %    
|                                 | Expense                          |          |          |      |              |       |            | 38.1  |       |       |     |      |   |      |      | 38.3  |      
|                                 |                                  |          |          |      |              |       |            |       |       |       |     |      |   |      |      |      
|                                 |                                  | Combined |          |      |              |       |            |       | 113.9 | %     |     |      |   |      |      |       | 113.9 | %    
|                                 |                                  |          |          |      |              |       |            |       |       |       |     |      |   |      |      |      

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

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

Net operating results improved $396 million for the second quarter of 2002 as
compared with the same period in 2001. The after-tax impact of the second
quarter 2001 reserve strengthening, net of the related corporate aggregate
reinsurance treaty benefit, was $384 million for CNA Re, including $37 million
for APMT claims. The strengthening was based upon second quarter of 2001
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.

Excluding this 2001 significant item, net operating results increased $12
million for the second quarter of 2002 as compared with the same period in
2001. This increase was due primarily to improved underwriting results in the
U.S. operations and increased net investment income.

The combined ratio decreased 7.1 points for the second quarter of 2002 as
compared with the adjusted combined ratio for the same period in 2001, and
underwriting results improved by $12 million as compared with the adjusted
underwriting results for the same period in 2001. This change was due to a
decrease in the expense ratio, partially offset by an increase in the loss
ratio. The loss ratio increased 3.7 points primarily as a result of
unfavorable prior year development recorded in 2002, partially offset by
improvement in the current accident year loss ratio. The expense ratio
decreased 10.8 points due primarily to decreased acquisition expenses, a shift
in the business mix resulting in a lower commission rate and a reduction in
underwriting expenses relative to the earned premium base.

Net written premiums increased $91 million for the second quarter of 2002 as
compared with the same period in 2001. Second quarter results for 2001
included reductions in net written premiums totaling $21 million related to the
corporate aggregate reinsurance treaties and additional ceded premiums arising
from the reserve strengthening. Excluding these 2001 significant items, net
written premiums increased $70 million principally as a result of clients increasing their premium writings above original
estimates and achieved rate increases. This increase was partially offset by the decision made in the
third quarter of 2001 to cease new business writings in CNA Re U.K. Net earned
premiums increased $24 million for the second quarter of 2002 as compared with
the same period in 2001, due primarily to the increases in net written premiums
noted above.

Net operating results improved $419 million for the six months ended June 30,
2002 as compared with the same period in 2001. Included in the 2001 results
was $384 million related to the second quarter 2001 reserve strengthening.
Excluding this 2001 significant item, net operating results increased $35
million for the six months ended June 30, 2002 as compared with the same period
in 2001. This increase was due primarily to improved underwriting results in
the U.S. operations, an increased benefit related to the additional cessions to
the CCC Cover as a result of the increase in WTC related losses recorded in the
first quarter of 2002, partially offset by decreased net investment income.

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

The combined ratio decreased 18.4 points for the six months ended June 30, 2002
as compared with the adjusted combined ratio for the same period in 2001, and
underwriting results improved by $61 million as compared with the adjusted
underwriting results for the same period in 2001. This change was due to
decreases in the loss and expense ratios. The loss ratio decreased 13.2 points
due primarily to a $32 million net underwriting benefit related to the
corporate aggregate reinsurance treaties, partially offset by additional
premiums and losses recorded as a result of the re-estimation of the WTC event
in the first quarter of 2002. The expense ratio decreased 5.2 points primarily
as a result of decreased acquisition expenses, a shift in the business mix
resulting in a lower commission rate and a higher net earned premiums base.

Net written premiums increased $57 million for the six months ended June 30,
2002 as compared with the same period in 2001. The 2001 results included
reductions in net written premiums totaling $23 million related to the
corporate aggregate reinsurance treaties and additional ceded premiums arising
from the reserve strengthening. Excluding these 2001 significant items, net
written premiums increased $34 million as a result of clients increasing their
premium writings above original estimates and achieved rate increases across the book of
business. These increases were partially offset by the decision made in the
third quarter of 2001 to cease new business writings in CNA Re U.K. Net earned
premiums increased $2 million for the six months ended June 30, 2002 as
compared with the same period in 2001, due primarily to the increases in net
written premiums noted above.

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

Group Operations

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

Operating Results
(In millions)

|                      |  |              |     |            |   |      |  |      |       |  |   |       |  |  | 
|--------------------- |  | ------------ | --- | ---------- | - | ---- |  | ---- | ----- |  | - | ----- |  |  | 
|                      |  | Three Months |     | Six Months
|                      |  |              |     |           
|Period ended June 30  |  | 2002         |     | 2001       |   | 2002 |  | 2001
|                      |  |              |     |            |   |      |  |     
|Net earned premiums   |  | $            | 819 |            | $ | 809  |  | $    | 1,724 |  | $ | 1,618
|Net investment income |  | 42           |     | 39         |   | 83   |  | 79  
|Net operating income  |  | 19           |     | 15         |   | 34   |  | 30  

Net operating results improved $4 million for the second quarter of 2002 as
compared with the same period in 2001. This improvement was primarily
attributable to favorable expenses and increased net investment income.

Net earned premiums increased $10 million for the second quarter of 2002 as
compared with the same period in 2001. This growth was due primarily to higher
premiums in the Federal Markets mail handlers benefit program, which was driven
by increased medical cost trends. This increase was partially offset by lower
net earned premiums in the Group Benefits specialty medical line of business.

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

Net operating income improved $4 million for the six months ended June 30, 2002
as compared with the same period in 2001. This improvement was primarily
attributable to favorable expenses and increased net investment income.

Net earned premiums increased $106 million for the six months ended June 30,
2002 as compared with the same period in 2001. This growth was due primarily to
higher premiums in the Federal Markets mail handlers benefit program, which was
driven by increased medical cost trends and higher cost containment fees. In
addition there was also growth in the disability, life and accident and group
long term care lines of business. These increases were partially offset by
lower net earned premiums in the Group Benefits specialty medical line of
business.

Effective July 1, 2002, CNA closed on the sale of Claims Administration
Corporation and the transfer of the National Postal Mail Handlers Union group
benefits plan to First Health Group Corporation. CNA received $2.2 billion of
revenue and recorded $10 million of net operating income from this contract in
2001. The loss of this contract is not anticipated to have an adverse material
impact on 2002 net operating income.

Life Operations

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

Operating Results
(In millions)

|                      |  |              |     |            |   |      |  |      |     |  |   |       |  |  | 
|--------------------- |  | ------------ | --- | ---------- | - | ---- |  | ---- | --- |  | - | ----- |  |  | 
|                      |  | Three Months |     | Six Months
|                      |  |              |     |           
|Period ended June 30  |  | 2002         |     | 2001       |   | 2002 |  | 2001
|                      |  |              |     |            |   |      |  |     
|Sales volume*         |  | $            | 390 |            | $ | 936  |  | $    | 851 |  | $ | 1,429
|Net earned premiums   |  | 235          |     | 229        |   | 475  |  | 443 
|Net investment
income |  | 157          |     | 141        |   | 311  |  | 272 
|Net operating income  |  | 37           |     | 25         |   | 72   |  | 67  

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

Net operating results improved $12 million for the second quarter of 2002 as
compared with the same period in 2001. This improvement related primarily to
restructuring and other related charges of $11 million that occurred in 2001.
Excluding restructuring and other related charges, net operating results
improved $1 million due primarily to higher net investment income, partially
offset by increased acquisition expenses.

Sales volume decreased $546 million for the second quarter of 2002 as compared
with the same period in 2001. This decrease was attributable primarily to
lower sales of synthetic guaranteed investment contracts and structured
settlement annuities, along with reduced sales in the variable products
business, which the Company decided to exit in the fourth quarter of 2001.
These decreases were partially offset by increased sales in the Individual Life
and Long Term Care businesses. Net earned premiums increased $6 million for
the second quarter of 2002 as compared with the same period in 2001,
attributable primarily to growth in the Long Term Care business, partially
offset by decreased sales in the Retirement Services and structured settlements
businesses.

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

Net operating results improved $5 million for the six months ended June 30,
2002 as compared with the same period in 2001. This improvement related
primarily to the absence of restructuring and other related charges of $11
million that were recorded in 2001. Excluding restructuring and other related
charges, net operating results declined $6 million due primarily to increased
acquisition expenses and favorable 2001 results in the Index 500 product,
partially offset by increased net investment income in 2002.

Sales volume decreased $578 million for the six months ended June 30, 2002 as
compared with the same period in 2001. This decrease was attributable
primarily to the second quarter 2001 decreases in sales volume noted above.
Net earned premiums increased $32 million for the six months ended June 30,
2002 as compared with the same period in 2001 attributable primarily to growth
in the Long Term Care business, partially offset by decreased sales in the
Retirement Services business.

Corporate and Other

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

Operating Results(In millions)

|                         |  |              |     |            |  |      |      |      |  |   |     |   |  |   |      |  
|------------------------ |  | ------------ | --- | ---------- |  | ---- | ---- | ---- |  | - | --- | - |  | - | ---- | -
|                         |  | Three Months |     | Six Months
|                         |  |              |     |           
|Period ended June 30     |  | 2002         |     | 2001       |  | 2002 |      | 2001
|                         |  |              |     |            |  |      |      |     
|Net investment income    |  | $            | 45  |            |  | $    | 33   |      |  | $ | 79  |   |  | $ | 67   |  
|Total operating revenues |  |              | 104 |            |  |      | 97   |      |  |   | 210 |   |  |   | 186  |  
|Net operating loss       |  |              | (22 | )          |  |      | (871 | )    |  |   | (46 | ) |  |   | (935 | )

Net operating results improved $849 million for the second quarter of 2002 as
compared with the same period in 2001. The after-tax impact of the second
quarter 2001 reserve strengthening on the Corporate and Other segment was $799
million, including $741 million for APMT. See the Environmental Pollution and
Mass Tort and Asbestos Reserves section following for a discussion of this
prior year reserve strengthening. Net operating results for 2001 also included
$20 million of restructuring and other related charges. Excluding these 2001
significant items, net operating results improved $30 million for the second
quarter of 2002 as compared with the same period in 2001. This improvement was
due primarily to reduced expenses for e-Business initiatives and increased net
investment income, partially offset by decreased operating results for CNA
UniSource.

Total operating revenues increased $7 million for the second quarter 2002 as
compared with the same period in 2001. This increase was due primarily to
higher net earned premiums in Group Reinsurance and increased net investment
income, partially offset by reduced revenues for CNA UniSource.

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

Net operating results improved $889 million for the six months ended June 30,
2002 as compared with the same period in 2001. Included in the 2001 results
were $799 million related to the second quarter 2001 reserve strengthening,
including $741 million for APMT, and $24 million of restructuring and other
related charges. Excluding these 2001 significant items, net operating results
improved $66 million for the six months ended June 30, 2002 as compared with
the same period in 2001. This improvement was due primarily to the second
quarter improvement described above.

Total operating revenues increased $24 million for the six months ended June
30, 2002 as compared with the same period in 2001. This increase was due
primarily to the second quarter increase described above.

In the second quarter of 2001, CNA planned the disposition of CNA UniSource, a
payroll processor and professional employer organization (PEO). After
exploring possible transactions to dispose of its PEO business, CNA UniSource
exited the PEO business as of March 31, 2002. As of that date, substantially
all existing PEO client contracts were terminated. All obligations related to
the PEO operation are being run off in an orderly manner and the associated
costs are included in continuing operations. The Company anticipates
additional operating losses from the PEO run-off for the remainder of 2002.
CNA UniSources payroll processing business, which has annual revenues of
approximately $11 million, remains designated as held for sale.

Environmental Pollution and Mass Tort and Asbestos Reserves

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

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

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

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 2001 or the first six
months of 2002, and it is unclear what positions Congress or the administration
will take and what legislation, if any, will result in the future. If there is
legislation, and in some circumstances even if there is no legislation, the
federal role in environmental cleanup may be significantly reduced in favor of
state action. Substantial changes in the federal statute or the activity of
the EPA may cause states to reconsider their environmental cleanup statutes and
regulations. There can be no meaningful prediction of the pattern of
regulation that would result or the effect upon CNAs results of operations
and/or financial position.

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

As of June 30, 2002 and December 31, 2001, CNA carried approximately $559
million and $617 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported environmental pollution
and mass tort claims. There was no environmental pollution and mass tort
development for the three and six months ended June 30, 2002. Unfavorable
environmental pollution and mass tort development for the three and six months
ended June 30, 2001 amounted to $449 million and $453 million.

The reserve strengthening in the second quarter of 2001 for environmental
pollution and mass tort reserves was due to reviews completed during the year,
which indicated that paid and reported losses were higher than expectations
based on prior year reviews. Factors that have led to this development include
a number of declaratory judgements filed this year due to an increasingly
favorable legal environment for policy-holders in certain courts involving
environmental pollution and mass tort claims and other unfavorable decisions
regarding cleanup issues. Due to the uncertainties created by these factors,
the ultimate liability of CNA for mass tort claims may also vary substantially
from the amount currently recorded.

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

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

As of June 30, 2002 and December 31, 2001, CNA carried approximately $1,219
million and $1,204 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
development for the three and six months ended June 30, 2002. Unfavorable
asbestos net claim and claim adjustment reserve development for the three and
six months ended for June 30, 2001 amounted to $748 million and $769 million.
CNA has attempted to manage its asbestos-related exposures by aggressively
resolving older claims.

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. This analysis indicated a
significant increase in claim counts for asbestos-related claims. The factors
that led to the deterioration in claim counts included, 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 continued in 2001. The volume of new claims 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 some bankruptcy proceedings asbestos claimants
may assert an entitlement to policy proceeds upon confirmation of a plan of
reorganization, rather than when claims would ordinarily be paid to all
claimants. If such assertions are made successfully, they could have the effect
of accelerating claims payment patterns.

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

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

Due to the uncertainties created by volatility in claim numbers and settlement
demands, the effect of bankruptcies, the extent to which non-impaired claimants
can be precluded from making claims and the efforts by insureds to obtain
coverage not subject to aggregate limits, the ultimate liability of CNA for
asbestos-related claims may vary substantially from the amount currently
recorded. Other variables that will influence CNAs ultimate exposure to
asbestos-related claims will be medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix
of asbestos-related diseases presented 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 mass tort and
asbestos claim and claim adjustment expenses. Management will continue to
review and monitor these liabilities and make further adjustments, including
the potential for further reserve strengthening, as warranted.

Investments

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

Net Investment Income(In millions)

|                                                               |        |            |     |              |     |            |     |      |     |   |     |   |     |   |     |   |     | 
|-------------------------------------------------------------- | ------ | ---------- | --- | ------------ | --- | ---------- | --- | ---- | --- | - | --- | - | --- | - | --- | - | --- | 
|                                                               |        |            |     | Three Months |     | Six Months
|                                                               |        |            |     |              |     |           
|Period ended June 30                                           |        | 2002       |     | 2001         |     | 2002       |     | 2001
|                                                               |        |            |     |              |     |            |     |     
|Fixed maturity securities:                                     |        |            |     |              |     |            |     |      |     |   |     |   |     |   |     |  
|                                                               | Bonds: |            |     |              |     |            |     |      |     |   |     |   |     |   |     |   |    
|                                                               |        | Taxable    |     | $            | 458 |            |     | $    | 400 |   |     | $ | 872 |   |     | $ | 809 | 
|                                                               |        | Tax-exempt |     |              | 38  |            |     |      | 28  |   |     |   | 71  |   |     |   | 62  | 
|Limited partnerships                                           |        |            | 37  |              |     |            | (4  | )    |     |   | 44  |   |     |   | 32  |  
|Short-term investments                                         |        |            | 11  |              |     |            | 37  |      |     |   | 27  |   |     |   | 79  |  
|Other, including interest on funds withheld and other deposits |        |            | (30 | )            |     |            | (46 | )    |     |   | (60 | ) |     |   | (44 | )
|                                                               |        |            |     |              |     |            |     |      |     |   |     |   |     |   |     |   |     | 
|Gross investment income                                        |        |            | 514 |              |     |            | 415 |      |     |   | 954 |   |     |   | 938 |  
|Investment expense                                             |        |            | (12 | )            |     |            | (13 | )    |     |   | (26 | ) |     |   | (29 | )
|                                                               |        |            |     |              |     |            |     |      |     |   |     |   |     |   |     |   |     | 
|Net investment income                                          |        | $          | 502 |              |     | $          | 402 |      |     | $ | 928 |   |     | $ | 909 |  
|                                                               |        |            |     |              |     |            |     |      |     |   |     |   |     |   |     |   |     | 

The Company experienced higher net investment income for the three and six
months ended June 30, 2002 as compared with the same periods in 2001. The
increase was due primarily to increased limited partnership income and reduced
interest costs on funds withheld and other deposits related to certain
reinsurance contracts. Other investment income includes interest costs on
funds withheld reinsurance contracts. See the Reinsurance section of the MD&A
for additional information. The interest cost on these contracts increased
significantly in the second quarter of 2001 because of ceded losses resulting
from the second quarter 2001 reserve strengthening. The bond segment of the
investment portfolio yielded 6.1% in the first six months of 2002 as compared
with 6.5% during the same period in 2001.

Other invested assets include investments in limited partnerships and certain
derivative securities. The Companys limited partnership investments are
recorded at fair value and typically reflect a reporting lag of up to three
months. Fair value of the Companys limited

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

partnership investments represents CNAs equity in the partnerships net assets
as determined by the general partner. The carrying value of the Companys
limited partnership investments was $1,400 million and $1,307 million as of
June 30, 2002 and December 31, 2001.

Limited partnerships are a relatively small portion of the Companys overall
investment portfolio. The majority of the limited partnerships invest in a
substantial number of securities that are readily marketable. The Company is a
passive investor in such partnerships and does not have influence over the
partnerships management, who are committed to operate them according to
established guidelines and strategies. These strategies may include the use of
leverage and hedging techniques that potentially introduce more volatility and
risk to the partnerships. Due to unfavorable market conditions since the close
of the second quarter, based upon current trends the Company expects that
limited partnership income in the third quarter will likely be down
significantly from the level reported in the second quarter.

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

Net Realized Investment (Losses) Gains(In millions)

|                                                                 |                            |                                   |                                 |                                          |      |              |      |            |     |     |      |     |      |      |      |       |     |     |     | 
|---------------------------------------------------------------- | -------------------------- | --------------------------------- | ------------------------------- | ---------------------------------------- | ---- | ------------ | ---- | ---------- | --- | --- | ---- | --- | ---- | ---- | ---- | ----- | --- | --- | --- | 
|                                                                 |                            |                                   |                                 |                                          |      | Three Months |      | Six Months
|                                                                 |                            |                                   |                                 |                                          |      |              |      |           
|Period ended June 30                                             |                            | 2002                              |                                 | 2001                                     |      | 2002         |      | 2001      
|                                                                 |                            |                                   |                                 |                                          |      |              |      |           
|Realized investment (losses) gains:                              |                            |                                   |                                 |                                          |      |              |      |            |     |     |      |     |      |      |      |      
|                                                                 | Fixed maturity securities: |                                   |                                 |                                          |      |              |      |            |     |     |      |     |      |      |      |       |    
|                                                                 |                            | U.S. Government bonds             |                                 | $                                        | 44   |              |      | $          | (21 | )   |      | $   | 49   |      |      | $     | 107 |    
|                                                                 |                            | Corporate and other taxable bonds |                                 |                                          | (258 | )            |      |            | 1   |     |      |     | (249 | )    |      |       | (7  | )  
|                                                                 |                            | Tax-exempt bonds                  |                                 |                                          | 14   |              |      |            | (15 | )   |      |     | 16   |      |      |       | 38  |    
|                                                                 |                            | Asset-backed bonds                |                                 |                                          | 19   |              |      |            | 4   |     |      |     | 28   |      |      |       | 55  |    
|                                                                 |                            | Redeemable preferred stock        |                                 |                                          | (1   | )            |      |            | (21 | )   |      |     | (15  | )    |      |       | (21 | )  
|                                                                 |                            |                                   |                                 |                                          |      |              |      |            |     |     |      |     |      |      |      |       |     |    
|                                                                 |                            |                                   | Total fixed maturity securities |                                          |      | (182         | )    |            |     | (52 | )    |     |      | (171 | )    |       |     | 172 |    
|                                                                 | Equity securities          |                                   |                                 | 42                                       |      |              |      | 1,015      |     |     |      | 49  |      |      |      | 1,087 |    
|                                                                 | Derivative securities      |                                   |                                 | (13                                      | )    |              |      | 8          |     |     |      | (34 | )    |      |      | 3     |    
|                                                                 | Other invested assets      |                                   |                                 | (8                                       | )    |              |      | (403       | )   |     |      | (4  | )    |      |      | (314  | )  
|                                                                 |                            |                                   |                                 |                                          |      |              |      |            |     |     |      |     |      |      |      |       |     |    
|                                                                 |                            |                                   |                                 | Total realized investment (losses) gains |      |              | (161 | )          |     |     | 568  |     |      |      | (160 | )     |     |     | 948 | 
|Allocated to participating policyholders and minority interests |                            |                                   | (1                              | )                                        |      |              | (1   | )          |     |     | (1   | )   |      |      | (10  | )    
|Income tax benefit (expense)                                     |                            |                                   | 57                              |                                          |      |              | (255 | )          |     |     | 58   |     |      |      | (389 | )    
|                                                                 |                            |                                   |                                 |                                          |      |              |      |            |     |     |      |     |      |      |      |       |     |    
|Net realized investment (losses) gains                           |                            | $                                 | (105                            | )                                        |      | $            | 312  |            |     | $   | (103 | )   |      | $    | 549  |      
|                                                                 |                            |                                   |                                 |                                          |      |              |      |            |     |     |      |     |      |      |      |       |     |    

Net realized investment gains decreased $417 million for the second quarter of
2002 compared with the same period in 2001. This decline was due primarily to
$292 million of impairment losses recorded in the second quarter of 2002
principally on corporate bonds, contrasted with large gains realized in the
second quarter of 2001 from closing out the hedge agreements, entered into in
early 2000, related to the Companys investment in Global Crossing Ltd. common
stock.

Noted in the General Account Investments table below, corporate bonds
comprise a significant portion of the Companys investment portfolio. The Company
regularly reviews the market value of each investment compared to its
carrying value. When the market value is less than the carrying value, the
company makes a determination as to whether the decline is other than
temporary. When a decline in value is determined to be other than temporary,
investments are written down to net realizable value and losses are recognized in income.
Included in the second quarter 2002 impairment writedowns were $129 million
related to debt securities issued by WorldCom Inc. and $74 million related to
Adelphia Communications Corporation, both of which have recently filed for
bankruptcy. These securities were written down to estimated net realizable
value of $33 million and $29 million, respectively. The remaining $89 million
of impairment writedowns relates primarily to issuers in the telecommunications
sector. The Company may be subject to future impairment losses that
could materially adversely impact its results of operations.
Management believes any future impairment losses would not have a
material impact on the Company's financial position.

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

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

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

In the fourth quarter of 2001, the Company sold certain businesses as planned.
The realized after-tax loss applicable to these businesses recognized in the
second quarter of 2001 was $38 million. Revenues of these businesses included
in the three and six months ended June 30, 2001 totaled approximately $18
million and $25 million. Net operating losses related to these businesses
included in the three and six months ended June 30, 2001 were approximately $14
million and $17 million.

At June 30, 2002, CNA Re U.K. and certain other businesses remain held for
sale. On July 15, 2002, the Company announced that it signed a share purchase
agreement to sell CNA Re U.K. to Tawa U.K. Limited, a subsidiary of Artemis
Group, a French conglomerate. The share purchase agreement includes all
remaining business underwritten since inception by CNA Re U.K. The sale is
subject to approval in the United Kingdom by the Financial Services Authority.
Additionally, certain aspects of the transaction also require approval by the
Illinois Insurance Department (the Illinois Department), which will also
conduct a comprehensive review of the terms of the transaction. While there
can be no assurance that the transaction will close, management believes that
all conditions necessary to close, including regulatory approvals, will be
satisfied and that such closing will occur by the end of 2002. This sale does
not impact CNA Res on-going U.S.-based operations.

CNA Re U.K. will be sold for $1, subject to a completion adjustment at closing
primarily driven by certain operating results between January 1, 2002 and
closing, and changes in interest rates. No additional impairment loss is
expected based on the terms of the sale agreement.

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

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
considerations. This activity will produce realized gains and losses depending
on market conditions including interest rates.

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

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

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

General Account Investments(in millions)

|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   |            |      |  
|------------------------------------------------------------------------ | --------------------------------------------------------------- | - | -------- | ------ | ------------ | - | ------ | ------ |  | - | ---------- | ---- | -
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   | Six Months
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   | Ended     
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   | June 30,  
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   | 2002      
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   | Change in 
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   | Unrealized
|                                                                         |                                                                 |   | June 30, |        | December 31, |   | Gains/
|                                                                         |                                                                 |   | 2002     |        | 2001         |   | Losses
|                                                                         |                                                                 |   |          |        |              |   |       
|Fixed maturity securities:                                               |                                                                 |   |          |        |              |   |        |        |  |   |            |     
|                                                                         | U.S. Treasury securities and obligations of government agencies |   | $        | 6,297  |              |   | $      | 5,081  |  |   | $          | 50   |  
|                                                                         | Asset-backed securities                                         |   |          | 8,075  |              |   |        | 7,723  |  |   |            | 91   |  
|                                                                         | Tax-exempt securities                                           |   |          | 3,713  |              |   |        | 2,720  |  |   |            | 70   |  
|                                                                         | Taxable securities                                              |   |          | 12,102 |              |   |        | 13,403 |  |   |            | (244 | )
|                                                                         | Redeemable preferred stock                                      |   |          | 32     |              |   |        | 48     |  |   |            | (13  | )
|                                                                         | Options embedded in convertible debt securities                 |   |          | 111    |              |   |        | 189    |  |   |            |     |  
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   |            |     
|Total fixed maturity securities                                          |                                                                 |   | 30,330   |        |              |   | 29,164 |        |  |   | (46        | )   
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   |            |     
|Equity securities:                                                       |                                                                 |   |          |        |              |   |        |        |  |   |            |     
|                                                                         | Common stock                                                    |   |          | 783    |              |   |        | 996    |  |   |            | (35  | )
|                                                                         | Non-redeemable preferred stock                                  |   |          | 366    |              |   |        | 342    |  |   |            | (54  | )
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   |            |     
|Total equity securities                                                  |                                                                 |   | 1,149    |        |              |   | 1,338  |        |  |   | (89        | )   
|Short-term investments                                                   |                                                                 |   | 4,097    |        |              |   | 3,740  |        |  |   | 18         |     
|Other investments, primarily limited partnerships                        |                                                                 |   | 1,668    |        |              |   | 1,584  |        |  |   |           |     
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   |            |     
|Total investments                                                        |                                                                 | $ | 37,244   |        |              | $ | 35,826 |        |  |   | (117       | )   
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   |            |     
|Separate account business and other                                      |                                                                 |   |          |        |              |   |        |        |  |   | 15         |     
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   |            |     
|Change in unrealized gains/losses reported in other comprehensive income |                                                                 |   |          |        |              |   |        |        |  | $ | (102       | )   
|                                                                         |                                                                 |   |          |        |              |   |        |        |  |   |            |     

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

Investments in the general account had a total net
unrealized gain of $228 million at June 30, 2002 compared with $345 million at December 31, 2001. The
unrealized position at June 30, 2002 was composed of a net unrealized gain of
$148 million for fixed maturities, a net unrealized gain of $81 million for
equity securities and a net unrealized loss of $1 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.

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

The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 92% of which were rated as investment grade at both June 30,
2002 and December 31, 2001. The following table summarizes the ratings of
CNAs general account bond portfolio at carrying value.

General Account Bond Ratings(In millions)

|                                                 |  |          |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|------------------------------------------------ |  | -------- | ------ | - |  | ---- | --- | ------------ |  | - | ------ |  |  |  | --- | -
|                                                 |  | June 30, |        |   |  |      |     | December 31, |  |   |        | 
|                                                 |  | 2002     |        | % |  | 2001 |     | %           
|                                                 |  |          |        |   |  |      |     |             
|U.S. Government and affiliated agency securities |  | $        | 6,733  |   |  |      | 22  | %            |  | $ | 5,715  |  |  |  | 20  | %
|Other AAA rated                                  |  |          | 9,586  |   |  |      | 32  |              |  |   | 9,204  |  |  |  | 32  |  
|AA and A rated                                   |  |          | 5,919  |   |  |      | 19  |              |  |   | 6,127  |  |  |  | 21  |  
|BBB rated                                        |  |          | 5,700  |   |  |      | 19  |              |  |   | 5,583  |  |  |  | 19  |  
|Below investment-grade                           |  |          | 2,360  |   |  |      | 8   |              |  |   | 2,487  |  |  |  | 8   |  
|                                                 |  |          |        |   |  |      |     |              |  |   |        |  |  |  |     |  
|Total                                            |  | $        | 30,298 |   |  |      | 100 | %            |  | $ | 29,116 |  |  |  | 100 | %
|                                                 |  |          |        |   |  |      |     |              |  |   |        |  |  |  |     |  

At both June 30, 2002 and December 31, 2001, approximately 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 (Moodys). The remaining bonds were
rated by other rating agencies, outside brokers or Company management.

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

Included in CNAs general account fixed maturity securities at June 30, 2002
are $8,075 million of asset-backed securities, at fair value, consisting of
approximately 73% in collateralized mortgage obligations (CMOs), 13% in
corporate asset-backed obligations, 10% in U.S. Government agency issued
pass-through certificates and 4% in corporate mortgage-backed pass-through
certificates. The majority of CMOs held are actively traded in liquid markets
and are priced by broker-dealers.

Short-term investments at June 30, 2002 and December 31, 2001 consisted
primarily of commercial paper and money market funds. The carrying value of
the components of the general account short-term investment portfolio are
presented in the following table.

Short-term Investments(In millions)

|                             |  |          |       |              |  |   |       | 
|---------------------------- |  | -------- | ----- | ------------ |  | - | ----- | 
|                             |  | June 30, |       | December 31,
|                             |  | 2002     |       | 2001        
|                             |  |          |       |             
|Commercial paper             |  | $        | 2,041 |              |  | $ | 1,194 | 
|U.S. Treasury securities     |  |          | 8     |              |  |   | 175   | 
|Money market funds           |  |          | 1,455 |              |  |   | 1,641 | 
|Other                        |  |          | 593   |              |  |   | 730   | 
|                             |  |          |       |              |  |   |       | 
|Total short-term investments |  | $        | 4,097 |              |  | $ | 3,740 | 
|                             |  |          |       |              |  |   |       | 

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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 Standard &
Poors 500® (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 June 30,
2002 and December 31, 2001 due to instantaneous parallel increases in the
period end yield curve of 100 and 150 basis points.

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CNA FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, 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 June 30, 2002 and December 31, 2001, with all other variables held
constant.

Equity price risk was measured assuming an instantaneous 10% and 25% decline in
the S&P 500 Index (Index) from its level at June 30, 2002 and December 31, 2001
with all other variables held constant. The Companys equity holdings were
assumed to be highly and positively correlated with the Index. At June 30,
2002, a 10% and 25% decrease in the Index would result in a $324 million and
$811 million decrease compared to $366 million and $914 million decrease at
December 31, 2001, in the market rate of the Companys equity investments.

Of these amounts, under the 10% and 25% scenarios, $131 million and $327
million at June 30, 2002 and $163 million and $407 million at December 31, 2001
pertained to decreases in the market value of the separate account investments.
These decreases would substantially be offset by decreases in related separate
account liabilities to customers. Similarly, increases in the market value of
the separate account equity investments would also be offset by increases in
the same related separate account liabilities by the same approximate amounts.

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

The following tables present the estimated effects on the market value of the
Companys financial instruments at June 30, 2002 and December 31, 2001, due to
an increase in interest rates of 100 basis points, a 10% decline in foreign
currency exchange rates and a 10% decline in the Index.

Market Risk Scenario 1(In millions)

|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |      |  
|----------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | -------- | ------ | ------------------- | ------ | ------ | --- | --- | --- | - | ---- | ---- | ---- | -
|                                                      |                             |                         |        |           |        |          |        | Increase (Decrease)
|                                                      |                             |                         |        |           |        |          |        |                    
|                                                      |                             |                         |        | Market    |        | Interest |        | Currency            |        | Equity
|June 30, 2002                                         |                             | Value                   |        | Rate Risk |        | Risk     |        | Risk               
|                                                      |                             |                         |        |           |        |          |        |                    
|Held for Other Than Trading Purposes:                 |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|General account:                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|                                                      | Fixed maturity securities   |                         | $      | 30,330    |        |          | $      | (1,799              | )      |        | $   | (59 | )   |   | $    | (23  | )   
|                                                      | Equity securities           |                         |        | 1,149     |        |          |        |                    |        |        |     | (31 | )   |   |      | (113 | )   
|                                                      | Short-term investments      |                         |        | 4,097     |        |          |        | (1                  | )      |        |     |    |     |   |      |     |     
|                                                      | Limited partnerships        |                         |        | 1,400     |        |          |        | 55                  |        |        |     |    |     |   |      | (57  | )   
|                                                      | Other invested assets       |                         |        | 271       |        |          |        |                    |        |        |     |    |     |   |      |     |     
|                                                      | Interest rate caps          |                         |        | 1         |        |          |        | 1                   |        |        |     |    |     |   |      |     |     
|                                                      | Interest rate swaps         |                         |        | 8         |        |          |        | 1                   |        |        |     |    |     |   |      |     |     
|                                                      | Other derivative securities |                         |        | (12       | )      |          |        | (9                  | )      |        |     | 19  |     |   |      |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|                                                      |                             | Total general account   |        |           | 37,244 |          |        |                     | (1,752 | )      |     |     | (71 | ) |      |      | (193 | )
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Separate accounts:                                    |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|                                                      | Fixed maturity securities   |                         |        | 1,918     |        |          |        | (109                | )      |        |     |    |     |   |      |     |     
|                                                      | Equity securities           |                         |        | 126       |        |          |        |                    |        |        |     |    |     |   |      | (13  | )   
|                                                      | Short-term investments      |                         |        | 138       |        |          |        |                    |        |        |     |    |     |   |      |     |     
|                                                      | Other invested assets       |                         |        | 473       |        |          |        |                    |        |        |     |    |     |   |      | (47  | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|                                                      |                             | Total separate accounts |        |           | 2,655  |          |        |                     | (109   | )      |     |     |    |   |      |      | (60  | )
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Total securities held for other than trading purposes |                             |                         | 39,899 |           |        |          | (1,861 | )                   |        |        | (71 | )   |     |   | (253 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Held for Trading Purposes:                            |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|Separate accounts:                                    |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|                                                      | Fixed maturity securities   |                         |        | 221       |        |          |        | (4                  | )      |        |     |    |     |   |      | (2   | )   
|                                                      | Equity securities           |                         |        | 18        |        |          |        |                    |        |        |     |    |     |   |      | (2   | )   
|                                                      | Short-term investments      |                         |        | 154       |        |          |        |                    |        |        |     |    |     |   |      |     |     
|                                                      | Limited partnerships        |                         |        | 329       |        |          |        |                    |        |        |     |    |     |   |      | (2   | )   
|                                                      | Equity indexed futures      |                         |        |          |        |          |        | 1                   |        |        |     |    |     |   |      | (65  | )   
|                                                      | Other derivative securities |                         |        | 1         |        |          |        | 2                   |        |        |     |    |     |   |      |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Total securities held for trading purposes            |                             |                         | 723    |           |        |          | (1     | )                   |        |        |    |     |     |   | (71  | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Total securities                                      |                             | $                       | 40,622 |           |        | $        | (1,862 | )                   |        | $      | (71 | )   |     | $ | (324 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Debt (carrying value)                                 |                             | $                       | 2,567  |           |        | $        | (94    | )                   |        | $      |    |     |     | $ |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     

67



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##### Table of Contents



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

Market Risk Scenario 1(In millions)

|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |      |  
|----------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | -------- | ------ | ------------------- | ------ | ------ | --- | --- | --- | - | ---- | ---- | ---- | -
|                                                      |                             |                         |        |           |        |          |        | Increase (Decrease)
|                                                      |                             |                         |        |           |        |          |        |                    
|                                                      |                             |                         |        | Market    |        | Interest |        | Currency            |        | Equity
|December 31, 2001                                     |                             | Value                   |        | Rate Risk |        | Risk     |        | Risk               
|                                                      |                             |                         |        |           |        |          |        |                    
|Held for Other Than Trading Purposes:                 |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|General account:                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|                                                      | Fixed maturity securities   |                         | $      | 29,164    |        |          | $      | (1,500              | )      |        | $   | (38 | )   |   | $    | (20  | )   
|                                                      | Equity securities           |                         |        | 1,338     |        |          |        |                    |        |        |     | (23 | )   |   |      | (129 | )   
|                                                      | Short-term investments      |                         |        | 3,740     |        |          |        | (1                  | )      |        |     | (14 | )   |   |      |     |     
|                                                      | Limited partnerships        |                         |        | 1,307     |        |          |        | 51                  |        |        |     |    |     |   |      | (54  | )   
|                                                      | Other invested assets       |                         |        | 258       |        |          |        |                    |        |        |     |    |     |   |      |     |     
|                                                      | Interest rate caps          |                         |        | 2         |        |          |        | 2                   |        |        |     |    |     |   |      |     |     
|                                                      | Interest rate swaps         |                         |        | 3         |        |          |        | (9                  | )      |        |     |    |     |   |      |     |     
|                                                      | Other derivative securities |                         |        | 14        |        |          |        | (12                 | )      |        |     | 18  |     |   |      |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|                                                      |                             | Total general account   |        |           | 35,826 |          |        |                     | (1,469 | )      |     |     | (57 | ) |      |      | (203 | )
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Separate accounts:                                    |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|                                                      | Fixed maturity securities   |                         |        | 2,039     |        |          |        | (120                | )      |        |     |    |     |   |      |     |     
|                                                      | Equity securities           |                         |        | 149       |        |          |        |                    |        |        |     |    |     |   |      | (15  | )   
|                                                      | Short-term investments      |                         |        | 98        |        |          |        |                    |        |        |     |    |     |   |      |     |     
|                                                      | Other invested assets       |                         |        | 533       |        |          |        |                    |        |        |     |    |     |   |      | (53  | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|                                                      |                             | Total separate accounts |        |           | 2,819  |          |        |                     | (120   | )      |     |     |    |   |      |      | (68  | )
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Total securities held for other than trading purposes |                             |                         | 38,645 |           |        |          | (1,589 | )                   |        |        | (57 | )   |     |   | (271 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Held for Trading Purposes:                            |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|Separate accounts:                                    |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |     
|                                                      | Fixed maturity securities   |                         |        | 308       |        |          |        | (5                  | )      |        |     |    |     |   |      | (5   | )   
|                                                      | Equity securities           |                         |        | 12        |        |          |        |                    |        |        |     |    |     |   |      | (1   | )   
|                                                      | Short-term investments      |                         |        | 296       |        |          |        |                    |        |        |     |    |     |   |      |     |     
|                                                      | Limited partnerships        |                         |        | 342       |        |          |        |                    |        |        |     |    |     |   |      | (2   | )   
|                                                      | Equity indexed futures      |                         |        |          |        |          |        | 2                   |        |        |     |    |     |   |      | (87  | )   
|                                                      | Other derivative securities |                         |        | 1         |        |          |        | 1                   |        |        |     |    |     |   |      |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Total securities held for trading purposes            |                             |                         | 959    |           |        |          | (2     | )                   |        |        |    |     |     |   | (95  | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Total securities                                      |                             | $                       | 39,604 |           |        | $        | (1,591 | )                   |        | $      | (57 | )   |     | $ | (366 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     
|Debt (carrying value)                                 |                             | $                       | 2,567  |           |        | $        | (104   | )                   |        | $      |    |     |     | $ |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |     |     |     |   |      |      |     

68



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##### Table of Contents



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

The following tables present the estimated effects on the market value of the
Companys financial instruments at June 30, 2002 and December 31, 2001, due to
an increase in interest rates of 150 basis points, a 20% decline in foreign
currency exchange rates and a 25% decline in the Index.

Market Risk Scenario 2(In millions)

|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |      |  
|----------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | -------- | ------ | ------------------- | ------ | ------ | ---- | ---- | ---- | - | ---- | ---- | ---- | -
|                                                      |                             |                         |        |           |        |          |        | Increase (Decrease)
|                                                      |                             |                         |        |           |        |          |        |                    
|                                                      |                             |                         |        | Market    |        | Interest |        | Currency            |        | Equity
|June 30, 2002                                         |                             | Value                   |        | Rate Risk |        | Risk     |        | Risk               
|                                                      |                             |                         |        |           |        |          |        |                    
|Held for Other Than Trading Purposes:                 |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |     
|General account:                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |     
|                                                      | Fixed maturity securities   |                         | $      | 30,330    |        |          | $      | (2,730              | )      |        | $    | (119 | )    |   | $    | (57  | )   
|                                                      | Equity securities           |                         |        | 1,149     |        |          |        |                    |        |        |      | (62  | )    |   |      | (284 | )   
|                                                      | Short-term investments      |                         |        | 4,097     |        |          |        | (1                  | )      |        |      |     |      |   |      |     |     
|                                                      | Limited partnerships        |                         |        | 1,400     |        |          |        | 83                  |        |        |      |     |      |   |      | (143 | )   
|                                                      | Other invested assets       |                         |        | 271       |        |          |        |                    |        |        |      |     |      |   |      |     |     
|                                                      | Interest rate caps          |                         |        | 1         |        |          |        | 2                   |        |        |      |     |      |   |      |     |     
|                                                      | Interest rate swaps         |                         |        | 8         |        |          |        | 1                   |        |        |      |     |      |   |      |     |     
|                                                      | Other derivative securities |                         |        | (12       | )      |          |        | (13                 | )      |        |      | 39   |      |   |      |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     
|                                                      |                             | Total general account   |        |           | 37,244 |          |        |                     | (2,658 | )      |      |      | (142 | ) |      |      | (484 | )
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     
|Separate accounts:                                    |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |     
|                                                      | Fixed maturity securities   |                         |        | 1,918     |        |          |        | (166                | )      |        |      |     |      |   |      |     |     
|                                                      | Equity securities           |                         |        | 126       |        |          |        |                    |        |        |      |     |      |   |      | (32  | )   
|                                                      | Short-term investments      |                         |        | 138       |        |          |        |                    |        |        |      |     |      |   |      |     |     
|                                                      | Other invested assets       |                         |        | 473       |        |          |        |                    |        |        |      |     |      |   |      | (118 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     
|                                                      |                             | Total separate accounts |        |           | 2,655  |          |        |                     | (166   | )      |      |      |     |   |      |      | (150 | )
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     
|Total securities held for other than trading purposes |                             |                         | 39,899 |           |        |          | (2,824 | )                   |        |        | (142 | )    |      |   | (634 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     
|Held for Trading Purposes:                            |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |     
|Separate accounts:                                    |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |     
|                                                      | Fixed maturity securities   |                         |        | 221       |        |          |        | (7                  | )      |        |      |     |      |   |      | (5   | )   
|                                                      | Equity securities           |                         |        | 18        |        |          |        |                    |        |        |      |     |      |   |      | (4   | )   
|                                                      | Short-term investments      |                         |        | 154       |        |          |        |                    |        |        |      |     |      |   |      |     |     
|                                                      | Limited partnerships        |                         |        | 329       |        |          |        |                    |        |        |      |     |      |   |      | (6   | )   
|                                                      | Equity indexed futures      |                         |        |          |        |          |        | 2                   |        |        |      |     |      |   |      | (162 | )   
|                                                      | Other derivative securities |                         |        | 1         |        |          |        | 3                   |        |        |      |     |      |   |      |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     
|Total securities held for trading purposes            |                             |                         | 723    |           |        |          | (2     | )                   |        |        |     |      |      |   | (177 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     
|Total securities                                      |                             | $                       | 40,622 |           |        | $        | (2,826 | )                   |        | $      | (142 | )    |      | $ | (811 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     
|Debt (carrying value)                                 |                             | $                       | 2,567  |           |        | $        | (140   | )                   |        | $      |     |      |      | $ |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |      |      |   |      |      |     

69



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##### Table of Contents



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

Market Risk Scenario 2(In millions)

|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |      |  
|----------------------------------------------------- | --------------------------- | ----------------------- | ------ | --------- | ------ | -------- | ------ | ------------------- | ------ | ------ | ---- | --- | ---- | - | ---- | ---- | ---- | -
|                                                      |                             |                         |        |           |        |          |        | Increase (Decrease)
|                                                      |                             |                         |        |           |        |          |        |                    
|                                                      |                             |                         |        | Market    |        | Interest |        | Currency            |        | Equity
|December 31, 2001                                     |                             | Value                   |        | Rate Risk |        | Risk     |        | Risk               
|                                                      |                             |                         |        |           |        |          |        |                    
|Held for Other Than Trading Purposes:                 |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |     
|General account:                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |     
|                                                      | Fixed maturity securities   |                         | $      | 29,164    |        |          | $      | (2,203              | )      |        | $    | (75 | )    |   | $    | (51  | )   
|                                                      | Equity securities           |                         |        | 1,338     |        |          |        |                    |        |        |      | (47 | )    |   |      | (322 | )   
|                                                      | Short-term investments      |                         |        | 3,740     |        |          |        | (1                  | )      |        |      | (28 | )    |   |      |     |     
|                                                      | Limited partnerships        |                         |        | 1,307     |        |          |        | 77                  |        |        |      |    |      |   |      | (134 | )   
|                                                      | Other invested assets       |                         |        | 258       |        |          |        |                    |        |        |      |    |      |   |      |     |     
|                                                      | Interest rate caps          |                         |        | 2         |        |          |        | 3                   |        |        |      |    |      |   |      |     |     
|                                                      | Interest rate swaps         |                         |        | 3         |        |          |        | (14                 | )      |        |      |    |      |   |      |     |     
|                                                      | Other derivative securities |                         |        | 14        |        |          |        | (17                 | )      |        |      | 36  |      |   |      |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     
|                                                      |                             | Total general account   |        |           | 35,826 |          |        |                     | (2,155 | )      |      |     | (114 | ) |      |      | (507 | )
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     
|Separate accounts:                                    |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |     
|                                                      | Fixed maturity securities   |                         |        | 2,039     |        |          |        | (176                | )      |        |      |    |      |   |      |     |     
|                                                      | Equity securities           |                         |        | 149       |        |          |        |                    |        |        |      |    |      |   |      | (37  | )   
|                                                      | Short-term investments      |                         |        | 98        |        |          |        |                    |        |        |      |    |      |   |      |     |     
|                                                      | Other invested assets       |                         |        | 533       |        |          |        |                    |        |        |      |    |      |   |      | (133 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     
|                                                      |                             | Total separate accounts |        |           | 2,819  |          |        |                     | (176   | )      |      |     |     |   |      |      | (170 | )
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     
|Total securities held for other than trading purposes |                             |                         | 38,645 |           |        |          | (2,331 | )                   |        |        | (114 | )   |      |   | (677 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     
|Held for Trading Purposes:                            |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |     
|Separate accounts:                                    |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |     
|                                                      | Fixed maturity securities   |                         |        | 308       |        |          |        | (7                  | )      |        |      |    |      |   |      | (12  | )   
|                                                      | Equity securities           |                         |        | 12        |        |          |        |                    |        |        |      |    |      |   |      | (2   | )   
|                                                      | Short-term investments      |                         |        | 296       |        |          |        |                    |        |        |      |    |      |   |      |     |     
|                                                      | Limited partnerships        |                         |        | 342       |        |          |        |                    |        |        |      |    |      |   |      | (6   | )   
|                                                      | Equity indexed futures      |                         |        |          |        |          |        | 3                   |        |        |      |    |      |   |      | (217 | )   
|                                                      | Other derivative securities |                         |        | 1         |        |          |        | 2                   |        |        |      |    |      |   |      |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     
|Total securities held for trading purposes            |                             |                         | 959    |           |        |          | (2     | )                   |        |        |     |     |      |   | (237 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     
|Total securities                                      |                             | $                       | 39,604 |           |        | $        | (2,333 | )                   |        | $      | (114 | )   |      | $ | (914 | )   
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     
|Debt (carrying value)                                 |                             | $                       | 2,567  |           |        | $        | (151   | )                   |        | $      |     |     |      | $ |     |     
|                                                      |                             |                         |        |           |        |          |        |                     |        |        |      |     |      |   |      |      |     

Liquidity and Capital Resources

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

For the six months ended June 30, 2002 net cash provided by operating
activities was $435 million as compared with net cash used by operating
activities of $826 million for the same period in 2001. The improvement
related primarily to federal tax refunds received in 2002 as compared to taxes
paid in 2001, partially offset by increased paid claims.

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

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

For the six months ended June 30, 2002, net cash used by investing activities
was $410 million as compared with net cash provided by investing activities of
$1,106 million for the same period in 2001. This decrease was due primarily to
less net sales of equity securities and $264 million of net proceeds related to
the sale of 180 Maiden Lane, New York facility in 2001.

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

For the six months ended June 30, 2002, net cash used by financing activities
was $22 million as compared with $301 million for the same period in 2001.
Cash used by financing for the six months ended June 30, 2001 included $262
million of principal payments on debt.

The Company is monitoring the cash flows related to claims and reinsurance
recoverables from the WTC event. It is anticipated that significant claim
payments will be made prior to receipt of the corresponding reinsurance
recoverables. The Company does not anticipate any liquidity problems resulting
from these payments. Approximately 37%, 36% and 24% of the reinsurance
recoverables on the estimated losses related to the WTC event are from
companies with S&P ratings of AAA, AA or A. As of August 2, 2002, the Company
has paid $341 million in claims and recovered $144 million from reinsurers.

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

Debt(In millions)

|                                                              |                                                      |   |          |     |              |   |       |     | 
|------------------------------------------------------------- | ---------------------------------------------------- | - | -------- | --- | ------------ | - | ----- | --- | 
|                                                              |                                                      |   | June 30, |     | December 31,
|                                                              |                                                      |   | 2002     |     | 2001        
|                                                              |                                                      |   |          |     |             
|Variable rate debt:                                           |                                                      |   |          |     |              |   |       |    
|                                                              | Credit facility  CNAF, due April 30, 2004           |   | $        | 250 |              |   | $     | 500 | 
|                                                              | Term loan, due April 29, 2003                        |   |          | 250 |              |   |       |    | 
|                                                              | Credit facility  CNA Surety, due September 30, 2002 |   |          | 75  |              |   |       | 75  | 
|Senior notes:                                                 |                                                      |   |          |     |              |   |       |    
|                                                              | 7.250%, face amount of $134, due March 1, 2003       |   |          | 134 |              |   |       | 133 | 
|                                                              | 6.250%, face amount of $250, due November 15, 2003   |   |          | 250 |              |   |       | 250 | 
|                                                              | 6.500%, face amount of $493, due April 15, 2005      |   |          | 491 |              |   |       | 491 | 
|                                                              | 6.750%, face amount of $250, due November 15, 2006   |   |          | 249 |              |   |       | 249 | 
|                                                              | 6.450%, face amount of $150, due January 15, 2008    |   |          | 149 |              |   |       | 149 | 
|                                                              | 6.600%, face amount of $200, due December 15, 2008   |   |          | 199 |              |   |       | 199 | 
|                                                              | 8.375%, face amount of $70, due August 15, 2012      |   |          | 68  |              |   |       | 68  | 
|                                                              | 6.950%, face amount of $150, due January 15, 2018    |   |          | 148 |              |   |       | 148 | 
|Debenture, 7.250%, face amount of $243, due November 15, 2023 |                                                      |   | 240      |     |              |   | 240   |    
|Capital leases, 8.000%-13.700%, due through December 31, 2011 |                                                      |   | 37       |     |              |   | 38    |    
|Other debt, 1.000%-8.500%, due through 2019                   |                                                      |   | 27       |     |              |   | 27    |    
|                                                              |                                                      |   |          |     |              |   |       |     | 
|Total debt                                                    |                                                      | $ | 2,567    |     |              | $ | 2,567 |    
|                                                              |                                                      |   |          |     |              |   |       |     | 

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

The Company has a $250 million three-year facility with an April 30, 2004
expiration date. The Company previously had a $250 million 364-day facility
with an expiration date of April 29, 2002. An option to convert the 364-day
facility to a one-year term loan was exercised in April 2002. The term loan
began on April 29, 2002 and expires on April 29, 2003.

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

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

The Company pays interest on any outstanding debt/borrowings under the one-year
term loan and three-year facility based on a rate determined using the
long-term debt ratings of the Company. The interest rate is equal to the
London Interbank Offering Rate (LIBOR) plus 60.0 basis points for the one-year
term loan and LIBOR plus 57.5 basis points for the three-year facility.
Further, if the Company has outstanding loans greater than 50% of the amounts
available under the three-year facility, the Company will also pay a
utilization fee of 12.5 basis points on such loans.

A Moodys downgrade of the CNAF senior debt rating from Baa2 to Baa3 would
increase the facility fee on the three-year component of the facility from 17.5
basis points to 25.0 basis points. The applicable interest rate on the
one-year term loan would increase from LIBOR plus 60.0 basis points to LIBOR
plus 80.0 basis points and the applicable interest rate on the three-year
facility component would increase from LIBOR plus 57.5 basis points to LIBOR
plus 75.0 basis points. The utilization fee would remain unchanged on the
three-year facility at 12.5 basis points.

The terms of CNAs credit facility require the Company to maintain certain
financial ratios and combined property-casualty company statutory surplus
levels. At June 30, 2002 and December 31, 2001, CNA was in compliance with all
restrictive debt covenants.

The CNA Surety credit facility matures on September 30, 2002. CNA Surety is
currently in discussions with members of its bank group and other lenders
regarding the renewal or refinancing of the $75 million in outstanding
borrowings under the credit facility. CNA Surety expects to refinance the
outstanding borrowings, but anticipates the interest and other related costs will be significantly
higher than under the existing credit facility. CNA Surety is a 64% owned and
consolidated subsidiary of CNA.

In the normal course of business, CNA has obtained letters of credit in favor
of various unaffiliated insurance companies, regulatory authorities and other
entities. At June 30, 2002 there were approximately $276 million of
outstanding letters of credit.

The Company has committed approximately $172 million to future capital calls
from various third-party limited partnership investments in exchange for an
ownership interest in the related partnerships.

The Company has a commitment to purchase a $100 million floating rate note
issued by the California Earthquake Authority in the event California
earthquake-related insurance losses exceed $4.9 billion prior to December 31,
2002.

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

The Company is obligated to make future payments totaling $433 million for
non-cancelable operating leases expiring from 2002 through 2014 primarily for
office space and data processing, office and transportation equipment.
Estimated future minimum payments under these contracts are as follows: $50
million in 2002; $85 million in 2003; $65 million in 2004; $57 million in 2005;
and $176 million in 2006 and beyond. Additionally, the Company has entered
into a limited number of guaranteed payment contracts, primarily relating to
telecommunication services, amounting to approximately $34 million. Estimated
future minimum purchases under these contracts are as follows: $8 million in
2002; $13 million in 2003; $10 million in 2004; and $3 million in 2005.

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

The table below reflects ratings issued by A.M. Best, S&P, Moodys and Fitch as
of August 9, 2002 for the CCC Pool, the Continental Insurance Company (CIC)
Pool, Continental Assurance Corporation (CAC) Pool and CNA Group Life Assurance
Company (CNAGLA). Also rated were CNAFs senior debt and commercial paper and
The Continental Corporation (Continental) senior debt.

|          |  |                                      |    |              |  |      |    |             |  |             |    |        |    |            |   |        |  |     |    |       |  |      |  |  |  |  |  | 
|--------- |  | ------------------------------------ | -- | ------------ |  | ---- | -- | ----------- |  | ----------- | -- | ------ | -- | ---------- | - | ------ |  | --- | -- | ----- |  | ---- |  |  |  |  |  | 
|          |  | Insurance Financial Strength Ratings |    | Debt Ratings
|          |  |                                      |    |             
|          |  | Property & Casualty                  |    | Life & Group |  | CNAF |    | Continental
|          |  |                                      |    |              |  |      |    |            
|          |  | CCC                                  |    | CIC          |  | CAC  |    |             |  |             |    | Senior |    | Commercial |   | Senior
|          |  | Pool                                 |    | Pool         |  | Pool |    | CNAGLA      |  | Debt        |    | Paper  |    | Debt      
|          |  |                                      |    |              |  |      |    |             |  |             |    |        |    |           
|A.M. Best |  |                                      | A  |              |  |      | A  |             |  |             | A  |        |    |            | A |        |  | BBB |    | AMB-2 |  | BBB-
|Fitch     |  |                                      | A  |              |  |      | A  |             |  | AA-         |    |        | A+ |            |   | BBB    |  | NR  |    | BBB  
|Moodys   |  |                                      | A3 |              |  |      | A3 |             |  |             | A2 |        |    | NR         |   | Baa2   |  |     | P2 |       |  | Baa3
|          |  |                                      |    |              |  |      |    |             |  | (Negative)* |    |        |    |            |   |        |  |     |    |       |  |      |  |  |  | 
|S&P       |  |                                      | A- |              |  |      | A- |             |  |             | A+ |        |    | NR         |   | BBB-   |  |     | A3 |       |  | BBB-

NR = Not Rated

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

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

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

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

CCC is the lead insurance company subsidiary within the CCC Pool and is the
main source of CNAF dividends. All other insurance companies within the CCC
Pool are subsidiaries of CCC and are subject to the dividend rules of their
applicable state of domicile. Dividends from CCC are subject to the insurance
holding company laws of the State of Illinois, the domiciliary state of CCC.
Under these laws, ordinary dividends, or dividends that do not require prior
approval of the Illinois Department, may be paid only from earned surplus,
which is calculated by removing unrealized gains (under which statutory
accounting includes cumulative earnings of CCCs subsidiaries) from unassigned
surplus. As of June 30, 2002, CCC is in a negative earned surplus position.
In February 2002, the Illinois Department approved an extraordinary dividend in
the amount of $117 million to be used to fund CNAFs 2002 debt service
requirements. Until CCC is in a positive earned surplus position, all
dividends require prior approval of the Illinois Department.

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

Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets(SFAS 142). SFAS 142 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,
ceased upon adoption of SFAS 142, which for CNA was January 1, 2002. As
required under SFAS 142, the Company has completed the first step of its
initial impairment testing and has identified $65 million of its $247 million
of total net carried goodwill and indefinite-lived intangible assets, as being
impaired. The impaired goodwill is related to Specialty Lines and Life
Operations. The second step of the impairment testing, which involves
quantification of the amount of the impairment, will be completed in the third
quarter of 2002. The initial impairment loss will be reported as a cumulative
effect of a change in accounting principle as of January 1, 2002, and will
require restatement of the interim 2002 results. Any impairment losses
incurred after the initial application of this standard will be reported in
operating income. If the provisions of SFAS 142, regarding no longer
amortizing goodwill and indefinite-lived intangible assets, were applied to
prior periods, net loss for the three and six months ended June 30, 2001 would
have been $1,757 million and $1,457 million and basic and diluted loss per
share would have been $9.59 per share and $7.95 per share.

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

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Effective
January 1, 2002, CNA adopted this statement for all impairments of long-lived
assets and for long-lived assets to be disposed of occurring after January 1,
2002. The adoption of SFAS 144 did not have a significant impact on the net
income or financial position of the Company; however, it did impact the income
statement presentation of certain operations sold in 2002.

FORWARD LOOKING STATEMENTS

This quarterly report includes a number of statements that relate to
anticipated future events (forward-looking statements) rather than actual
present conditions or historical events. You can identify forward-looking
statements because generally they include words such as believes, expects,
intends, anticipates, estimates, and similar expressions. Forward-looking
statements in this quarterly report include expected developments in the
Companys insurance business, including losses for asbestos, environmental
pollution and mass tort claims; the Companys expectations concerning its
revenues, earnings, expenses and investment activities; expected cost savings
and other results from the Companys restructuring activities; and expected
proceeds and terms of, and other matters concerning, the Companys disposition
of its U.K. reinsurance business; and the Companys proposed actions in
response to trends in its business.

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



| |  | general economic and business conditions;                                                                                                                                                                                                               
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | changes in financial markets such as fluctuations in interest rates,
credit conditions and currency, commodity and stock prices;                                                                                                                        
| 
| |  | the effects of corporate
bankruptcies and/or accounting restatements (such as Enron and
WorldCom), on the financial markets and the resulting decline in
value of securities held by the Company which may result in
additional charges for impairments;
| 
| |  | the effects of corporate
bankruptcies and/or accounting restatements on the markets for
directors and officers and errors and omissions coverages;                                                                                                      
| 
| |  | changes in foreign or domestic political, social and economic
conditions, including the possible occurrence of terrorist attacks;                                                                                                                       
| 
| |  | regulatory initiatives and compliance with governmental regulations,
judicial decisions and rulings and changes in tax laws and
regulations;                                                                                                            
| 
| |  | regulatory limitations and restrictions upon the Company;                                                                                                                                                                                               
| 
| |  | the impact of competitive products, policies and pricing and the
competitive environment in which the Company operates;                                                                                                                                 
| 
| |  | product and policy availability and demand and market responses,
including the effect of the absence of applicable terrorism
legislation on coverages;                                                                                                  
| 
| |  | development of claims and the impact on loss reserves;                                                                                                                                                                                                  

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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 the Company;                                                                                                                                 
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | results of financing efforts;                                                                                                                                                                                          
| 
| |  | changes in the Companys composition of operating segments;                                                                                                                                                            
| 
| |  | exposure to liabilities due to claims made by insureds and others
relating to asbestos remediation and health-based asbestos
impairments, and exposure to liabilities for environmental pollution
and mass tort claims;
| 
| |  | the sufficiency of the Companys loss reserves and the possibility of
future increases in reserves;                                                                                                                    
| 
| |  | the possibility of changes in the Companys ratings by ratings
agencies and changes in rating agency policies and practices; and                                                                                       
| 
| |  | the actual closing of contemplated transactions and agreements.                                                                                                                                                        

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

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Item 1. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders.

Set forth below is information relating to the 2002 Annual Meeting of Shareholders of the
Registrant.

The annual meeting was called to order at
10:00 a.m., May 8, 2002. Represented at the meeting, in
person or by proxy, were 220,931,676 shares, approximately 98.8% of
the issued and outstanding shares entitled to vote.

The following business was transacted:

Election of Directors

Over 98.7% of the votes cast for directors were
voted for the election of the following directors. The number of
votes for and withheld with respect to each director was as follows:

|                       |  |             |  |               
|---------------------- |  | ----------- |  | --------------
|                       |  | Votes For   |  | Votes Withheld
|                      
|Antoinette Cook Bush   |  | 219,465,297 |  | 1,466,379     
|Walter L. Harris       |  | 219,471,521 |  | 1,460,155     
|Bernard L. Hengesbaugh |  | 219,258,667 |  | 1,673,009     
|Stephen W. Lilienthal  |  | 219,227,017 |  | 1,704,659     
|Edward J. Noha         |  | 220,586,209 |  | 345,467       
|Don M. Randel          |  | 220,637,659 |  | 294,017       
|Joseph Rosenberg       |  | 219,227,526 |  | 1,704,150     
|James S. Tisch         |  | 218,066,508 |  | 2,865,168     
|Laurence A. Tisch      |  | 218,059,903 |  | 2,871,773     
|Preston R. Tisch       |  | 219,431,184 |  | 1,500,492     
|Marvin Zonis           |  | 219,465,385 |  | 1,466,291     

Ratification of the appointment of Independent
Certified Public Accountants

Approved 219,361,751 votes approximately 99.3% of the votes cast, voted to ratify the
appointment of Deloitte & Touche, LLP as independent certified public accountants for the
Company, 1,562,183 votes, approximately 0.7% of the votes cast, voted against, and shares
representing 7,742 votes, approximately 0.0% of the votes cast, abstained.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K:

None




SIGNATURES

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

|                      |  |                           |  |                             
|--------------------- |  | ------------------------- |  | ----------------------------
|                      |  | CNA FINANCIAL CORPORATION
|                     
|Date: August 13, 2002 |  | By:                       |  | /s/ ROBERT V. DEUTSCH       
|                      |  |                           |  |                             
|                      |  |                           |  | Robert V. Deutsch           
|                      |  |                           |  | Executive Vice President and
|                      |  |                           |  | Chief Financial Officer     

77